The new federal tax law takes effect for tax year 2018. One of the biggest changes is a near doubling of the standard deduction to $12,000 on single returns, $18,000 for head-of-household filers and $24,000 on joint returns. That’s up from $6,350, $9,350 and $12,700 in 2017. Individuals age 65 or older and blind people continue to get an additional standard deduction of $1,300 more per person ($1,600 if unmarried).
Along with increasing the standard deduction, a bunch of deductions went away, but there are still some tax breaks that remain. These ideas all reduce your taxable income, providing direct benefits to your tax bottom line.
Traditional IRA contributions
Contributing to a traditional individual retirement account (IRA) is a win-win move that lets you boost your retirement savings and trim your tax bill at the same time. The contribution limit is $5,500 ($6,500 if you’re 50 or older) for 2018, and if you don't have a retirement plan at work (or your spouse does), every dollar of that can be knocked off your income. If you’re covered by a retirement plan at the office (or your spouse is) then that deduction might be limited by your income; check the limits at the IRS.
Health savings account
If you have a high-deductible health insurance plan, you need a health savings account (HSA) alongside to reduce your costs.
If you fund the HSA with your own money, you can deduct the amount contributed each year. If your employer adds money to the HSA, you do not get to deduct the contributions. But in either case, the money you spend from this account on qualified health care is tax-free. And, you need to file a Form 8889 with your taxes.
The maximum HSA contribution for 2018 is $6,900 for family coverage and $3,450 if you’re an individual. If you’re 55 or over at any time in the year, you can contribute (and deduct) another $1,000.
If you work for yourself, you have to pay both the employer and the employee share of Social Security and Medicare taxes—a total of 15.3 percent of net self-employment income. But at least you get to write off half of what you pay as an adjustment to income. You can also deduct contributions to a self-directed retirement plan such as a SEP or SIMPLE plan (and those can cut big chunks off your income).
And you can also deduct the cost of health insurance for the self-employed (and their families)—including Medicare premiums and supplemental Medicare (medigap), up to your business' net income.
You can’t claim this deduction if you are eligible to be covered under a health plan subsidized either by your employer (if you have a job as well as your business) or your spouse’s employer (if he or she has a job that offers family medical coverage).
You can deduct alimony you pay to a former spouse as long as the monetary payments are spelled out in your divorce agreement. You must report your ex-spouse’s Social Security number so the IRS can make sure he or she reports the same amount as taxable income. (Child support, however, is not deductible.)
The new tax law eliminates this deduction for agreements signed after December 31, 2018. For agreements signed before then, the deduction continues.
Up to $2,500 in student-loan interest (for you, your spouse or a dependent) can be tax deductible on 2018 returns if your modified adjusted gross income is less than $65,000 if you’re single or $135,000 if you are married and file a joint return.
The deduction is phased out above those levels, disappearing completely if you earn more than $80,000 if single or $165,000 if filing a joint return.
Tax reform did away with almost all employee deductions that were taken on Schedule A by itemizers. But in certain lines of work, under certain conditions, you can still knock off some of your costs above the line. Here are those niches:
- You’re a schoolteacher and you buy supplies for your classroom. The Educator Expense Deduction lets educators write off up to $250 each year of such expenses, if they teach kindergarten through 12th grade and put in at least 900 hours a year on the job.
You don't have to be a teacher to claim this break; aides, counselors and principals may claim it if they have the receipts to back it up. But home schoolers are out of luck.
- You're in the Army Reserve and you travel to drills. You must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and meals (following the federal per diem schedule) plus an allowance for driving your own car. For 2018 travel, the rate is 54.5 cents a mile, plus what you paid for parking, fees and tolls.
- You’re a performing artist making less than $16,000 (sorry Beyoncé, not for you). The IRS will expect you to show that at least two employers paid you $200 each for your services and that the expenses you intend to deduct are more than 10 percent of what you made from performing. Note that the IRS specifies employers—and wage income. Payment for gigs doesn’t count, further limiting the number of people who might be able to claim it.
- You’re disabled, have a job, and incur expenses that allow you to work. Here’s an example from the IRS: You're deaf and use a sign-language interpreter during meetings while you are at work—that's deductible here.
- You’re a “fee-based public official” and want to write off job expenses. This does not mean people employed by any government. Rather, it's for individuals such as notary publics who perform a public function and are paid directly by the people they serve. If you meet that definition, you can deduct your work-related expenses here.
Early withdrawal penalties
If you break into a certificate of deposit (CD) early and get a bank penalty, it’s a deduction. The penalties can vary widely, but regardless, you get to deduct the penalty. A Form 1099-INT or Form 1099-OID from the bank will show the amount of any penalty you paid.
Moving expenses when military service members change jobs
Moving for work used to be a deduction. But the new tax law killed that break. There is one exception: If you’re in the armed forces, the cost of any move associated with a permanent change of station still qualifies. You can deduct the cost of getting yourself and your household goods to the new location. If you drove your own car for a move in 2018, deduct 18 cents a mile plus what you paid for parking and tolls. (Use IRS Form 3903 to tally your moving deductions.)
Like a lot of things in financial planning, there are some moving parts here. If you want help understanding how these tax savings connect with your financial planning goals, you might want the help of a CERTIFIED FINANCIAL PLANNER™ professional.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great tax choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their financial plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.