Tax Deductions – What You Need To Know

Tax season is in full swing. Americans everywhere are adding up their receipts and trying to find ways to reduce their adjusted gross income (AGI) to a much lower “taxable income” figure. The easy route is to take the standard deduction. The standard deduction for 2018 is $12,000 is you are single or $24,000 if you are married filing jointly (MJF). The significant increase in the standard deduction from prior years mean far fewer households will be itemizing their deductions.  Prior to 2018 approximately 30% of households itemized.  Now, it is likely to be fewer than 10%. The change to the standard deduction was accompanied by a lowering of tax rates across the boards, and personal exemptions were eliminated. There is an expanded  child tax credit in place of the personal exemption. The tax credit is $2,000 per qualifying child (17 years old or under at end of the tax year). $1,400 of the tax credit is refundable, which means that if your tax-liability was zero, you would get money back from Uncle Sam.

You Can’t Deduct That!

Below are some examples of deductions that are not going to fly.  (NOTE: Sometimes my attempts at humor fall flat)

Questionable Dependents – Sadly, you cannot claim your dog or unborn child as a dependent.

Non-Business Entertainment – Just because you were entertained does not make it a deductible entertainment expense. For example, the IRS is not going to allow you to write off your daughter’s wedding because you invite some business colleagues.

Fines – Even if you were speeding in order to make it to a business meeting, speeding tickets and fines are not deductible.

Misinterpretations of Charitable Donations – If your house or car gets repossessed, that is not considered a charitable deduction.

Hobbies – The IRS does not allow deductions for hobby expenses. So, there is no need to keep receipts birdwatching binoculars.

Keeping Up Appearances – The cost of botox and manicures are generally not deductible despite the possible benefits to your career.

Losses on Personal Use Assets – I know it is shocking that your boat did not appreciate, but the loss is not deductible. That goes for personal residences too. Funny, how gains on personal use assets are taxable but but you can’t take a deduction for losses. Hmm?

Expansive Home Office Expenses – Deductions on a home office are limited to the portion of the home dedicated to the business. The IRS usually has a hard time believing that your family lives in 10% of the house and the other 90% is used strictly for work.

Non-Business, Business Trips – That trip to Disneyland with your kids is not going to be deductible, no matter how often you called into the office.

Legitimate itemized deductions generally fall into one of the seven categories below:

Medical and Dental Expenses – To qualify for a medical or dental expense deduction, the total out of pocket costs must exceed 7.5% of the taxpayer’s Adjusted Gross Income (AGI). The deduction is for un-reimbursed expenses in excess of the 7.5%.  One significant expense is the premiums paid toward medical and dental insurance if those premiums were paid by you with after-tax dollars. The 7.5% threshold will return to 10% after 12/31/2018.

Taxes You Paid – Generally state and local income taxes, sales tax, and real estate property taxes fall in this section. You can only deduct the first $10,000 in taxes paid per year.  Any tax paid above $10,000 (in any year after 2017) is not deductible. Real estate taxes paid should be shown on Form 1098, Mortgage Interest Statement, assuming you have a mortgage.

Interest You PaidYou can deduct mortgage interest on your primary residence and a second home. However, Uncle Sam is only going to partially subsidize your beachfront mansion because you can only deduct interest on the first $750,000 in mortgages.  Home Equity Line of Credit (HELOC) debt is only deductible if the funds are used to substantially improve the property secured by the loan. Check out this cool mortgage interest deduction calculator.  Student loan interest may also be deductible.  Check out this student loan interest deduction calculator.

Gifts to CharityCharitable gifts are one of those deductions that can give individuals trouble during a tax audit. It’s possible to deduct cash gifts and property donated. Individuals making a gift of property, such as donating a car or clothing, need a receipt for the gift and an appraisal of its fair market value. This is not the same as the original price paid for the donated item.

Casualty and Theft – It’s only possible to take a deduction for this category if the loss exceeds 10% of your AGI. Typical losses include vandalism, storm damage/flood damage, and even the bankruptcy of others.  Starting in 2018, these deductions for “personal casualty losses” will only be deductible if the losses are attributable to federally declared natural disaster.  For those who are not in a Federal disaster area, though, casualty losses will no longer be deductible after 2017.

Job & Miscellaneous Expenses – All of these have been eliminated and are no longer deductible. Bummer!

NOTE: if your deductions are substanitally higher than average, they may raise your chances of an IRS Audit.  Good luck with your return and let the refunds begin!