2018 Tax Deductions for Individual and Small Business | 2019 Tax Return

The Tax Cuts and Jobs Act of 2018 changed the tax rules for deductions and credits for your April 2019 tax returns. Learn all about the new changes to know how to file your taxes for bigger take-home pay better. Do you know how to maximize your tax deductions and claim credit eligibility? Read our guide for great tax breaks.

What is a Tax Deduction?

A tax deduction is a dollar-for-dollar direct slash off your Adjusted Gross Income (AGI). It reduces your tax liabilities before all the tax computations by lowering your taxable income.

There are two ways in which your tax deductions are computed: through Standard deductions or Itemized deductions.

Standardized Tax Deductions

Standard deductions are fixed dollar reductions on your AGI.

It means the amounts are subtracted from your actual income before tax computations. Your eligible deductions depend on your filing status.

But other than that, this type of tax deduction is a no-questions-asked reduction on your taxable income.

For the 2018 tax year, the previous year’s tax deduction rates have significantly increased by almost twice the 2017 amount.

Check out the table below for the different filing status and corresponding deduction rates to know how much you can qualify for:

2018 vs 2017 Tax Table

Filing Status2017 Tax Year2018 Tax Year
Single$6,350$12,000
Married, filing separately$6,350$12,000
Married, filing jointly$12,700$24,000
Head of Household$9,350$18,000

Itemized Tax Deductions

Just like standard deductions, itemized deductions are taken off from your AGI. The difference is, there’s no fixed deduction rate.

You can also deduct as much as is eligible for your tax situation for the past year.

However, itemizing deductions may require more time and effort. But it’s worth the extra hassle especially if you end up getting bigger tax breaks compared to the fixed standard deduction rates.

When you itemize, you are responsible for applying all eligible deductions.

Now, this requires you to organize your expenses within the year so you can be sure that you can deduct all qualified expenses. Thus, you should compute both ways to see which method you should take for the tax year.

How to Claim Tax Deductions?

An Individual Income Tax Return or IRS Form 1040 is used to declare income and claim credits and deductions. It comes in 3 forms: 1040, 1040A, 1040EZ.

Form 1040EZ doesn’t allow you to claim any credits or deductions except for the Earned Income Tax Credit.

You can use this form if you are married filing jointly or single filing without any dependents and with income less than $100,000.

Form 1040A doesn’t allow you to itemize, but you can claim certain tax credits using this.

You can use this form if you earned less than $100,000 coming solely from wages, tips, salaries, pensions, interests, ordinary dividends, etc. You can only claim certain credits such as child and dependent tax credits and education-related tax credits.

Form 1040 is the most comprehensive and allows you to itemize all your qualified expenses for deductions.

Use this if your income is over $100,000 and you earn from other types of revenues. Fill out this form if you have more credits and deductions not covered in the 2 previously mentioned forms.

Tax Deductions vs Tax Credits

The significant difference between deductions and credits is timing.

It makes a difference when the eligible amount is reduced from your tax liabilities.

Deductions are reduced from your AGI while credits are taken off your actual computed tax liabilities.

What are Tax Deductions? 

Let’s take a look at this example:

If you have a $100,000 taxable income and filing a single tax return, you fall in the 24% income tax bracket.

If you decide to go for a standard deduction instead of itemizing, the computation for your tax bill is:

$100,000   – $12,000 (standard tax deduction)   = $88,000 (taxable income)

$88,000   – $82,500   = $5,500 x   24% = $1,320  + $14,089.50 =  $15,409.5 (tax bill)

Let’s say you are eligible for credits totalling $8,500.

Then:

$15,409.5  – $8,500 =   $6,909.5 (reduced tax bill)

What are Tax Credits?

As opposed to tax deductions, tax credits are deducted from your total tax liabilities.

Some credits can be refunded up to a certain limit while some only apply as tax reductions. Refundable credits are significant because it means you can get cash even when you reduce your tax liabilities to zero.

For example, you have $1,000 in tax credits, and you owe $300 in taxes.

But if that specific type of credit is non-refundable, then you only reduce your tax liability to zero. However, if you are allowed to refund the amount in excess, you get to pocket the remaining $700 after paying off the $300 tax debt.

You can now see the impact credits and deductions have on your actual tax bill.

Thus, you can maximize your tax returns by applying everything you are qualified for especially unrecognized credits and deductions.

20 Personal Tax Deductions and Credits

Here are the most common tax deductions you can take when filing your personal taxes:

Child Tax Credits have increased from $1,000 per qualifying child to $2,000, and an additional $500 per non-child qualified dependent. Moreover, eligible dependents are children above 17 years old, parents, grandparents, and other relatives who are unable to support themselves financially and who have lived with you for at least the last 6 months. However, they must have an SSN to be eligible for the credit.

Daycare costs for children under 13 or other incapacitated dependent such as spouse or parents are eligible for care tax credits. If you pay for any similar service needed so you can go to work, you can claim 20-30% of $3,000 (or $6,000 for two or more dependents) in care tax credits.

  • Adoption Credit

Up to $13,840 in adoption costs for each child are eligible for this item. However, this doesn’t apply if you are adopting your spouse’s child. It also phases out for taxpayers with AGIs above $207,580. Similarly, if you’re adopting a child with special needs, you can claim the full refund even if you spent less on adoption costs.

You can claim the first $2,000 and 25% of the next $2,000 spent on educational fees and materials for the first 4 years of college. However, you must be enrolled with at least half of the advised credits and have an AGI of less than $90,000 (for single filers) to be able to qualify.

You can claim up to $2,000 from your tuitions, fees, and other educational expenses such as books and materials. But, you can only claim either this or the American Opportunity Credit.

The difference is there’s no minimum workload requirement and is applicable for undergraduate, graduate, and even non-degree courses. However,  the $2,000 is per return which makes that the maximum amount you can claim.

Higher education fees that can be deducted include tuition, room and board, supplies, other miscellaneous expenses, books, etc. Qualified student loans can be for yourself or your children, spouse, or dependents. As long as your AGI is less than $80,000 (single file) you can deduct as much as $2,500 from your taxes.

  • Earned Income Tax Credit

Those who have $55,000 or less AGI qualify and can claim $3,461-$6,431, depending on your income, marital status, and the number of children. You won’t qualify if you have more than $3,500 in earnings from investment income, dividends, capital gains, etc.

  • State and Local Tax Deduction

This deduction varies by state and locality. For instance, California has the highest 2018 income tax at 13.3 % followed by Hawaii at 11%. On the other hand, Florida and Nevada have no personal income tax.

If you have unreimbursed medical expenses that are qualified for deductions, you can claim any billed amounts that are over 7.5% of your AGI. For example, if you have a $40,000 AGI and your medical bill is running at $10,000, amounts over $3,000 (which is 7.5% of your AGI) can be deductible, which equals to $7,000.

  • Mortgage Interest Deduction

The interests you pay for a mortgage can be deductible from your taxable income. This is one of the ways that the government makes homeownership more affordable for Americans.

  • Traditional IRA Contribution Deduction

IRA contributions are deductible, and the amounts depend on your income and whether you or your spouse has another retirement plan.

You can beef up your retirement plans up to $18,500 per year ($24,500 for ages 50 and above) and your contributions are deductible from your taxable income.

  • Health Savings Account Contribution Deduction

Health savings contributions are deductible from your taxable income, and all withdrawals used for medical purposes are tax-free.  You can contribute up to $3,450 for self-only high deductible HSAs and $6,900 for family-high deductible coverage.

  • Charitable Donation Deduction

You have to itemize this deduction to be able to include your donations, whether in cash or kind, to a qualified charity or organization.

  • Saver’s Credit

Consider this credit if your AGI is less than $63,000. You can claim 10-50% of up to $2,000 (depending on your status and filing income) in contributions to retirement plans.

  • Gambling Losses Deduction

You can’t claim amounts more than your actual winnings. So this means $100 spent on the lottery can be deducted but only if you report at least $100 in winnings as well.

  • Alimony Deduction

Alimonies you pay to a former spouse, excluding financial support to children, can be deducted from your taxable income. However, this will disappear for couples who get a divorce in the years succeeding 2018.

  • Educator Expenses Deduction

Up to $250 spent on in-class educational materials can be deducted from the taxable income of school teachers and instructors.

  • Job-hunting Expenses Deduction

If you are eligible under conditions in “Miscellaneous Deductions,” then you can deduct your expenses while searching for a new job within your current occupation.

  • Casualty and Theft Losses Deduction

What are losses? 

Fire, storm, car accident, theft, and vandalism are considered personal losses. You can claim amounts over $100 as damages, and you also subtract your insurance policy claims.

20 Small Business Tax Deductions

Here are the most common tax deductions you can take when filing your business taxes:

All payments made only to employees in the form of salaries, wages, bonuses, and commissions are deductible. However, you cannot include payments you made to your partners, sole proprietors, and LLC members.

Payments made to freelancers and independent contractors can be deductible. Payments over $600 require that you accomplish a 1099-MISC.

  • Employee Benefit Programs

Costs to fund employee retirement plans and other employee programs such as education assistance are deductible. If you are self-employed, contributions to your retirement plans fall under personal tax deductions.

  • Depreciation

This covers the costs of business properties including business equipment and machines (up to $1,000,000). Remember, you can deduct 50% of the depreciation allowance for property acquired before Sep. 26, 2017.  Additionally, you can deduct 100% of the depreciation allowance for a property you bought after the 2017 date.

You can deduct costs to maintain and operate a vehicle used solely for business purposes if you can back up your claims with receipts and documents. You can also use the standard IRS mileage rate of 54.5 cents for every mile regardless of whether you own or lease the vehicle.

  • Insurance

Various insurance plans such as flood insurance, business continuation insurance, malpractice coverage, etc. are deductible. Small businesses can claim tax credits of up to 50% of the cost of employee premiums.

  • Taxes

Other taxes such as real estate tax, licenses, state unemployment taxes, FICA and FUTA taxes, are fully deductible. If you are self-employed, you can apply your deduction for self-employment tax on your AGI. You claim it on your personal income tax return.

  • Repairs

Ordinary repairs and service maintenance can be deducted fully. Any repairs or renovations that add value to the property are capitalized and recovered through depreciation.

Cost of operation such as electricity and water bills (and company mobile phones) are fully deductible as business expenses. If you have a home office, your first landline is not allowable, only the succeeding telephone lines.

  • Rent Expenses

If you don’t have your land and facility, your rent expenses can be deducted fully. Spaces include offices, factories, boutiques, etc.

  • Advertising

Costs for only simple and typical advertising and endorsement can be deducted as business expenses.

  • Supplies

Office and business materials such as cleaning supplies, office supplies, postage, etc. are deductible.

  • Travel Expenses

Transportation and lodging costs for business trips are fully deductible too, except for local transportation costs. Accordingly, check and follow the guidelines in IRS Publication 463 to be able to qualify.

  • Commission and Fees

You need to report expenses on commissions and fees paid on a Form 1099-MISC. However, commissions from real property sales are not deductible.

  • Legal and Professional Fees

Professional fees, including legal fees, are fully deductible as business expenses.

  • Home Office

If you use your home as your exclusive place of business, whether to operate, meet, or deal with clients, you can deduct direct and indirect expenses to maintain the property.

  • Meals Expenses

You can also deduct up to 50% of your meal expenses incurred while doing business.

  • Mortgage Interest

There is no limit as to how much loan interest you can claim for this item. Also, if your business owns real property then you can deduct mortgage interests in full.

  • Machine and Equipment Rentals

You can also claim the costs to lease or rent pieces of machinery needed for your business are fully deductible.

  • Interest on Business Debts

Loan interests for businesses are fully deductible except for those who have over $25 in annual gross receipts in the 3 prior years. However, only loans for business interests are considered as deductible business expenses.

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