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Making the Most of Personal Deductions

Why pay more taxes than you have to? If you understand the rules, you can take advantage of legitimate tax breaks and minimize your taxable income. Part of your tax planning should include making use of personal deductions.

What do deductions do?

Deductions are subtracted from your total income to determine your taxable income. Your tax bill is calculated based on your taxable income. As a result, the more deductions you take, the lower your tax liability will generally be.

Take the standard deduction or itemize?

The standard deduction is what you are allowed to take automatically, without having to identify or calculate any separate deductions. The standard deduction for the 2019 tax year is $12,200 for a single person and $24,400 for a married couple filing jointly. When you file your taxes, you must make a choice between taking the standard deduction or itemizing your deductions.

When filing your tax return, how do you know whether to take the standard deduction or itemize? You should calculate your taxes (including any alternative minimum tax) using both methods and go with the one that lowers your tax liability the most. It is also very important to consider the state income tax impact of your choice. States often have different rules about itemized deductions and some states require you to use the same method you chose for the federal return.

If you determine it’s best to itemize, you should know that itemized deductions are reported on Schedule A of your federal tax return (Form 1040). They include certain personal expenses, such as out-of-pocket medical expenses, mortgage interest, property taxes, and charitable contributions paid during the year.

Some of these deductions have special limits. For example, only the out-of-pocket medical expenses in excess of 10% of your adjusted gross income are deductible. In addition, some deductions have been repealed or modified for 2018 and beyond. Another change made in 2018 is that taxpayers can take a maximum deduction of $10,000 for their state and local income, sales or property taxes.  

Note: There may be circumstances where it is better to itemize deductions even if the standard deduction is greater than itemized deductions. For example, if you are subject to alternative minimum tax, even a small amount of itemized deductions may be preferable to the standard deduction, which is reduced to zero for alternative minimum tax purposes.

How should deductions be timed?

If you can control when you pay for a deductible expense, you may be able to minimize your taxes. You can take a deduction for the tax year in which it was paid. So, if you're in a higher income tax bracket this year than you expect to be in next year, you may want to pay expenses related to deductions before yearend so that you can use them to offset your higher taxable income. For example, if you have major dental work scheduled for January, see if you can reschedule it for December so that you can take the deduction this year. Other tips include:

  • If you pay a deductible expense by check, it should be dated and mailed before year-end. (Although it’s not necessary for the check to clear the bank by year-end.)
  • If you pay by credit card, the expense is deductible in the year the charge is made, not when the credit card bill is paid.
  • Remember that you don’t get a deduction for pledging or promising a charitable contribution. The money must be paid to the charity in the year you want to deduct it.

This document is valid for planning for 2019 tax returns.

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