The Tax Cuts and Jobs Act was the biggest overhaul to the U.S. tax code in decades, and it made some significant changes to the tax deductions that are available. Many tax deductions were kept intact, but others were modified, and some were eliminated entirely.
There are also several different types of tax deductions, and these can get a bit confusing. For example, some tax deductions are only available if you choose to itemize deductions, while others can be taken even if you opt for the standard deduction. With all that in mind, here's a rundown of what Americans need to know about tax deductions as the 2019 tax filing season opens.
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What is a tax deduction?
The term "tax deduction" simply refers to any item that can reduce your taxable income. For example, if you pay $2,000 in tax-deductible student loan interest, this means your taxable income will be reduced by $2,000 for the year in which you paid the interest.
There are several different types of tax deductions. The standard deduction is one that every American household is entitled to, regardless of their expenses during the year. Taxpayers can claim itemizable deductions instead of the standard deduction if it benefits them to do so. Above-the-line deductions, which are also known as adjustments to income, can be used by households regardless of whether they itemize or not. And finally, there are a few other items that don't really fit into one of these categories but are still tax deductions.
The standard deduction
When filling out their tax returns, American households can choose to itemize certain deductions (we'll get to those in a bit), or they can take the standard deduction -- whichever is more beneficial to them.
The Tax Cuts and Jobs Act nearly doubled the standard deduction. Before the increase, about 70% of U.S. households used the standard deduction, but now it is estimated that roughly 95% of households will use it. For the 2018 and 2019 tax years, here are the standard deduction amounts.
Tax Filing Status
2018 Standard Deduction
2019 Standard Deduction
Married Filing Jointly
Head of Household
Married Filing Separately
Data source: IRS.
To be perfectly clear, unless your itemizable deductions exceed the standard deduction amount for your filing status, you'll be better off using the standard deduction.
The alternative to taking the standard deduction is choosing to itemize deductions. Itemizing means deducting each and every deductible expense you incurred during the tax year.
For this to be worthwhile, your itemizable deductions must be greater than the standard deduction to which you are entitled. For the vast majority of taxpayers, itemizing will not be worth it for the 2018 and 2019 tax years. Not only did the standard deduction nearly double, but several formerly itemizable tax deductions were eliminated entirely, and others have become more restricted than they were before.
With that in mind, here are the itemizable tax deductions you may be able to take advantage of when you prepare your tax return in 2019.
The mortgage interest deduction is among the tax deductions that still exist after the passage of the Tax Cuts and Jobs Act, but for many taxpayers it won't be quite as valuable as it used to be.
Specifically, homeowners are allowed to deduct the interest they pay on as much as $750,000 of qualified personal residence debt on a first and/or second home. This has been reduced from the former limit of $1 million in mortgage principal plus up to $100,000 in home equity debt.
On that note, the deduction for interest on home equity debt has technically been eliminated for the 2018 tax year and beyond. However, if the home equity loan was used to substantially improve the home, the debt is considered a qualified residence loan and can therefore be included in the $750,000 cap.
This is perhaps the least changed of the major tax deductions. Contributions to qualified charitable organizations are still deductible for tax purposes, and in fact the deduction has become a bit more generous for the ultra-charitable. U.S. taxpayers can now deduct charitable donations of as much as 60% of their adjusted gross income (AGI), up from 50% of AGI.
One negative change to note: If you donate to a college in exchange for the ability to buy athletic tickets, that is no longer considered a charitable donation for tax purposes.
The IRS allows taxpayers to deduct qualified medical expenses above a certain percentage of their adjusted gross income. The Tax Cuts and Jobs Act reduced this threshold from 10% of AGI to 7.5%, but only for the 2017 and 2018 tax years. So when you file your 2018 tax return this year, you can deduct qualified medical expenses exceeding 7.5% of your AGI. For example, say your AGI is $50,000, and you incur $5,000 in qualified medical expenses. The threshold you need to cross before you can start deducting those expenses is 7.5% of $50,000, or $3,750. Your expenses are $1,250 above the threshold, so that's the amount you can deduct from your taxable income.
However, the medical deduction threshold is set to return to 10% of AGI starting with the 2019 tax year. So when you file your 2019 tax return in 2020, you'll use this higher percentage to determine whether you qualify for the deduction.
State income tax or state sales tax
The IRS gives taxpayers the choice to claim either their state and local income tax or their state and local sales tax as an itemized deduction. Naturally, if your state doesn't have an income tax, the sales tax deduction is the way to go. On the other hand, if your state does have an income tax, then deducting that will generally save you more money than deducting sales tax.
One quick note: If you choose the sales tax deduction, you don't necessarily need to save each and every receipt to document how much sales tax you've paid. The IRS provides a handy calculator you can use to easily determine your sales tax deduction.
If you pay property tax on a home, car, boat, airplane, or other personal property, you can count it toward your itemized deductions. This deduction and the deduction for income or sales tax are collectively known as the SALT deduction -- that is, the "state and local taxes" deduction.
There's one major caveat when it comes to the SALT deduction. The Tax Cuts and Jobs Act limits the total amount of state and local taxes you can deduct -- including property taxes and sales/income tax -- to $10,000 per year. So if you live in a high-tax state or simply own some valuable property that you pay tax on, this could significantly limit your ability to deduct these expenses.
The bottom line on itemizable deductions
That wraps up the major itemizable deductions that are still available under the newly revised U.S. tax code. As you can see, there aren't many of them, and some of those that remain -- such as the medical expense and SALT deductions -- are quite limited.
For itemizing to be worth your while, you need some combination of these deductions to exceed your standard deduction. It's easy to see why most taxpayers won't itemize going forward.
As a personal example, my wife and I have traditionally itemized our deductions. However, in 2018 we'll have about $9,000 in deductible mortgage interest, a few thousand dollars in charitable contributions, and about $6,000 in state and local taxes, including property taxes. In previous years, this would have made itemizing well worth it, but it looks like we'll be using the standard deduction when we file our return in 2019.
Above-the-line tax deductions
While you need to itemize deductions to take advantage of the deductions I discussed in the previous section, there are quite a few tax deductions that you can use regardless of whether you itemize or take the standard deduction.
These are known as adjustments to income and are more commonly referred to as above-the-line tax deductions. And with a few exceptions, most of these survived the recent tax reform unscathed. Here are the above-the-line deductions you may be able to take advantage of in 2019.
Tax-deferred retirement contributions
If you contribute to any tax-deferred retirement accounts, you can generally deduct the contributions from your taxable income, even if you don't itemize. This includes:
- Contributions to a qualified retirement plan such as a traditional 401(k) or 403(b). For 2018, the maximum elective deferral by an employee is $18,500, and for the 2019 tax year this is increasing to $19,000. If you're 50 or older, these limits are raised by $6,000 each year.
- Contributions to a traditional IRA. The IRA contribution limit is $5,500 for the 2018 tax year and $6,000 for 2019, with an additional $1,000 catch-up contribution allowed if you're 50 or older. However, it's important to point out that if you or your spouse is covered by a retirement plan at work, your ability to take the traditional IRA deduction is income-restricted.
- If you are self-employed, your contributions to a SEP-IRA, SIMPLE IRA, or Solo 401(k) are generally deductible, unless they are made on an after-tax (Roth) basis.
Health savings account (HSA) and flexible spending account (FSA) contributions
If you contribute to a tax-advantaged healthcare savings account (HSA), your contributions are tax-deductible up to the IRS's contribution limits. The 2018 contribution limit is $3,450 for those with single healthcare policies or $6,900 those with family coverage. In 2019, these limits will increase to $3,500 and $7,000, respectively. There's also a $1,000 catch-up allowance if you're 55 or older.
An HSA has many unique features. Most importantly, you can withdraw your HSA funds tax-free from your account at any time to cover qualifying medical expenses. That means you can get a tax break on both your contribution and your withdrawal -- a perk that no IRA or 401(k) offers. Once you turn 65, you can withdraw money for non-healthcare purposes for any reason without paying a penalty -- though you'll have to pay income tax on withdrawals that don't go toward qualifying medical expenses. Additionally, unlike a flexible spending account (more on this below), an HSA allows you to carry over and invest your money year after year.
You can participate in an HSA if all of the following apply:
- You're covered by a high-deductible health plan (HDHP)
- You're not covered by another health plan that is not an HDHP
- You're not enrolled in Medicare
- You're not claimed as a dependent on someone else's tax return
If you don't qualify for an HSA, you may still be able to contribute to a flexible spending account, or FSA. The FSA contribution limit is $2,650 in 2018 and $2,700 in 2019. While FSAs aren't quite as beneficial as HSAs, they can still shelter a good amount of your income from taxation. Beware that you can only roll over up to $500 in leftover funds to the following year, so for the most part, FSAs are "use it or lose it" accounts.
Dependent care FSA contributions
There's another type of flexible spending account that's designed to help families pay for child care expenses. Married couples filing jointly can set aside as much as $5,000 per year on a pre-tax basis, and single filers can set aside as much as $2,500 to be spent on qualifying dependent care expenses.
Note that you can't use a dependent care FSA and the popular Child and Dependent Care tax credit for the same expenses. However, with child care expenses running well into the five-figure range in many parts of the country, it's fair to say that many parents should be able to take advantage of both child care tax breaks.
Teacher classroom expenses
If you're a full-time K-12 teacher and have paid for any classroom expenses out of pocket, you can deduct up to $250 of those expenses as an above-the-line tax deduction. Potential qualifying expenses could include classroom supplies, books you use in teaching, and software you purchase and use in your classroom, just to name a few.
Student loan interest
The IRS allows taxpayers to take an above-the-line deduction for up to $2,500 in qualifying student loan interest per year. To qualify, you must be legally obligated to pay the interest on the loan -- essentially this means the loan is in your name. You also cannot be claimed as a dependent on someone else's tax return, and if you choose the "married filing separately" status, it will disqualify you from using this deduction.
One important thing to know: Your lender will only send you a tax form (Form 1098-E) if you paid more than $600 in student loan interest throughout the year. If you paid less than this amount, you are still eligible for the deduction, but you'll need to log into your loan servicer's website to get the required information.
Half of the self-employment tax
There are some excellent tax benefits available to self-employed individuals (we'll discuss some in the next section), but one downside is the self-employment tax.
If you're an employee, you pay half of the tax for Social Security and Medicare, while your employer pays the other half. Unfortunately, if you're self-employed, you have to pay both sides of these taxes, which is collectively known as the self-employment tax.
One silver lining is that you can deduct one-half of the self-employment tax as an above-the-line deduction. While this doesn't completely offset the additional burden of paying the tax, it certainly helps to lessen the sting.
Home office deduction
If you use a portion of your home exclusively for business, you may be able to take the home office deduction for expenses related to its use. The IRS has two main requirements you need to meet. First, the space you claim as your office must be used regularly and exclusively for business. In other words, if you regularly set up your laptop in your living room where you also watch TV every night, you shouldn't claim a home office deduction for the space.
Second, the space you claim must be the principal place you conduct business. Generally, this means you're self-employed, but there are some circumstances in which the IRS allows employees to take the home office deduction as well.
There are two ways to calculate the deduction. The simplified method allows you to deduct $5 per square foot, up to a maximum of 300 square feet of dedicated office space. The more complicated method involves deducting the actual expenses of operating in that space, such as the proportion of your housing payment and utility expenses that are represented by the space, as well as expenses relating to the maintenance of your home office. You are free to use whichever method is more beneficial to you.
Other tax deductions
In addition to the itemizable and above-the-line deductions I've discussed, there are a few tax deductions that deserve separate mention, because they generally apply only if you have specific types of income.
- Investment losses: If you sold any investments at a loss, you can use these losses to offset any capital gains income that you have. Short-term losses must first be used to offset short-term gains, while long-term losses must first be applied to long-term gains. And if your investment losses exceed your gains for the year, you can use up to $3,000 in remaining net losses to reduce your other taxable income for the year. If there are still losses remaining, you can carry them forward to future years.
- Pass-through income: This deduction is a product of the Tax Cuts and Jobs Act and is designed to help small-business owners save money. U.S. taxpayers can now use as much as 20% of their pass-through income as a deduction. This includes income from an LLC, S-Corporation, or sole proprietorship, as well as partnership income and income from rental real estate, just to name some of the potential sources. The deduction is not available to certain taxpayers whose income comes from "specified service businesses" (more details here) and exceeds certain thresholds.
- Gambling losses: You can deduct gambling losses on your taxes, but only to the extent that you have gambling winnings. In other words, if none of your income came from gambling, you can't deduct the $500 you lost on your last trip to Las Vegas.
- Other self-employed deductions: Finally, if you're self-employed, there are a ton of business deductions you may be able to take advantage of. You can deduct business-related travel expenses, office supplies and equipment, and health insurance premiums from your self-employment income, just to name a few potential deductions. And don't forget about the special retirement accounts for the self-employed that we covered earlier.
Deductions you can't use anymore
Unfortunately, no discussion of tax deductions would be complete without mentioning those that didn't survive the Tax Cuts and Jobs Act, the recently implemented overhaul of the U.S. tax code. Here are some of the tax deductions that were available before the 2018 tax year but aren't around anymore:
- The tuition and fees tax deduction -- although the American Opportunity Credit and Lifetime Learning Credit are still available.
- The deduction for casualty and theft losses, unless the losses were caused by a federally declared disaster.
- Unreimbursed employee expenses. If you had to pay for work uniforms, for example, you're out of luck.
- The above-the-line deduction for job-related moving expenses, although military personnel may still be able to use it.
- Employer-subsidized parking and transportation reimbursement are no longer deductible.
- Tax preparation costs. The costs of hiring an accountant to do your taxes, or of using tax-prep software, used to be deductible -- but they aren't anymore.
- All other deductions that previously fell under the IRS's "miscellaneous deductions" category have been eliminated.
Tax deductions vs. tax credits: What's the difference?
You may notice that some familiar tax breaks haven't been included in this discussion. That's because many of the most popular tax breaks are tax credits, not deductions. Here are just a few popular tax credits that you may be able to claim:
- The Earned Income Tax Credit, or EITC
- The American Opportunity Credit
- The Lifetime Learning Credit
- The Child Tax Credit
- The Child and Dependent Care Credit
- The Retirement Savings Contributions Credit, or "Saver's Credit"
There's a big difference between tax deductions and tax credits. Tax deductions lower the amount of your income that will be subject to taxation. For example, if your income is $80,000, and you have $20,000 worth of tax deductions, your taxable income is $60,000. If you're single, this would reduce your tax bill by over $4,000, based on the 2019 tax brackets.
On the other hand, tax credits lower the amount of tax you have to pay, dollar for dollar. So if your taxable income translates to a 2018 federal income tax of $10,000, and you have $3,000 in tax credits, you'll only have to pay $7,000.
If you're unsure about taking any of these tax deductions
As a final point, it's important to mention that this guide is a broad overview of the various tax deductions that may be available to you, and some of them have quite a bit of fine print attached to them that we couldn't possibly cover in one article. For example, the IRS publication that discusses the home office deduction is 34 pages long all by itself.
Some tax deductions are pretty straightforward. If you donate money to a qualified charity and get a receipt, for instance, you can be pretty certain that you'll qualify for the charitable contributions deduction. However, if there's any doubt in your mind about your ability to take any of these deductions, be sure to consult a qualified tax professional for advice.
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