With taxes due next month, you may already be well on your way to completing your 2019 tax returns. Whether you’re doing your taxes on your own or hiring someone to do them for you, be on the lookout for these top nine overlooked tax deductions and tax credits.
What Is the Difference Between a Tax Deduction and a Tax Credit?
Before we go any further, let’s define a couple of terms.
A tax deduction is something that reduces the amount of your taxable income. Deductions may put you in a different tax bracket altogether, which would decrease your federal tax rate.
A tax credit reduces the amount of tax you owe directly. After you complete your tax return and determine the amount of taxes you owe versus what you will be getting back, a tax credit is an additional boon that reduces that tax liability in dollar amounts, not percentages.
Tax Deductions to Know
We will begin with some of the more well-known deductions and move into ones that are more obscure.
Standard Deductions vs Itemized Deductions
You will only get to deduct EITHER your standard deduction OR your itemized deduction; whichever is higher. Your itemized deduction is composed of a lot of different numbers such as state and property taxes, mortgage interest and charitable deductions.
Standard Deduction Differences by Age
The standard deduction for 2019 tax returns is $12,200 for single filers and $24,400 for married couples filing jointly. However, if you are 65 years of age or older, that standard deduction increases by $1,300 if you are in the married filing jointly category and by $1,650 for single or head of household filers.
Deductions for Homeowners
Mortgage Interest and Property Taxes
Mortgage interest and property taxes are deductible expenses, even if you sold your home and bought a new one. You can deduct the interest and taxes that you paid on your old home for the portion of the year that you were living there. You can only take this deduction if you itemize your return.
Mortgage Points for New Homeowners and Refinanced Loans
If you bought a new home and purchased mortgage loan points or if you refinanced your home loan, you can take deductions. Mortgage points on a new home are fully deductible at once; if you refinanced, those deductions must be spaced out over the lifetime of the loan. You can only take this deduction if you itemize your return.
Personal Property Taxes
To take personal property tax deductions, the tax must be assessed on an annual basis on a movable piece of personal property. This tax must be based on the property’s value.
Examples of personal property taxes include vehicle registration fees (for cars, RVs, boats, etc.) and taxes paid on personal business equipment. Dig out those receipts and take your deduction(s). Note that there is a cap of $10,000 in deductions from state and local taxes. You can only take this deduction if you itemize your return.
The IRS requires that any jury fees be reported as taxable income. However, some employers will require their employers to turn over their jury fees in exchange for continuing the employee’s full salary while they are away.
If you were required to turn over your jury fees to your employer and report them as income, you can deduct those fees. You effectively serve as a pass-through entity and are no longer responsible for paying taxes on that money.
Gambling losses are tax deductible! …but only up to the amount that you won (and report as taxable income) and only if you itemize. The cost of non-winning lottery, raffle, and bingo tickets also falls into this category.
Medicare Premiums for Self-Employed Workers
If you run your own business and pay yourself, you know that you are responsible for the full amount of Medicare taxes that would usually be split by you and your employer.
To help make up for this, self-employed workers are eligible to deduct some of their Medicare premiums. It does not matter if you itemize or take the standard deduction; you will still be able to take this deduction.
One thing to note: Self-employed workers may not deduct the premiums for any time that they could have been covered under another employer’s health plan (if they work for themselves and another employer) or if they could have been covered under a spouse’s plan.
Tax Credits to Know
Missing a tax deduction here or there may not be detrimental or put you in a different tax bracket, but missing a tax credit can have a huge impact on the amount that you owe.
Child Care Tax Credit
Money paid for the care of your dependent(s) is eligible for a child care tax credit. The minimum credit amount is 20% and it can go as high as 35% of up to $3,000 in child care expenses. Household income determines the percentage.
College Tax Credit for New and Improved Job Skills
Even if you have been out of school for decades, you can claim a credit of up to $2,000 per year on post-secondary education that leads to new and/or improved job skills. This credit is subject to income limits.
These final two items do not qualify as deductions or credits, but they are useful to know in the context of tax returns.
State Income Tax Refund – Only If You Take the Standard Deduction
Most taxpayers choose to take the standard deduction. If you fall into this category, you do not need to report a state income tax refund on this year’s taxes. State tax refunds are tax-free, so long as your deductions in the previous year were not itemized.
If you have set up your dividends to automatically reinvest, be sure to take that into account when it comes time to unload your investments. Each dividend reinvestment lowers your future capital gains taxes.
We are already in the thick of tax season, but if you would like to revisit your tax strategy or create one for the years to come, take a look at our tax planning services and reach out to one of our Mount Pleasant financial advisors for more information.
The opinions expressed herein are those of Morris Financial Concepts, Inc. (“MFC”) and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.MFC-20-03.