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With most W-2 and 1099 tax forms available at the start of February, almost everyone is getting ready to file taxes in the next month or two. There have been significant changes to the tax laws since the Tax Cuts and Jobs Act was signed into law in December 2017, some positive, some negative. Here is a list of the top changes you should be aware of when filing this year, as well as some common deductions that you can and should take advantage of.
Major changes to the current deductions:
Cap on state and local tax (SALT) deductions: There is a $10,000 cap on the deductibility of SALT payments. For example, if you paid $12,000 in state and local taxes, only $10,000 will be deducted from your income, potentially increasing your total tax bill
Cap on mortgage interest deductions: You can deduct mortgage interest expense if you itemize, and the amount is capped at $1,000,000 in debt (if your mortgage was closed before December 16, 2017) or $750,000 (if your mortgage was closed after December 16, 2017). This shouldn’t affect most homeowners, as your mortgage balance must be more than $750,000 to potentially lose part of this deduction.
Increased standard deduction: The standard deduction increased in 2019 to $12,200 for single filers and $24,400 for married couples filing jointly. This severely limits the benefit of itemizing returns for many taxpayers. Those that used to itemize may find it more advantageous to take the standard deduction now.
Tax breaks which have been eliminated:
Job search expenses: You cannot deduct expenses related to finding a new job
Tax preparation expenses: You can no longer deduct the costs of getting your taxes done. The exception to this is self-employed individuals.
Employee business expenses: Employees can no longer to deduct unreimbursed expenses that they incur for work.
Health insurance: You are no longer required to show proof that you had health insurance in 2019, nor will you have to pay a penalty for not having health insurance.
Gig economy: While not a tax break to begin with, there have been significant changes to the deductibility of certain expenses for those generating income from the gig economy (ride sharing and vacation rentals) the IRS created a new website to offer tips, resources, and answer questions relating to filing and reporting income and expenses. This can be found at https://www.irs.gov/businesses/gig-economy-tax-center
New and still available tax breaks:
Additional senior standard deduction: If you are over the age 65 at the beginning of the year, or blind, an additional standard deduction of $1,650 for single filers or $2,600 (combined) for married individuals filing jointly can be applied to your return,
Mortgage debt forgiveness: If you foreclosed on your home, and the amount was under $2,000,000, you are not required to report the forgiven loan amount as income.
College tuition and fees: You can deduct up to $4,000 for qualified college tuition and fees, however income limitation apply.
Medical expenses: You are allowed to deduct all qualified medical and dental expenses, provided that they exceed 7.5% of your adjusted gross income.
Qualified retirement plan contribution: Available until you actually file your taxes, this allows you to defer a portion of your income from taxes. This can be a powerful deduction, with the ability to potentially lower your overall tax bill by thousands of dollars. Contribution amounts can vary depending on your age and the type of account.
No one likes to pay taxes, but it is unfortunately a fact of life. While this is not an all-encompassing list of every deduction available, hopefully it will provide you with some insight on how to minimize your taxable liability going forward. Taxes can be a huge drag on investment performance and after-tax income, so it is important to ensure that you are doing everything possible to minimize that impact.
This is for informational purposes only. Waddell & Reed and its representatives do not offer tax advice. 01/20