Are you looking for a way to reduce your taxable income? For many, the easiest way is to claim popular tax deductions that immediately reduce your taxable income.
The recent tax law changes mean fewer people will benefit from itemizing deductions. However, there are plenty of tax deductions you may still want to claim.
Some of the most common tax deductions include student loan interest, retirement plan contributions and home mortgage interest. But these aren’t the only tax deductions you might be eligible for.
Whether you file your taxes yourself online or use an accountant, it’s always a good idea to see what deductions are possible. That way, you can make sure you don’t accidentally overlook any.
Table of Contents
- What are Tax Deductions?
- Tax Deduction Changes for 2019
- Common Tax Deductions
- Itemized Tax Deductions
- Claiming Tax Deductions
What are Tax Deductions?
Tax deductions reduce your taxable income. The standard tax deduction is a flat amount that anyone can take, but only if you don’t itemize your deductions.
Thanks to the new tax law, the standard deductions have gone up. For single taxpayers, it’s $12,000 and for married filers, it’s $24,000. That’s the amount you can subtract from your gross income.
Then you can claim some other deductions (#1-#7 below) to further reduce your taxable income. Note that you can’t claim the other deductions unless you itemize, and you’re not eligible for the standard deduction if you do itemize.
Tax Deduction Changes for 2019
The Tax Cut and Jobs Act of 2017 suspended or eliminated some deductions you used to be able to claim, including moving expenses and job search expenses. Fewer people than before will find it makes sense to itemize tax deductions, because the standard deduction is now $12,000 for single filers and $24,000 for those who are married and filing joint tax returns.
Although there’s less incentive to itemize tax deductions like charitable donations or state and local taxes, there are several deductions you can claim without filing an itemized return.
Common Tax Deductions
You don’t have to itemize to claim these popular tax deductions. Keep in mind that certain deductions have income restrictions. It’s possible you only qualify for a partial deduction if you earn a high income.
1. Student Loan Interest
You can deduct up to $2,500 in paid student loan interest each year per tax return. This means single filers can deduct $2,500. Married filers can only deduct $2,500 (not $5,000), even when both spouses have student loan payments. Your student loan lenders will provide you with Form 1098-E showing the amount of interest you paid.
2. Traditional IRA and 401k Contributions
Traditional IRA and 401k contributions reduce your taxable income for the current tax year. As a tradeoff, you will pay taxes on the entire amount you withdraw in the future. Note that if you are contributing to your 401k at work, you already contributed from your pre-tax income, so there’s nothing to note on your tax return.
Roth IRA and Roth 401k contributions aren’t tax deductible because you fund them with your after-tax income.
IRA Contribution Limits
- Tax year 2018: $5,500 ($6,500 if age 50 or older).
- Tax year 2019: $6,000 ($7,000 if age 50 or older).
Each taxpayer can contribute up to the contribution limits listed above. So if you are married, each spouse can contribute $6,000 for tax year 2019 and you can deduct $12,000 from your combined taxable income.
401k Contribution Limits
- Tax year 2018: $18,500 ($24,500 if age 50 or older)
- Tax year 2019: $19,000 ($25,000 if age 50 or older)
Like a traditional IRA, your tax-deferred 401k contributions reduce your taxable income for the current tax year, but you will pay taxes when you make a withdrawal. As we said, there’s nothing to note on your tax return when it comes to 401k contributions, but it is good to understand the contribution limits so you can reduce your income taxes this year.
3. FSA and HSA Contributions
If your employer offers health insurance, you might qualify for this tax deduction.
Flexible Spending Arrangements (FSA) and Health Savings Accounts (HSA) let you save money on your taxes while you save for medical expenses. Like a 401k, your FSA is employer sponsored, so you’ll contribute pre-tax income from your paycheck and there’s nothing to note on your tax return. For an HSA, you’ll need to prepare Form 8889 with your tax return to deduct your HSA contributions.
There are many similarities between an FSA and HSA, but the annual contribution limits (i.e., your tax deduction) differ.
Before maxing out this deduction, read the savings plan rules. It’s not uncommon for a portion of your unused contributions to an FSA to expire at the end of the year. Your plan might let you roll up to $500 of your unused balance into the next calendar year.
Flexible Spending Arrangements
- Tax year 2018: $2,650.
- Tax year 2019: $2,700.
FSAs are linked to the individual taxpayer like an IRA or 401k. This means joint filers can each have an FSA and each enjoy the tax savings.
Health Savings Accounts
- Tax year 2018: $3,450 for single filers ($6,900 for families).
- Tax year 2019: $3,500 for single filers ($7,000 for families).
Contributors at least 55 years or older can make an annual $1,000 catch-up contribution.
If you have a high-deductible health plan, your employer may offer an HSA instead of an FSA. This can work to your advantage because of the higher contribution limits.
4. Investment Losses
Nobody wants to sell investments for a loss. But sometimes selling for a loss can help you at tax time. Selling your losers first offsets any taxable capital gains you earn by selling profitable investments. After that, you can deduct up to $3,000 in annual investment losses in excess of your capital gains with the capital loss deduction.
You can manually decide which investments to sell for a loss. But even if you use a robo-advisor to manage your portfolio, you may be able to sell for a loss. Some robo-advisors, such as Betterment, use a strategy called “tax loss harvesting” to minimize your potential capital gains taxes while maintaining a balanced portfolio.
5. Educator Expenses
If you teach students between grades kindergarten and 12, you can deduct up to $250 in unreimbursed supply, training and equipment purchases each year. If both spouses teach, you can deduct up to $500 annually.
The following vocations qualify for the educator expense deduction:
6. Self-Employment Expenses
If you have a side hustle or are self-employed, you can deduct many business-related expenses, including:
- Materials and supplies
- Digital services
- Business mileage
- Licenses and permits
- Training courses
- Payments to subcontractors
As a rideshare driver for Uber or Lyft, you can deduct the miles you drive, plus parking and tolls, to name a few possible deductible expenses.
If you solely use a portion of your house for business purposes, you might also be able to deduct the square footage of your home office. If neither you nor your spouse has employer health insurance, you can also deduct your monthly health insurance premiums.
7. Rental Property Expenses
A growing trend for earning extra income is to own rental property or become an Airbnb host. Whether you rent a spare bedroom or an entire house, it’s possible to deduct business-related property expenses.
Some rental property tax deductions include:
- Mortgage interest
- On-property services like internet and cable TV
- Cleaning fees and maintenance costs
Keep a running log of your rental property expenses to save time calculating your deduction.
Itemized Tax Deductions
Itemizing your expenses for the deductions below only makes sense if, when totaled up, they exceed the standard deduction amount. That means single filers need at least $12,000 in qualified deductions and married couples filing a joint return should have at least $24,000 in qualified deductions.
For example, a single filer with at least $12,000 in charitable contributions and state and local taxes should itemize. Each dollar above the standard deduction further reduces your taxable income.
But remember that you can deduct expenses like student loan interest and side hustle costs without filing an itemized return.
1. Charitable Contributions
Cash donations to tax-exempt organizations are probably the easiest way to make charitable contributions. You can also donate physical items like clothing, used cars or canned food.
Make sure you receive a written receipt for each contribution, or get a year-end donation summary.
It’s also possible to deduct charitable mileage and other out-of-pocket expenses you might encounter.
Tip: Accurately track your various charitable contributions with TurboTax. Their ItsDeductible tool lets you track your donations in real time during the year.
2. State and Local Taxes
Starting with tax year 2018, you can only deduct up to $10,000 in state and local taxes (SALT). In prior tax years, the SALT deduction was unlimited.
You can deduct these state and local taxes on your itemized federal return:
- Income tax
- Property tax
- Sales tax
When married taxpayers file separate returns, each filer can deduct up to $5,000.
3. Home Mortgage Interest
The home mortgage interest deduction still exists, but is only $750,000 for mortgages originating after December 16, 2017. If your mortgage originated before this date, you can deduct up to $1 million in paid home mortgage interest.
Your mortgage lender will send you a Form 1098 each year stating the amount of interest you paid.
4. Medical and Dental Expenses
Medical bills are a leading cause of financial problems. Itemizers might be able to get some relief with deductions for unreimbursed medical and dental expenses.
On your 2018 tax return (due April 15, 2019), you can deduct medical and dental expenses exceeding 7.5% of your adjusted gross income.
Starting in tax year 2019, you will only be able to deduct medical expenses exceeding 10% of your adjusted gross income.
While not every person with medical bills will qualify for this deduction, almost any medical or dental expense is eligible, including:
- Fees to doctors, surgeons, chiropractors, and psychiatrists.
- Inpatient hospital care or residential nursing home care.
- Alcohol or drug addiction treatment.
- Insulin and prescription medication.
- Medical supplies including false teeth, eyeglasses, crutches and wheelchairs.
Please refer to IRS Topic Number 502 for a detailed list of eligible expenses.
5. Casualty and Theft Losses
If you experienced any property damage, loss or theft from a federally-declared disaster, you can itemize your unreimbursed losses. Before claiming this tax deduction, you will need to file a claim with your homeowners insurance policy. Any insurance reimbursement reduces your deduction amount.
According to the IRS, for personal property losses, you can deduct the lesser of the adjusted basis of your property or the decreased fair market value as a result of the disaster.
Claiming Tax Deductions
So how do you claim tax deductions?
Online tax prep programs make it easy to claim the most popular ones. As you go through the filing process, you will answer different questions that determine if you qualify for deductions. Most filers will be able to file their own taxes without overlooking a deduction.
For instance, your tax prep program may ask questions like, “Did you donate to charity in 2018?” or, “Did you have student loan payments in 2018?”
You may decide to hire an accountant if you have a complex tax situation and are inexperienced with the tax code. Two examples may include navigating self-employment deductions or deducting casualty and theft losses. An accountant can cost more but can help you file an accurate return while saving you time.
If you decide to file your own tax return, you might use one of these programs to file an accurate tax return at the lowest cost.
Credit Karma Tax
Credit Karma Tax lets you file the most complex tax returns for free. Other programs may charge up to $160 when you report investment income, self-employment income or itemized deductions. With Credit Karma Tax, you could file that exact same federal and state return for free.
As a bonus, you will get free audit support and access to live chat support and knowledge base articles to help answer your tax questions.
You can file a basic federal and state return for free on H&R Block if you don’t have have to itemize or report investment income or self-employment income. It’s also possible to file for free when you have student loan interest and tax credits like childcare to report.
You might decide to use H&R Block because the platform can be more user-friendly than a service like Credit Karma Tax. For an additional fee, Block’s Tax Pro Review lets a tax professional review your return for errors and potential tax deductions before you file.
TurboTax is one of the most popular tax prep programs because it’s so easy to use. It’s possible to file a free federal and state return, but you will have to pay if you have common tax deductions like student loan interest. It’s possible to track your deductions in real-time online or using the TurboTax app. This convenience might be worth the higher fee if you itemize.
Tax deductions are an easy way to reduce your taxable income. Depending on the deduction, you may receive a tax form, such as a Form 1098-E from your student loan lender, in January stating your deductible spending. For other deductions such as auto mileage or web hosting fees that you’ve incurred from your self-employment, you will need to keep a running log during the year.
What deductions can you claim this year? Share your favorite deduction in the comments.