As you work on finalizing your 2017 federal income tax return, you may be searching for some last-minute deductions to help reduce your tax liability. Here are a few places to consider:
Taxes You Paid
You can deduct most taxes you paid last year on your 2017 income tax return. The main exceptions are federal income taxes, Federal Insurance Contributions Act (or FICA) taxes, and estate or gift taxes. For many people, the most common deductible tax payments are personal property taxes, real property taxes, and state and local income taxes.
Personal property taxes include ad valorem taxes paid on vehicles, while real property taxes include taxes paid on your primary residence. Keep in mind that the $10,000 annual deduction limit for state and local taxes is effective for tax year 2018, so it doesn’t impact your 2017 tax return.
If you live in a state where you are fortunate to not have to file a state income tax return and you itemize deductions, then you are allowed a deduction for state and local sales taxes paid in lieu of the state and local income tax deduction. (Note: Even if you are in a state that has state income tax, you can take the higher of the state income tax or the state and local sales tax deductions. One caveat: you can’t take both.)
This can work two ways: If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount or you can take a “general sales tax deduction,” whichever is higher. Big spenders probably benefit from adding up all of their receipts; but with that being said, could you imagine adding up all of the sales tax on your receipts in any given year?
One modification to using the general sales tax deduction: you can also add in the sales taxes paid on “big ticket” items such as a motor vehicle, boat, plane, home, home addition, or major home renovations. That was a nice little bonus, since most people buy new (at least new to the taxpayer – used cars qualify too) cars every couple of years.
If you don’t want to add up all of your receipts, then the IRS allows what is known as the “general sales tax deduction.” The IRS determines the amount you can deduct based on your income level and a “general spending habit,” building out the 2017 Optional State Sales Tax Table and the 2017 Optional Local Sales Tax Table.
You’ll want to discuss with your tax professional whether it makes sense to take the general state tax deduction or if you should sort through all of your receipts and actually calculate the sales tax you paid.
Whether you can deduct interest depends on the type of interest payments you made. What the IRS deems to be “personal interest” — e.g., interest paid on credit cards and car loans — is not deductible. The following types of interest payments generally are deductible:
Mortgage interest: You can deduct interest paid last year on up to $1 million of mortgage debt on your primary and second home if you’re married and file jointly or single on your 2017 income tax return. For those who file married filing separately, you are limited to $500,000 of mortgage debt. (Note that these limits have changed for 2018 tax returns.)
Interest paid on home equity loans or home equity lines of credit up to $100,000 if you’re married and file jointly or single is also deductible, as are mortgage insurance premiums, up to adjustable gross income (AGI) limits. Note, for those that file married filing separately, you are limited to $50,000 of debt from home equity loans or home equity lines of credit.
Investment interest: You can deduct interest paid last year on any loans you incurred to purchase taxable investments typically up to the total amount of net investment income. This doesn’t include any interest allocable to passive activities or to securities that generate tax-exempt income. Excess interest paid above this amount can be carried forward indefinitely.
Qualified higher education loan interest: You can deduct up to $2,500 of interest paid last year on loans taken out to help pay college and other higher education expenses. This deduction is subject to AGI and other limitations.
Medical Expenses Incurred
You can usually deduct the amount of medical and healthcare expenses you paid last year that exceeds 7.5% of your AGI. A wide range of healthcare expenses qualify for the deduction, including non-cosmetic dental procedures, eye examinations and eyeglasses, chiropractic procedures, acupuncture, prescription drugs and contraceptives, and psychiatric treatment.
Health insurance premiums paid with after-tax dollars are also deductible. And if you’re self-employed, you potentially can deduct the total amount of insurance premiums you paid even if you don’t itemize deductions.
Casualty and Theft Losses Suffered
If you suffered damage, destruction or loss of property last year resulting from an identifiable event that is sudden, unexpected or unusual, you can deduct these losses that exceed 10% of your AGI. Losses suffered due to a wide range of events qualify for the deduction, including storms, floods, earthquakes, fires, terrorist attacks, vandalism, auto accidents, and theft. Keep in mind that according to the IRS, you cannot deduct these losses if they are covered by insurance, unless you file a claim for reimbursement and reduce the loss by the amount of that reimbursement.
Note that special tax breaks exist this year for victims located in the core disaster areas impacted by Hurricanes Harvey, Irma and Maria. Visit the IRS website for more details.
Charitable Donations Made
You can deduct cash, securities and property (such as clothing and household items) you donated last year to qualified charitable organizations (or 501(c)(3) organizations) on your federal income tax return. You must itemize deductions in order to deduct charitable contributions.
Your charitable contribution deduction may be limited if your AGI exceeds certain limits. The deduction is also generally limited to no more than 50% of your AGI, with 20% and 30% limitations applying to some kinds of donations and certain types of charitable organizations.
Miscellaneous Fees and Other Costs
Finally, a wide range of miscellaneous fees and costs may be deductible. These include:
- Accountant and tax preparation fees
- Union and professional dues
- Subscription costs for professional journals
- Job-related education expenses
- Expenses related to a job search in your current occupation
- Investment management and custody fees for taxable investments
- Moving expenses if the move is to start work in a new location
- Properly substantiated gambling losses to offset the total amount of gambling winnings
The tax-filing deadline will be here before you know it! The clock is ticking toward April 17, so you’ll need to act fast in order to claim these deductions. Be sure to speak with a tax professional for detailed guidance in your specific situation.
Learn more about taxes, deductions, and how they fit into your holistic financial life by reading our free guide Personal Capital Tax Guide for Holistic Financial Planning.
This blog is for informational purposes only and is intended to offer guidance; not specific legal or tax advice. Clients are advised to consult their CPA before taking action based on this advice.
Brian Wainscoat, CPA
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