In the previous blog of Tax Season 2019 Ultimate Guide, we talked about Form W-2 and everything there is to know about it. We really hope our efforts to bring tax information in a simplified form are being of help to you. Now, let us dive into the science of tax deductions, understand its types and advantages.
Tax deduction is a fascinating thing, and it is your friend. As the name suggests, a permitted amount is deducted from your income and the amount left is subjected to federal and state income taxes as per law. So you’d want to increase your tax deductions to decrease the taxable amount, meaning fewer taxes to pay.
There are many kinds of deductions. Some encourage you to participate in activities and give back to the community by making charitable donations. There is also an advantage in saving for retirement, to make your life easier when you reach that age.
The Standard Deduction
The IRS understands that living and providing for dependants costs money, and thus it makes some amount from your income tax-free. What standard deduction applies to you completely depends on your filing status (more about this here). The slab changes according to inflation, and the new Tax Cuts and Jobs Act has significantly increased (approximately doubled) the deduction amount.
| Standard Deduction Amounts | ||
| Filing Status | Year 2017 | Year 2018 |
| Single | $6,350 | $12,000 |
| Head of Household | $9,350 | $18,000 |
| Married Filing Jointly | $12,700 | $24,000 |
| Married Filing Separately | $6,350 | $12,000 |
| Qualifying Widow or Widower | $12,700 | $24,000 |
There are a few conditions to consider. They are listed below:
- For older and blind people: An additional amount is deducted from your taxable income if you are legally blind or more than 65 years old.
- For married couples filing separately: You and your spouse both need to take the standard deduction or both must take the itemized deduction. Mixing isn’t allowed. It is better to calculate both cases and make a decision.
- For dependents: Taxpayers who are named as dependent in another person’s tax return have a changing standard deduction amount. It is $1,050, or $350 added to your earned income, whichever is higher.
The Itemized Deduction
Here, you report an expense for a deduction. You keep track of what you spent during the year, and if some expenditure is qualified for a deduction, you list and total them up in your tax filing. Keep the proof (receipts, bills, bank statements, etc.) handy in case the IRS asks for proof. Your charitable contributions also come under this category.
It completely depends on the taxpayer if they want to opt for a standard deduction or itemized deduction. But in some cases, it can be out of hand. If you’re married but filing separately, you and your spouse both must take the same deduction. Non-resident aliens cannot take the standard deduction, so they must itemize.
The list of allowed deductions is very long. There are, of course, conditions to each as to how they are applicable. Some of the common ones are – real estate taxes, state and local income taxes, home mortgage interest, charitable contributions, medical expenses, theft losses, and more. The IRS updates their list each year.
The Medical Expense Deduction
This benefit is applicable only if you are itemizing your deduction and not claiming a standard deduction. The major thing is, you can deduct a part of your medical expenses which are not insured that exceed 7.5% of your gross income for April 2019 filing, and 10% from next year onwards.
You can deduct medical expenses that you have paid for yourself, your spouse, and your dependents. But, there are other provisions too, if you paid for someone who is not your dependent (either you could not claim them as your dependent, or they were non-dependent but you helped them out).
You can also claim your health insurance premium. You can subtract premiums for health, dental and vision care insurance, provided that these payments were made using the money after tax is given.
The Dependents to Claim
The provision of claiming dependents and reducing taxable income was eliminated in 2018 since TCJA went into effect. But you can get some tax credits for them. Those will be explained in the next and final blog of our guide.
There are rules to claiming dependents in your filing.
- You cannot claim a dependent if you are some else’s dependent. Similarly, if you claim a dependent, no one can claim you as their dependent.
- A dependent cannot be someone who is married and files a joint return. There is one exception: if the joint return was filed to claim a refund.
- A dependent must be a US citizen, a resident alien, a national, or a resident of Canada or Mexico.
- A dependent can be claimed by only one taxpayer. If you and your spouse are no longer married and filing separately, only one of you can claim your child as a dependant.
- To qualify as a dependent child, they must be related to you. You may not be a biological parent, but you might be a sibling, half-sibling, uncle, aunt, foster parent, or a stepparent. A legal family relation is needed.
- A child is dependent only until their 19th birthday. If they are a full-time student, they can be dependent until the age of 24. There is no age limit for disabled children.
- A qualifying relative can also be dependent. They must live with you for the whole year (exceptions are there for close relations).
- The dependent relative’s income should not exceed personal exemption amount for that year (there are no personal exemptions after TCJA but the bar exists for defining dependents and tax credits).
This list is a long one. The above are some of the most common scenarios.
The Retirement Planning
The government wants you to save for your retirement. The contributions you make to the IRA can be claimed for a tax deduction. You can claim up to $6,000 in contributions for 2019 (if few requirements are met) and $7,000 if you are of age 50 or older.
The employer-sponsored 401(k) plans are also tax deductible. As they are subtracted from your paycheck before taxes are calculated, they are reported to you and the IRS on Form W-2. Thus, it means upfront savings. These savings cannot be claimed again on your tax return.
You can also make contributions to Health Savings Accounts (HSAs) and claim for a tax deduction. These help you save for future health expenses. You can withdraw from your HSA tax-free to pay for qualified medical bills. Bonus: You do not need to itemize this deduction. This lowers your adjusted gross income and helps you qualify for more tax credits.
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