As we all know, tax season is upon us. What a thought, Springtime equals tax season. We can get through this. Promise! Here at Flat Top Bookkeeping, we are committed to answering all questions/concerns. We will discuss 10 tax deductions that you should take in 2018. These 10 items will fall into categories simplified as deductions from adjusted gross income and itemized deductions.
Deductions from Adjusted Gross Income (AGI)
You will find this on the first page of form 1040. This is where all income is added from all sources; including salary, interest, and dividends.
Once all income has been listed, subtract your deductions to arrive at the adjusted gross income (AGI).
Please take note of four deductions you should take in 2018, is applicable to your situation:
Retirement Plans: IRA and SEP
Taxpayers may deduct contributions made to retirement plans. But, you need to understand the difference between two retirement plan categories.
A Simplified Employee Pension (SEP) plan is for self-employed people.
An Individual Retirement Account (IRA) is available to both employees and self-employed workers.
When you contribute after-tax dollars into these plans, your contribution is tax deductible. Say you earn $100 and pay $20 in federal taxes. If you invest the remaining $80 into an IRA, that $80 is deductible on your tax return. The rules to determine your investment are complicated. Check with a financial advisor to follow the tax laws.
There’s a great of confusion about the self-employment tax. Many business owners don’t deduct the proper amount of self-employment taxes.
Traditional employees pay Social Security and Medicare through payroll withholdings, which are reported on the W-2 form. The employer pays a portion of the tax also, and the employer deducts the taxes paid as a business expense. For 2017, the employer and the worker each pay a 7.65% tax.
When you’re self-employed, you pay both the employer and employee taxes. But, you can deduct the employer portion on Form 1040. Use Schedule SE to compute the amount of the tax deduction.
Student loan interest
in the 2018 tax year, if you’re not “married filing separately,” you can deduct up to $2,500 in interest on qualified student loans.
There are limits on the deduction based on your adjusted gross income.
For the tax year 2018, your modified adjusted gross income must be less than $80,000. This applies to taxpayers who file as single, head of household, or as a qualifying widow. AGI must be less than $165,000 for a married couple filing jointly.
Qualified student loans are for yourself, your spouse, or your dependents.
Qualified higher education expenses include:
- Room and board
Many educators pay for school supplies and equipment out of their own pockets. For the tax year 2017, you can deduct up to $250 of the qualified expenses that you paid during the year. If your expenses are more than $250, you may be able to deduct the higher amount as an unreimbursed employee expense on Form 1040, Schedule A.
To be eligible for this deduction, you must be a K-12 teacher, counselor, principal, or aide. You also must work at least 900 hours during a school year.
Qualified expenses include:
- Professional development course fees
- Computer hardware or software
Page 2 of Form 1040 asks you to take the standard deduction or to compute your itemized deductions. The standard deduction for 2018 is $12,000 for individuals and $24,000 for married couples filing jointly. Always use Schedule A and calculate your total itemized deductions. Take the higher amount if itemized deductions are greater than the standard deduction.
Here are some itemized deductions that you should take:
The tax deductibility of home mortgage interest can have a huge impact on your tax bill. The IRS allows you to deduct interest on mortgage loans used to buy, build, or improve your home. To deduct the interest, mortgages were taken out before December 15, 2017, cannot exceed $1 million for married couples filing jointly or $500,000 for married taxpayers filing separately.
This deduction may be the most difficult to track if you make dozens of small donations throughout the year. Keep a log of the donations you make in cash and document the checks that you write to a charity. If you donate clothing or other items, ask the charity to give you a written receipt.
Medical and Dental Expenses
If the total amount of your medical and dental expenses exceeds 7.5% of your AGI, you may deduct them on your Schedule A. If your total expenses are below the 7.5% floor, they are not deductible at all. Keeping track of this deduction during the tax year can be challenging. If you have a large medical bill in a given year, you’re likely distracted. This deduction is a good reason to ask Flattop Bookkeeping to help you with your tax return. A tax professional can ask the right questions to help you maximize your deductions.
State and Local Taxes
This tax deduction is particularly important if you live in a state with a high state tax rate. You can deduct state and local income taxes on Schedule A of your federal return. But federal contributions such as Social Security, Medicare, or Federal Unemployment are ineligible.
401(k) Matching Contributions
Many employer-sponsored retirement plans offer an employer matching contribution to your 401(k). If your employer offers a matching contribution, take full advantage of the benefit. Here’s an example. Assume that your company offers a 3% match on 401(k) retirement plan contributions. You decide to contribute 3% of your annual salary, or $1,800. These are pre-tax dollars, meaning that 100% of the $1,800 you earn is invested. Since you contributed 3%, your employer invests another $1,800. You now have $3,600 invested, and you don’t pay taxes on the earnings until you start to withdraw funds in retirement. It may be the most valuable tax strategy available to you.
Here at Flat Top Bookkeeping, we highly advise keeping detailed records. Preparing to file your taxes can be time-consuming but getting the most out of your available tax deductions will save you money. Use these tips and keep detailed records during the tax year. Consider working with an experienced tax preparer who can help you file your taxes accurately. Please let us here at Flat Top Bookkeeping assist in this stressful moment, that does not have to be stressful. Let us take the pressure off your shoulders