By: Matthew Frankel, CFP
The Tax Cuts and Jobs Act made the most sweeping changes to the U.S. tax code in several decades, and the first time most Americans will really feel its impact is when they file their 2018 tax return sometime in 2019. With that in mind, here are five deductions or types of deductions that can still save you lots of money under the new tax law and what you need to know about each.
1. The standard deduction
The vast majority of Americans will take advantage of the standard deduction in 2019, but this has become a far larger deduction than it used to be, so it’s worth mentioning.
The Tax Cuts and Jobs Act has made the standard deduction much larger than it used to be. In fact, while roughly 70% of taxpayers have used the standard deduction historically, experts now expect that 95% of all taxpayers will find the standard deduction more valuable than itemizing.
If you choose to take the standard deduction when you file your 2018 or 2019 tax returns, here’s how much of your income you’ll be able to exclude from taxation:
|Tax Filing Status||2018 Standard Deduction||2019 Standard Deduction|
|Married Filing Jointly||$24,000||$24,400|
|Head of Household||$18,000||$18,350|
2. Itemized deductions
Thanks to the Tax Cuts and Jobs Act and the higher standard deduction that came with it, experts have estimated that only about 5% of Americans will be able to itemize deductions going forward. Several deductions can be itemized, but the “big four” generally determine whether you can itemize:
- Mortgage interest — You can deduct the interest on qualified residence loans of as much as $750,000 in principal balances. Home equity loan interest can be included, but only if the loan’s proceeds were used to substantially improve your primary or secondary residence.
- Charitable contributions — The deduction for charitable contributions survived the Tax Cuts and Jobs Act mostly intact. One big difference is that if you donate to a college or university and receive the right to purchase athletic tickets as a result, it is no longer deductible.
- Medical expenses — Medical expenses in excess of 7.5% of your adjusted gross income (AGI) are deductible for the 2018 tax year. This threshold is set to rise to 10% for 2019, but it’s certainly possible Congress will decide to extend it.
- State and local taxes — Also known as the SALT deduction, this includes state and local income taxes or sales taxes, as well as property taxes, but the deduction is capped at a total of $10,000.
In a nutshell, if these four deductions add up to more than your standard deduction, itemizing is probably the way to go. On the other hand, if you’re like most American taxpayers, the opposite will be true and the standard deduction will be your best option.
3. Health Savings Account contributions
If you have a qualifying high-deductible health insurance plan, you are eligible to make contributions to a health savings account, or HSA.
A qualifying plan is defined as one with a deductible of $1,350 (single)/$2,700 (family) or more for 2019, with an out-of-pocket maximum of up to $6,750/$13,500. If you qualify, you can contribute as much as $3,500 (single coverage) or $7,000 (family coverage) to your HSA.
Not only are health savings account contributions tax deductible, but withdrawals used to pay for qualified medical expenses are 100% tax free. Plus, the funds in your HSA can be invested, similar to a 401(k), so this is a unique way to invest money and enjoy a double tax benefit.
4. Student loan interest
Student loan interest remains deductible, and eligible borrowers can deduct as much as $2,500 in interest on qualified student loans that they pay during each calendar year. While nobody enjoys paying their student loans, this deduction can certainly help.
Furthermore, the student loan interest deduction can be used whether or not you choose to itemize deductions, so all American taxpayers with student loan payments are eligible.
5. Retirement savings
I’ve said before that tax deductions for retirement account contributions are perhaps the best deductions of all. Not only do you save money on your taxes for contributing to a tax-deferred retirement account, but you’ll be setting yourself up for greater financial health in retirement.
Just to give a rundown of a few key retirement savings limits, participants in a 401(k), 403(b), or 457 plan can elect to defer as much as $19,000 of their compensation in 2019 and even more if they’re over 50 or otherwise qualify for catch-up contributions. (Note: 403(b) plans have a unique catch-up provision for long-tenured employees.) And Americans who qualify for the traditional IRA deduction can contribute as much as $6,000 ($7,000 if 50 or older), fully tax deductible. Self-employed individuals can also get excellent deductions for their SIMPLE IRA, SEP IRA, or Solo 401(k) contributions.
Still plenty of tax breaks, but not everyone’s taxes will go down
The Tax Cuts and Jobs Act made the most comprehensive overhaul to the U.S. tax code in decades, but many tax breaks survived unscathed. In addition to the five deductions discussed here (well, eight if you include the breakdown of major itemized deductions), there are a bunch of tax credits available, some of which, like the Child Tax Credit, have been significantly expanded.
Having said that, while many Americans will indeed get a tax cut when they file their return in 2019, this won’t be the case for everyone. For example, residents of high-tax states will undoubtedly miss the unlimited SALT deduction, and larger families with older children will feel the sting from the loss of the personal exemption and the inability to take the Child Tax Credit for children over 16.
The $16,122 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.
Disclaimer: This tax information is provided for educational use only and should not be used as tax advice. For tax advice on your individualized situation please consult a tax professional.
Past performance is not a predictor of future results. Individual investment results may vary. All investing involves risk of loss.The Motley Fool has a disclosure policy.