Tax deductions are subtracted from your income and what's left is subject to state and federal income taxes. They reduce the amount of income tax you would owe by decreasing your taxable income. The IRS Code includes deductions for making charitable donations, saving for retirement and other forms of deductions.
Here are some of the most common deductions that may apply to your tax situation. As always, consult a professional about all deductions and your eligibility for them.
The Tax Cuts and Jobs Act almost doubled standard deductions for all filing statuses when it went into effect in January 2018. Taxpayers age 65 or older (or blind) get an additional amount over and above what everyone else may claim:
- $1,600 extra if you file as single or head of household
- $1,300 if either you or your spouse is 65 years or older or blind and you are filing a joint married return
- $2,600 if both you and your spouse are 65 years or older or blind and you are filing a joint return
Medical Expense Deduction
This is available to taxpayers who itemize their deductions rather than claim the standard deduction. It may be of value if you've reached an age where you find you're spending more on healthcare.
You can deduct the portion of your uninsured medical expenses that exceed 7.5% of your adjusted gross income in 2018.
This deduction also includes some long-term care insurance and other premiums.
Deduction for IRA Contributions
The most common tax deduction for retirement planning is for contributions you make to a traditional IRA. You can claim a deduction for up to $6,000 in annual contributions in 2019, and this increases to $7,000 if you're age 50 or older. There are restrictions so check with your tax professional before you take the deduction.
Not only does this deduction allow you to add to your retirement savings and is also an "above the line" adjustment to income. You don't have to itemize to claim it. You can always either itemize your deductions or use the standard deduction.
Are Contributions to a 401(k) Plan Tax Deductible?
Contributions to employer-sponsored retirement plans like 401(k) plans are tax deductible. These contributions are automatically deducted from the paycheck before tax withholding is calculated. They're subtracted from the taxable wages that are reported to you and the IRS on Form W-2, so you are getting the tax savings up front.
Health Savings Account Contributions
Health savings accounts are tax-deductible savings plans that enable you to save pre-tax dollars for future healthcare expenses. They are a great way to save for retirement because there are no penalties for using these savings accounts for non-medical expenses when you are 65 years or older. And, these withdrawals are tax-free as long as the funds are used to pay for qualified medical expenses.
This is an above the line adjustment to your income, so there is no need to itemize. There is one other advantage to this deduction—it can lower your adjusted gross income.
Tax Credit for the Elderly
The IRS offers a tax credit specifically for those age 65 or older, or those who suffer a disability regardless of age. This is sometimes referred to as the Senior Tax Credit. It's complicated, and you won't qualify if you earn too much. There are also limits to Social Security income and other pension incomes.
The credit range is from $3,750 up to $7,500...and you can easily claim it when you're older if you qualify.
How Is a Tax Deduction Different from a Tax Credit?
Tax deductions and tax credits both can lower the income tax bill but in different ways. A tax credit can directly reduce the income tax you owe, and it does that dollar by dollar.
If you complete your tax return and realize that you owe the IRS $1,500, and if you then realize that you're eligible to claim $1,000 as a tax credit, now you only owe the IRS $500. The IRS will send you a check for the difference if there's anything left over after crediting your tax bill.
Credits are generally better than deductions. Tax deductions can also save you money on your tax bill. They can help you fund your retirement too. It is best to seek professional advice when it comes to tax deductions and tax credits.
Also Read: Income Requirements for 2018 Tax Filings