With tax season here, chances are you are probably asking yourself which tax deductions and tax credits will you be able to claim for your 2018 tax return, unless of course you did some tax planning before the end of 2018 and you have an idea of what to expect this tax season.
Tax credits and tax deductions are said to be the most satisfying part of preparing your tax return, because they reduce your tax bill, and put money into your pockets. But they do this in different ways. First, let’s review the difference between a deduction and a credit.
A Tax deduction: is used to decrease taxable income, thereby decreasing the amount of tax owed. They are calculated using your marginal tax bracket. For example, if Rose is in the 24% tax bracket, a $1,000 tax deduction will save her $240.
A Tax Credit: is subtracted not from taxable income but directly from a person’s tax liability; thus it reduces taxes dollar for dollar. It could be refundable or non-refundable. Looking at the example with Rose above, a tax credit of $1,000 will lower her tax bill by $1,000.
There are 2 types of Tax Deductions: Standard Deduction and Itemized Deductions. You can use one or the other but not both. It is generally recommended that you take the greater of the two unless special circumstances apply. Many taxpayers who itemized in the past will face a big question this year: whether is it still worth itemizing given the new higher standard deduction?
- Standard Deduction: is a set amount that ensures all taxpayers have at least some income that is not subject to federal tax (i.e., tax-free). Even if you have no other qualifying deductions, the IRS lets you take this deduction and no-question about it. It varies according to your filing status. For 2018 tax returns the standard deduction has nearly doubled ($12,000 for Single filers and Married filing separate, $24,000 for Married filing jointly, $18,000 for Head of household).
- Itemized Deductions: allow you to list qualified expenses on your tax return, the sum of which is used to lower your adjusted gross income, such as home mortgage interest on up to $750,000 of new home acquisition debt, state and local taxes up to $10,000, medical expenses over 7.5% of your adjusted gross income and charitable donations.
Let’s recap a few of the common credits and deductions for 2018:
- Child tax credit: increased to $2,000 and a new credit of $500 for non-children dependents was introduced.
- Credit for child care: up to $1,050 for one child and $2,100 for 2+ children.
- Earned Income Credit: up to $6,431 with 3+ children.
- Education credits: up to $2,500 for the American Opportunity Credit, up to $2,000 per return Lifetime Learning credit, up to $2,500 Student loan interest deduction.
The following are eliminated:
- Exemptions: With the increase of the standard deduction, came the elimination of the exemptions.
- Unreimbursed employee expenses.
- Moving expenses: except for active duty military.
Consult your Tax Advisor to make sure you are taking advantage of all the tax deductions and credits that are available to you.
