Understanding Tax Deductions


How to calculate income tax deductions

Filing federal income taxes is a necessary evil most people don’t like to discuss. The 16th amendment to the U.S. Constitution, or the federal income tax amendment, requires all U.S. citizens to pay state and federal taxes on or before April 15th of each year.

To some people, understanding taxes is more difficult than untying the Gordian Knot, in other words, impossible. The Tax Cuts and Jobs Act of 2017 has made big changes in the tax system and is considered the largest tax overhaul in over 30 years. It eliminates deductions and credits yet increases the standard tax and child tax credits. As a result, some people will see larger refunds. While others will mourn the loss of deductions.

Some tax breaks may return after provisions of the law expire in 2025. Following are tax deductions that have changed or are no longer available:

The Standard Deduction

The good news is that there is an increase in the $6,350 standard deduction. Single taxpayers will get a much higher deduction for the 2018 tax year. The standard deduction for individuals is now $12,000. Married couples receive a standard deduction of $24,000.

Miscellaneous Itemized Deductions

Several miscellaneous itemized deductions have been eliminated under the Tax Act. Taxpayers can no longer take deductions for tax preparation, professional dues, investment fees, fees for financial services.

Deductions for an Employee’s Unreimbursed Expenses

Workers who buy uniforms and other job-related items can no longer claim them as a deduction.

Moving Expenses

Only military personnel can deduct moving expenses if their job requires the move.

Casualty Loss

Taxpayers can’t deduct casualty losses unless they reside in a presidentially-designated disaster zone.

Alimony

In 2019, alimony is not taxable income; therefore alimony payments can’t be deducted.

Overlooked Deductions

Tax deductions are overlooked every year. Following are deductions taxpayers should consider when filing federal taxes:

State Income or Sales Tax

Taxpayers who itemize can choose to deduct either state income tax or state sales tax payments. Either way, the cap on the deduction is $10,000.

Medical Expenses

In 2019, the expenses must exceed 10% of the taxpayer’s adjusted gross income.

Car Registration Fees

Flat fees and weight-based fees are not tax deductible. The law allows taxpayers to deduct value-based fees.

Non-cash Charitable Giving

Making a cash donation to a charity is deductible. However, so are non-cash gifts, such as clothing.

Property Taxes

Starting in 2018, there is a $10,000 cap on property taxes, sales tax, and state income tax.

Traditional IRA Contributions

In 2018, workers under age 50 can contribute up to $5,500 per tax year, while those age 50 or older can make a $6,500 contribution.

Educational Expenses

Educational deductions include the Lifetime Learning Credit, the American Opportunity Credit, and student loan interest.

Child Care

Working parents may be able to receive the child and dependent care tax credit. The deduction may also include other forms of child care expense such as a day camp or summer program. However, the deduction requires detailed documentation.