- Rick Wilking/Reuters
- Tax Day 2019 is Monday, April 15.
- With the new tax reform passed earlier this year, filing 2018 taxes may be more complicated.
- But aside from seeing what’s changed with the new tax laws, you’ll have to figure out what you can deduct when it comes to lowering your taxable income.
- Many deductions aren’t largely known or are often overlooked, like business expenses if you’re an entrepreneur and some out-of-pocket medical expenses.
Navigating your 2018 taxes under new tax law may be a bit harder.
But when it comes to lowering your taxable income, you’ll need to do more than check what’s changed under the new tax laws – you’ll also have to go through your year’s expenses with a fine-tooth comb to see what you can deduct.
Below are 10 things you probably didn’t know you could deduct from your taxes.
Self-employed workers can write off half of what they pay in social security and Medicare taxes (the employer portion).
“For 2018, a 12.4% social security tax applies to the first $128,400 of earnings. If you earn more than that (from self-employment or, if you also have a job, from the combination of your job and your business), then the 12.4% part of the tax that pays for Social Security stops for the year,” Lisa Greene-Lewis, certified public accountant and tax expert at Turbo Tax, told Business Insider.
This deduction is available on Form 1040, so it doesn’t need to be itemized.
Self-employed workers get other tax benefits that employed workers don’t – like baggage fees if they are 100% related to business travel, Carla Wainwright, CPA and director in MAI Capital Management‘s tax department in Cleveland, Ohio, told Business Insider.
According to Greene-Lewis, car registration on your personal vehicle is also deductible as an itemized deduction. If you bought a new car for your business in 2018, you may be able to deduct more than $40,000 of its depreciation in the first four years, she said.
Post-college education expenses
The Lifetime Learning Credit allows taxpayers to deduct up to $2,000 a year, based on 20% off of the first $10,000 spent on education after high school, like a vocational or community-college class. It can be claimed for any post-secondary class you take; you don’t have to be working toward a degree, Greene-Lewis said.
“In order to qualify for the Lifetime Learning Credit, you must have made tuition and fee payments to a post-secondary school (after high school) during the year,” she added.
However, this phases out as your income level increases.
According to Investopedia, you can write off several healthcare and medical expenses if they’re out-of-pocket and cost more than 7.5% of your adjusted gross income – however, this limit will increase to 10% for 2019 returns.
“The tax law defines medical expenses as the costs for diagnosis, cure, mitigation, treatment or prevention of disease and for treatments affecting any part or function of the body,” wrote Barbara Weltman for Investopedia.
This includes newborn costs, service animals, rehab treatment programs, organ transplants, attending a medical conference, adaptive equipment, diabetes-related costs, and more. Cosmetic-type surgeries and treatments aren’t deductible.
Last spring’s state tax
If you owed taxes when filing your 2017 state tax return, Turbo Tax advises including that amount with your state tax itemized deduction on your 2018 return.
“If you paid state income tax when you filed your taxes and itemize your tax deductions this may still be tax deductible, but keep in mind when you itemize property, state income tax and sales tax is capped at $10,000 under the new tax law,” Greene-Lewis said.
Early withdrawal penalty
Find yourself in a tight bind this year and needed to withdraw money early from a retirement account or investment like an IRA or a certificate of deposit? You may be able to write off the penalty you paid come tax time.
“This applies to pension withdrawals before [age] 59 1/2, [but] there are exceptions – unreimbursed medical expenses, health insurance, [and] college costs, among others,” Wainwright said.
Selling your home
If you sold your home, you can write off up to $250,000 worth of profit – or $500,000 if married and filing jointly – under the new tax law, according to Greene-Lewis. If your profit exceeds either limit, the excess is reported as a capital gain on Schedule D.
However, mortgage debt incurred prior to December 15, 2017, is eligible for interest deduction up to $1 million of acquisition debt (the old limit prior to the tax reform), according to Wainwright.
Greene-Lewis said you must meet three tests to treat the gain from your home sale as tax-free:
1. Ownership – you must have owned your home for two of the five years before the sale.
2. Use – you must have lived in the home for two of the five years prior to the sale.
3. Timing – you haven’t excluded the gain on the sale of another home within two years prior to the sale.
If you have a mortgage, you can also deduct loan interest up to $750,000, or $375,000 if married and filing separately, according to Greene-Lewis.
“The tax deduction for interest paid on home-equity loans and lines of credit used to buy, build or substantially improve the taxpayer’s home secured by their home loan is still tax deductible, but interest paid on the same loan used for personal living expenses like paying off credit card debt is no longer tax deductible,” Greene-Lewis said.
You can include gambling losses as miscellaneous tax deductions as an itemized tax deduction.
“If your losses exceed your winnings, the amount you deduct cannot exceed the total amount of your winnings,” Greene-Lewis said.
Alimony and legal fees
You can take a tax deduction for alimony payments, even if you don’t itemize your deductions, as long as your divorce agreement was finalized before 2019, according to Greene-Lewis. Starting January 1, 2019, those paying alimony will no longer be able to deduct it.
However, the IRS won’t consider the payments as true alimony unless they’re made in cash and required by a divorce agreement. Your ex-spouse must also pay income tax on the deducted amounts, Greene-Lewis said.
You can also write off legal fees paid to secure alimony for pre-2019 divorce agreements.
State sales tax
According to Turbo Tax, you can choose between deducting state income tax and sales taxes from federal income tax.
“In a state that doesn’t have its own income tax, this can be a big money saver,” it stated. “Even if you paid state taxes, the sales tax break might be a better deal if you made a big purchase like an engagement ring or a car.”
However, you have to itemize for the deduction, which is capped at $10,000. The IRS has tables indicating how much a taxpayer can deduct in sales tax, but they have some exceptions.
“If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate,” stated Turbo Tax. “The same goes for home building materials you purchased.”
- Read more of our 2019 Tax Day coverage:
- Financial experts say there’s no reason to panic if your tax refund is smaller this year
- It took me under an hour to file my taxes this year thanks to a time-saving strategy that’s available to anyone
- Here’s how you can file your taxes online for free this year
- After someone stole my tax refund 2 years ago, I found the best way to protect myself is also the easiest