6 New Tax Breaks You’ll Regret Not Claiming
If you're stressed about how the new tax law could impact what you owe, you need to know about these six new or improved tax breaks and chances to save on your taxes that you don't want to miss.
Get ready for big changes
When you file your taxes this year, you may notice that the process is different. A new federal law passed in 2017, the Tax Cuts and Jobs Act (TCJA), is going into effect for the first time this tax filing season. The TCJA ushers in a lot of changes which will simplify the tax filing process for many Americans. However, if you’re used to itemizing your deductions, you may notice this year that many of the write-offs you’re used to claiming have gone away or have been reduced. Here’s a bit of good news: Just because you can’t claim some of your old deductions doesn’t automatically mean you’ll be paying more to Uncle Sam.
There’s nothing “standard” about the new standard deduction
Megan Brinsfield, CPA, CFP, and director of financial planning for Motley Fool Wealth Management, says, “The biggest deduction benefit from the TCJA comes from the increased standard deduction: $12,000 for single filers and $24,000 for married taxpayers.” In case you didn’t know, that’s nearly double the size of the standard deduction taxpayers were able to claim in years past. The bigger standard deduction might mean savings for millions of taxpayers this year. According to the Tax Foundation, “Nearly 30 million households will now find it more advantageous to take the standard deduction.” If you’re not getting a refund this year, this might be why.
How to know if the new standard deduction benefits you
Brinsfield explains that “many taxpayers will benefit from a simplified tax reporting process, reducing record keeping needs and decreasing the time spent in the filing their taxes.” Beyond the time-saving potential, some taxpayers may save money, as well. Debbie Todd, who blogs as the Spunky CPA, says, “The increased standard deduction could mean a lower tax bill for many, although the elimination of the personal exemption does narrow the savings.” The bottom line is whether the standard deduction will allow you to write off more of your income than you’ve been able to in the past.
Student loan interest paid by parents is now deductible
In past years, when parents made payments on a child’s student loans, no one could claim a deduction. As Riley Adams, CPA and founder of Young and the Invested, puts it, “The money paid toward the loans was lost in space from a tax perspective.” Now that’s changed: “If you’re the student loan borrower,” Adams explains, “you just got double the benefits: money toward the loans and a tax deduction.”
How much can students deduct?
The IRS has changed the way it views the money parents give to students to pay for student loans, says Adams. “In essence, a child who isn’t claimed as a dependent can qualify for tax deductions worth up to $2,500 per year for student loan interest that was paid by Mom and Dad.” Have you ever wondered where your student loan money actually goes? Check out who gets all that money.
Small businesses can save
If you’re a small business owner, you’ll like what experts have to say about the new Section 199A deduction: “Small businesses can shield up to 20 percent of their net income from tax,” explains Todd. For some, that could equal tens of thousands of dollars. “This is subject to overall income limits, as well as restrictions for certain professional service sectors (doctors, attorneys, accountants, etc),” Todd points out. Don’t miss these 13 secrets IRS agents won’t tell you about tax planning.
More savings for medical expenses
Did you have out-of-pocket medical expenses in 2018? If so, you may be able to write off more of those costs than you have in the past. On financial planning website The Balance, Beverly Bird explains: “You could only claim a deduction for the portion of your expenses that exceeded 10 percent of your adjusted gross income through the 2016 tax year. The TCJA reduces that threshold to 7.5 percent, although only for tax years 2017 and 2018.” Bird notes that the other rules don’t change. “You can claim expenses incurred for yourself, your spouse, or your dependents, and you must have paid them in the same year you claim them as a deduction.”
Child tax credit changes
The TCJA made some changes to the popular child tax credit: Justin Pritchard, CFP and founder of ApproachFP, a fee-only financial planning practice in Montrose, Colorado, explains that “the credit, which is twice as high as it used to be, is now available to more taxpayers due to a much higher income limit—$400,000 versus previously $110,000 for married filing jointly.” There’s another advantage to the new rule, says Pritchard: “The credit reduces the amount you owe dollar-for-dollar. Deductions, on the other hand, reduce what you report as income, so the dollar value depends on your tax rates.” These are the 11 tax-related documents you should never throw away.
The child tax credit can minimize the loss of personal exemptions
Brinsfield points out that thanks to the expanded number of taxpayers able to claim the credit (thanks to increasing the income threshold to $400,000 for married taxpayers—$200,000 for single) can soften the blow from lost deductions. “Families who fear they are going to be hit with higher taxable income should see significant relief thanks to the higher child tax credit,” she says.
The lack of health coverage penalty is gone
The Affordable Care Act, passed in 2010, contained a mandate that you had to maintain qualified health insurance or face a penalty on your taxes (unless you qualified for an exemption). The penalty, reports Forbes, could climb as high as $2,448 per individual or $12,240 for a family with five or more members. Starting in 2019, Healthcare.gov confirms that the penalty fees will no longer apply. The elimination of this mandate, Todd says, “will provide savings for those taxpayers who found themselves paying the penalty for inadequate health insurance coverage in the past few years.” Check out these 32 other things your tax accountant won’t tell you for free.
What the experts like most about the new tax changes
Change makes people nervous, so it isn’t surprising the new rules introduced by the TCJA are upsetting plenty a lot of taxpayers. But there are a few aspects of the new tax reform that experts prefer:
- “Many taxpayers won’t have sufficient deductions to itemize and will simply claim the standard deduction,” explains Adams. “This will make their tax returns quicker to prepare and have less headache come filing season.”
- Todd likes the fact that the simplified tax filing process will allow many families to “spend less effort and money on tax preparation and more time seeking knowledge and guidance on maximizing their financial life-wellness goals.”
- Brinsfield appreciates that many taxpayers will be less burdened “with record keeping and will be able to decrease the time spent filing their taxes.”
Now that you know the basics of the TCJA, read up on these 17 tax deductions you can’t afford to miss.