With the doubling of the standard deduction and elimination or reduction of several itemized deductions, you might think there aren’t many opportunities left to itemize. That isn’t the case at all, depending on your circumstances. With the recent tax reform, it’s never been a better time to figure out what you can still itemize in 2018 and in future tax years. To keep track of these deductible expenses, it’s important to be organized and maintain a box or folder to store your receipts throughout the year. This level of organization is necessary whether you work with a tax professional or prepare your own taxes.
Deductions fall into these categories:
- Medical and dental expenses
- Taxes you paid
- Interest you paid
- Gifts to charity
- Casualty and theft losses
- Other miscellaneous deductions
Certain categories, including medical and dental expenses, casualty and theft losses, are subject to a floor that only permits you to deduct expenses above certain thresholds, such as 7.5% of your adjusted gross income (AGI – IRS Form 1040, line 38). Your AGI is your total amount of income from all sources after subtracting certain deductions, such as alimony paid, HSA contributions, the deductible part of self-employment taxes, etc. For example, if your AGI is $100,000 and the threshold for medical expenses is 7.5%, then any qualifying expenses above $7,500 can be included and deducted.
A: Medical and Dental Expenses
Out-of-pocket medical and dental expenses are subject to a 7.5% AGI floor in tax years 2017 and 2018 and revert to 10% thereafter. So for tax year 2018, you can deduct any qualifying expenses greater than 7.5% of your AGI. You’ll be surprised how quickly these expenses add up and become eligible to write off. Below is a list of the common deductions in this category.
Insurance premiums paid for medical coverage
This includes all premium costs you paid for out of pocket, but not those you paid for pre-tax through your employer-provided plan. Any premium you already received a tax deduction for can’t be double-counted here.
Insurance premiums for long-term care coverage
Amounts listed in the table below are per person, so if both spouses have coverage, they can both include premium expenses up to the allowable amount per their age. Remember, you can’t deduct any part of a premium paid for by an employer for a group long-term care policy.
|Your Age||Deductible Part of Premium|
|40 or less||$420|
|41 to 50||$780|
|51 to 60||$1,560|
|61 to 70||$4,160|
|71 or older||$5,200|
Here are a few more expenses you may be able to deduct.
- Payments of fees to doctors, dentists, surgeons, chiropractors, etc.
- Nursing home care costs.
- Payments for admission and transportation to a medical conference relating to a chronic disease that you, your spouse or your dependents have.
- You can deduct $0.18 per mile you drive to and from places for medical reasons. It’s important to keep a log of all mileage driven for medical, charitable and business reasons.
- Payments for false teeth, reading or prescription eyeglasses or contacts, hearing aids, etc.
B: State and Local Taxes You Paid
Under the new tax reform, taxpayers are limited to $10,000 in deductions for state and local income, sales and property taxes.
You may be able to deduct the following taxes up to the limit.
Income tax or general sales tax
For income tax and general sale tax, you can deduct the greater of these two expenses, but not both.
State and local income tax
If you live in a state with an income tax, you can deduct these taxes paid on your federal tax return. Fourteen states also charge a local income tax that can be included in this amount. Keep in mind that people who have businesses and/or investments that generate income in other states have to file a tax return in that state and pay tax there.
General sales tax
When you buy things, your receipt reflects the sales tax you paid. To determine your deduction, you can either aggregate sales tax paid throughout the year, or you can you use an IRS calculator that provides estimates based on your income and zip code. Since many don’t want to take the time to save and add up every receipt, it makes sense to use the calculator. What’s important to know is you can add sales tax paid on larger purchases such as a car, boat, RV, etc., to the IRS calculator’s basic estimate. In fact, the IRS calculator asks you for the sales tax paid on any significant purchases during the year.
Real estate tax
Do you own a home or parcel of land and pay property tax? If so, you can deduct it. You can even deduct property tax paid on your vacation home.
Personal property tax
Some states and local jurisdictions charge personal property tax on your possessions, such as a boat or a car. Seattle, for example, charges a personal property tax as part of your annual car tab renewal fee, which is based on the value of your car. You can deduct the portion of these expenses tied to the value of your property.
C: Interest You Paid
Families with debt find that this is their largest deduction, which may allow them to itemize instead of claiming the new higher standard deduction. Those without debt will not benefit from this deduction.
Home mortgage interest and points
This includes mortgage interest paid on your first $750,000 of home mortgage debt across qualifying properties, such as your primary and secondary home. Secondary homes include vacation properties or even interest paid on an RV loan if the vehicle or travel trailer has a bathroom, bedroom and kitchen. You can’t deduct interest paid on mortgage balances above $750,000.
Mortgage insurance premiums
When you make a down payment of less than 20% of the sale price of a home, you’re subject to private mortgage insurance. You can prepay this cost, or include it in your monthly payment until you refinance or reach 22% equity in your home. Mortgage insurance premium costs are deductible up to certain income limits. Married couples filing jointly who make less than $100,000 a year and single taxpayers making less than $50,000 a year can deduct these premiums in full. Married couples filing jointly who make more than $109,000 and single taxpayers who make more than $54,500 can’t deduct mortgage insurance premiums.
If you’ve borrowed against your investment portfolio, otherwise called margin, to buy other investments, then you may be able to deduct the interest paid on the margin loan. The deduction for interest paid to buy income-producing securities/investments is limited to the net amount of investment income received. This means if you borrow $500,000 on margin to buy income-producing securities, you can deduct interest paid up to the amount of taxable income generated. You can’t buy tax-exempt municipal bonds with margin and deduct interest paid for the purchase since it isn’t creating taxable income.
D: Gifts to Charity
When you give cash, stock or collectibles like artwork to qualified charitable organizations, you’re entitled to deduct those donations. For gifts to public charities, such as churches, hospitals, qualified medical research organizations, schools, colleges and universities, you can deduct up to 60% of your AGI for cash related gifts, and for gifts of stock or property (investments, real estate, cars, artwork, etc.), you can deduct up to 30% of AGI. For gifts to private charities, such as family foundations, you can deduct up to 30% of AGI for cash related donations and up to 20% of AGI for stocks or property. Any gift you can’t deduct one year due to income limitations can be carried forward for five years.
Gifts by cash or check
You can deduct all gifts you make by cash or check to qualified charitable organizations. Regardless of the amount of cash given, you must keep a bank record or written communication with the charitable organization that has the name of the organization, the amount and the date of the contribution.
Gifts not made by cash or check
For gifts of property greater than $500, you must complete IRS form 8283. If the gift has a fair market value of more than $500 but less than $5,000, complete section A. If it’s greater than $5,000, a qualified appraisal is required along with section B of this form. If you moved securities to a Donor Advised Fund, this is where you deduct the fair market value of that gift.
You can find more information about how to determine the best charitable vehicle on the Merriman website. Stay tuned for more detailed information on this and other tax topics in our upcoming eBook!