You might have noticed some pretty big changes when filing your 2018 tax return last year, thanks to sweeping tax reform legislation. Some rules have carried over into the 2019 tax year—other things have been tweaked or eliminated altogether. This may have a direct impact on the tax deductions you’re able to take.
Now for some good news—you have a little more time to get your financial ducks in a row since the tax deadline has officially been extended to July 15 due to the COVID-19 crisis. That gives taxpayers three extra months to file their returns and pay their tax bill (if they have one) without interest or penalties. Self-employed workers also have this extra time before their first 2020 estimated quarterly tax payment comes due.
If you’re expecting a tax refund for 2019, the coronavirus shouldn’t slow down the process. The IRS is on track to process refunds within 21 days for folks who e-file with direct deposit.
It’s a lot to digest. Here’s what you can expect when filing your 2019 return.
What’s a tax deduction?
While deductions are perfectly legal strategies for saving money on your taxes, many Americans are in the dark as to how they work. Only 14 percent of those surveyed by GOBankingRates in 2019 knew how much the standard deduction is worth. (More on this in a moment.)
A tax deduction is an expense you can write off to reduce how much of your income is subject to taxes. This ends up bringing down your tax liability (a.k.a. how much you owe). Tax credits work a little differently, shaving an actual dollar amount off your final tax bill. If, for instance, you qualify for a $500 tax credit, your tax bill will drop by $500.
The tax code has a boatload of deductions for which you may be eligible, if you know where to look.
How do deductions work?
When filing your taxes, you can tackle your deductions in one of two ways. (You can’t do both.)
Claim the standard deduction
This is an amount that anyone can claim in order to reduce their taxable income. For the 2019 tax year, it sits at $12,200 for individuals and $24,400 for married couples filing jointly. Choosing to take the standard deduction means you can’t also list out additional deductions to bring down your taxable income even more (also known as itemizing).
Itemize your deductions
Saving money is the name of the game, so going this route makes sense if listing out your deductions will add up to more than the standard deduction. As we’ll break down in the next section, some deductions are only available if you choose to itemize.
What deductions can I take for the 2019 tax year?
The Tax Cuts and Jobs Act, which went into effect in 2018, resulted in some pretty big changes. The following deductions are worth your attention when filing your 2019 tax returns.
Certain retirement contributions
Whether you itemize or not, the money you kick into a 401(k) is tax-deductible—as are contributions to a traditional individual retirement account (IRA), assuming you meet certain requirements. If you have access to an employer-sponsored retirement plan, your income has to fall below $63,000 ($101,000 if you’re married and filing jointly). There is no income limit if you and your spouse don’t have access to a work-based plan. Note: contributions to a health savings account (HSA) are also tax-deductible.
Medical expenses that exceed 10 percent of your income
If you plan on itemizing your deductions, you can write off qualifying medical expenses that exceed 10 percent of your adjusted gross income. This number used to be 7.5 percent, but it jumped up for the 2019 tax year. This includes everything from insurance premiums to doctors’ bills to medical equipment. (See IRS-approved expenses here.)
Interest paid on a portion of your mortgage loans
Folks who bought their home after December 15, 2017 can take this deduction on the first $750,000 of their mortgage loans. If you made the purchase before this date, that number bumps up to $1 million. This also includes any interest paid on a home equity loan—as long as the loan was used to make home improvements.
Up to $2,500 of student loan interest
This is what’s called an above-the-line deduction, which means you can claim it even if you aren’t itemizing. However, the amount you can deduct may be gradually reduced depending on your income and filing status.
Single taxpayers with a modified adjusted gross income (MAGI) of $65,000 or less can claim the full deduction. If it’s between $65,000 and $79,999, you’re eligible for a partial deduction. However, it goes out the window entirely if your MAGI is $80,000 or higher.
Donations to charity
As long as you have the receipts to back it up, you can write off money and goods you donated to charity. Mileage you accrued while driving to and from volunteer events is tax-deductible as well.
Sidenote: hang onto your receipts if you make any charitable donations during the COVID-19 crisis. When you file your 2020 tax return next year, up to $300 in qualified charitable donations will be tax-deductible, regardless of whether or not you itemize. The idea here is to reward people for helping others during this crazy time.
A portion of state, local and property taxes
Live in a state with these types of taxes? The tax code allows you to deduct up to $10,000. Prior to the latest tax reform, there was no cap on how much you could write off. But $10,000 is still better than nothing.
Some of your housing expenses if you work from home
Self-employed people running a small business out of their homes may be eligible for the home office deduction if the space is used regularly and exclusively for work and it’s the principal place of business. Those who qualify can write off a portion of their housing payment, utilities, taxes and more.
What tax deductions have been eliminated?
There are a couple of popular deductions that were phased out in the 2019 tax year.
Alimony for divorces executed after December 31, 2018 isn’t tax-deductible
You can deduct them, however, if your divorce was finalized before 2019. Under the new law, alimony recipients also no longer have to report these payments as income.
The same goes for the individual mandate
Also known as the shared responsibility payment, the individual mandate originally applied to people who did not get health insurance under the Affordable Care Act. In previous years, unless you qualified for an exemption, you had to cough up the penalty come tax time—but that’s not the case anymore.
You don’t have to be a tax pro to maximize your 2019 return. Of course, it never hurts to consult an expert to prevent valuable tax deductions from falling through the cracks. At the end of the day, these legal loopholes could majorly curb your tax bill.
This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Acorns does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.