10 Tax Deductions You Need to KnowFebruary 9th, 2018 by Anchor Bay Capital's Investment Team
You don’t need to be an expert to save money on taxes. Our tax system provides many opportunities through credits and deductions to keep more money in your pocket. This post will give you an understanding of the basics of tax deductions and a reminder of key deductions to get so that you don’t leave money on the table.
What is a deduction?
A deduction reduces how much of your income is subject to taxes. There are two types of deductions to remember: above the line deductions and below the line deductions.
Above the Line Deductions:
These deductions are taken directly from your gross income and result in your adjusted gross income or “AGI”. Your AGI is a key number that is used for several benefits such as qualifying for financial aid on the FAFSA, phase out ranges for retirement plans, and the amount of social security income that is taxed.
Below the line Deductions:
These deductions are taken from the AGI and the result is your taxable income. When you add up your below the line deductions the total is compared to the standard deduction amount and you get to use the greater number. The standard deduction for 2017 is $6,350 for single and $12,700 for married filing jointly.
What is a tax credit?
A tax credit is different than a deduction. Credits directly reduce your taxes. This means that if you have a $1,000 credit, your taxes owed are lowered by $1,000. A deduction however, reduces your taxable income so the benefit equates to a percentage based on the tax bracket you are in. For example, if you are in a 15% tax bracket and you have a $1,000 deduction, you will receive a reduction of taxes of $150
10 Deductions You Should Review:
- Mortgage Interest, Points, and Home Equity Loans: You can deduct the mortgage interest paid in 2017 for mortgages up to $1 million on loans taken before December 15th. For loans after this date, the limit is $750,000. If you started a loan or refinanced, don’t forget points (pre-paid interest). HELOC interest is still deductible in 2017, but in the future it will be harder to deduct HELOC interest unless the loan was used to make home improvements.
- Real Estate Tax, Personal Property Tax, and State/Local Taxes: Make sure to take a deduction for these taxes paid in 2017. In the future these will be limited to $10,000.
- Tax Prep Fees and Financial Planning Fees: These professional service fees are deductible. The financial planning fees only apply if the amount exceeds 2% of your AGI. These deductions are going away in 2018 but still apply for last year.
- Charitable Donations: Keeping track of your donations to charity is pretty common, but do you also keep track of the expenses related to charitable service? Your costs for a church activity or travel costs to a charitable event that you are working can be deductible. Make sure to add it up and talk to your tax advisor.
- Medical and Dental Expenses: If you have a high amount of unreimbursed medical expenses, including premiums make sure to total these items for a deduction. You can deduct the amount that exceeds 7.5% of your AGI.
- Retirement Plan and Health Savings Account Contributions: Contributions to your company or individual retirement plans reduce your taxable income. Keep in mind Roth contributions are not deductible but provide tax-free income in retirement.
- Job-Hunting Expenses: These expenses qualify as above the line deductions, so make sure to keep track if you incurred expenses looking for a new job.
- Moving Expenses: This is another deduction that is going away for the future, but if work moved you more than 50 miles away you most likely have some deductions.
- Business Meals and Entertainment: If you had meals, activities, entertained clients, etc. you can deduct 50% of these expenses. These are costs that were not reimbursed to you.
- Business mileage: If you use your car for business, keep track of your miles driven. These add up. You can’t deduct commuting, or expenses that are reimbursed to you, make sure to get a deduction if you have mileage that applies.
These deductions should help you be proactive in reducing the taxes that you owe and give you some insight in how to plan for the current year. The Tax Cuts and Jobs Act changes quite a few of the current deductions and increases the standard deduction amounts. Make sure to consult a tax advisor with questions and you can always reach out to us to coordinate your tax planning strategy for 2018!