With April 15 the tax deadline, the clock is ticking on ways Americans can keep more of their hard-earned money in their pockets -- and less of it in Uncle Sam's.
The problem is, U.S. taxpayers have historically left too much tax return money on the table -- mostly because they haven't taken or known about all the breaks and deductions that were allowable.
That's a big problem. A University of California research paper notes that Americans pay about $1.5 trillion income taxes every year, and that's a big number -- approximately 8.3% of U.S. gross domestic product heads straight from taxpayer bank accounts into the U.S. Treasury.
Furthermore, the report states that American taxpayers routinely sell themselves short on their tax returns, walking away from money they could have saved, especially in key areas like retirement savings and claiming U.S. government tax deductions and benefits.
It all comes down to the tax breaks, in the form of tax deductions and tax credits, you can take full advantage of -- all allowable under U.S. law.Tax Deductions vs. Tax Credits
In your preparation to save money on your taxes this year, it's helpful to understand the difference between two key tax breaks -- deductions and credits.
- A tax deduction lowers the amount of income the IRS can tax -- the standard deduction is a good example of a common tax deduction available to U.S. taxpayers.
- A tax credit directly slashes your tax bill to Uncle Sam -- it's a dollar-for-dollar cut on your tax bill.
Basically, tax deductions are subtracted off the amount of taxable income you earn. If you stack up enough tax deductions, it's possible to overpay the IRS, in which case you get a refund.Tax Deductions Going Away in the 2019 Tax Year
Before we get into the mix on what tax breaks and deductions you should be taking on your 2018 tax returns, it's helpful to know which tax deductions and tax credits will disappear in 2019. That could be good news or bad news for you going forward, depending on your tax status.
But if you're going to take an inventory of potential tax breaks going forward, it's helpful to know what breaks won't be there for the 2018 tax year, and should be factored into your tax return planning before April 15.
These are the tax deductions going away until at least 2025, when they could return depending on the political winds blowing in Washington, D.C.
- The standard $6,350 deduction. (It's increased to $12,000)
- Personal exemptions.
- Unlimited state and local tax deductions.
- A $1 million mortgage interest deduction. For purchases after Dec. 15, 2017, the deduction is limited to $750,000
- An unrestricted deduction for home equity loan interest.
- Deductions for unreimbursed employee expenses.
- Miscellaneous itemized deductions.
- A deduction for moving expenses.
- Unrestricted casualty loss deduction.
- Alimony deduction for divorce agreements made after 2018.
- Deductions for certain school donations.
- Deductions from tax extenders.
The good news is that there are new tax breaks that should -- or could -- incentivize Americans to save more money on their tax returns.
So, why leave money on the table that the IRS can shovel into its pockets?
Don't do it - use these money saving tips to financially maximize your 2018 tax return experience that's due in 2019, and don't be the taxpayer who overpays the federal government every April when they didn't have to.1. Student Loan Interest Deduction
This tax break allows U.S. families to deduct up to $2,500 on interest paid on student loans.2. American Opportunity Tax Credit
College households can claim $2,000 in federal tax deductions on assorted college costs -- think tuition, meal plans, textbooks and fees. Qualified taxpayers can also claim an additional 25% of $2,000 more paid out in college costs.3. Child and Dependent Care Credit
U.S. households also can claim a deduction of up to 35% (up to $3,000) on daycare costs for kids under the age of 13, or for senior parents or an incapacitated spouse or dependent, or up to $6,000 for two or more family dependents.4. Child Tax Credit
The federal child tax credit provides a tax break of up to $2,000 for parents and $500 for a non-child dependent.5. Earned Income Tax Credit
Depending on the number of children in a household, and the amount of household income, the earned income tax credit provides up to $6,431 in tax deductions.6. Charitable Donation Tax Break
This tax deduction, available to taxpayers who itemize their deductions, enables taxpayers to deduct charitable donations, cash or otherwise, from their taxes.7. Medical Expenses Tax Deduction
This tax break allows taxpayers to claim unreimbursed medical costs that exceed 7.5% of the taxpayer's adjusted gross income over a calendar year.8. State and Local Deductions
Taxpayers can claim up to $10,000 in tax deductions for a combo platter of state and local taxes, including property taxes. Check with your state or local tax office to see what tax breaks are available.9. Retirement Plan Tax Deductions
Taxpayers can park up to $18,500 into a company-sponsored and self-employed 401(k) plans -- that's money that the federal government can't touch, tax-wise. Americans age 50 and over can tack on an additional $6,000 in 401(k) funds. Deductions on individual retirement accounts are available, too, depending on your income status and the amount of cash a spouse has stashed away in a 401(k) plan. The IRA contribution limit for 2018 is $5,500, or $6,500 for those age 50 and older.10. Health Savings Account Tax Break
Americans with health savings accounts can deduct up to $3,450 for individual contributions or $6,900 for family-level contributions.
The 2017 tax law changed the standard deduction, moving it up from $6,350 to $12,000 for individuals. Married couples can claim $24,000 as a standard deduction, while heads of households can claim $18,000.
On the investment front, you can also maximize tax returns by shedding losing stock market investments and reduce your capital gains tax in the process. Investors can deduct up to $3,000 annually this way, against ordinary income.
Let's say you have $20,000 in investment losses and $10,000 in market gains, with an overall loss of $10,000. Taxpayers can deduct up to $3,000 in investment losses on their tax returns. Additional losses can be pushed forward as deductions into the next tax year.
Another tip -- if you qualify for a workplace bonus, ask your employer to defer the payment until the next tax year. While that is too late for the 2018 tax year, it's a reliable way to reduce taxable income going forward and all you have to do is have your bonus payment deferred from December to January.The Takeaway
There are plenty of solid -- and perfectly legal -- ways to curb your tax burden this year.
Use the tips cited above, and, if needed, work with a professional tax specialist to save the maximum amount of money possible on your tax returns this year.
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