When tax time rolls around and your bill starts adding up, tax deductions can be a big money saver. As long as you know what they are and how to take advantage of them. Here’s a quick guide to tax deductions and the three most common deductions to take.
What is a Tax Deduction?
Tax deductions lower a person’s tax liability by decreasing his or her taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be subtracted from his or her adjusted gross income to figure out how much tax is owed.
The government uses tax deductions as a way to entice taxpayers to participate in community service programs for the betterment of society. This means taxpayers who are aware of state and federal deductions can benefit greatly from tax deductions while also supporting and giving back to their communities throughout the year.
There are two ways to claim tax deductions: take the standard deduction or itemize deductions. Keep in mind that you cannot do both.
Standard Deduction vs Itemized Deductions
The standard deduction is a non-taxable portion of income that can be used to reduce your bill. As mentioned above, you can only take the standard deduction if you choose to not itemize your deductions. The standard deduction amount is calculated based on your filing status, age, whether you’re disabled, or are claimed as a dependent on someone else’s tax return.
For 2019 taxes filed in April 2020, the standard deductions are:
- $12,200 for single taxpayers
- $12,200 for married taxpayers filing separately
- $18,350 for heads of households
- $24,400 for married taxpayers filing jointly
- $24,400 for qualifying widow(er)s
The additional standard deduction amount for taxpayers over 65 years of age or the blind is $1,300 and increases to $1,650 for unmarried taxpayers.
Itemized deductions allow you to list all your tax-deductible expenses for the year to reduce your tax bill. These can include property taxes, charitable giving, and mortgage interest, among others. The amount at which these deductions reduce your tax bill depends on your filing status and tax bracket. If you choose to itemize, it’s always a good idea to maintain records and receipts of your expenses in case the IRS requests them. Proof of expenses can include bank statements, tax receipts from eligible charitable organizations, and medical bills.
Quick Tip: you will be better off taking the standard deduction if your itemized deductions total less than the amount you would receive taking the standard deduction.
The list of expenses that can be itemized is extensive. If you’ve never itemized your deductions before and you’re unsure of what’s available to you, consider reaching out to a tax accountant for assistance.
If you do choose to itemize, below are three common deductions to consider taking in 2020.
Mortgage Interest Deduction
Known as a way to help make homeownership more affordable, the mortgage interest deduction allows homeowners to reduce their taxable income by the amount of money they’ve paid in mortgage interest during the year. In general, homeowners can deduct the mortgage interest paid during the tax year on the first $1 million of the mortgage debt for their primary or second home. However, homeowners who’ve bought houses after December 15, 2017, may deduct interest on the first $750,000 of the mortgage.
State and Local Tax (SALT) Deduction
If you own your home and paid real estate taxes in 2019, you will be able to deduct the taxes paid to the local government. In addition, if you had state income taxes withheld from your paycheck or paid state income estimated taxes in 2019, you will also be able to deduct those taxes paid. The amount paid in SALT taxes is the deductible amount, not the amount of SALT taxes billed. However, due to the 2017 Tax Cuts and Jobs Act (TCJA), the total SALT deduction is limited to $10,000 for all returns except for married filing separately, where the limit is $5,000.
Charitable Contribution Deductions
The charitable contribution deduction allows taxpayers to deduct contributions to qualified charitable organizations of cash and property within certain limitations. Not all donations are eligible for deductions, so be sure to check if the organization is qualified and has a tax-exempt status, which is determined by the U.S. Treasury.
In order to take advantage of this deduction, contributions must be paid in cash or other property before the close of the tax year. Generally, you’re allowed to deduct up to 50 or 60 percent of your adjusted gross income, but you may be limited to 20 and 30 percent depending on the type of contribution and the organization. Check out this article by the IRS for a list of qualified organizations.
Also, make sure to obtain proper documentation for your charitable contributions. The IRS has specific requirements for different dollar levels and types of cash and property donations. They may disallow your deduction upon audit if the documentation does not meet the required standards.
Though these are some of the most common deductions to take, there are many others available to taxpayers. Understanding which deductions you qualify for can save you a significant amount come tax time.
Lastly, due to the 2017 TCJA, many taxpayers stopped keeping track of itemized deduction expenses because they no longer itemize deductions for federal taxes. However, the TCJA did not affect many state income tax deductions and credits based on itemized deductions. So, you still may want to keep track of itemized deductions for state income tax purposes.
If you’re unsure which route you should take — the standard deduction or to itemize — reach out to our team. We can help walk you through your options and explore any deductions available to you.