Tax Write Offs You May Not Know About
Expanded Child Tax Credit
Taxpayers may claim a $2,000 tax credit for each qualifying child under the age of 17 beginning with the 2018 tax year (up from $1,000 the previous year). Couples earning more than $130,000 are not accustomed to claiming this credit due to the income limitation. This limitation, or phaseout, now begins at an adjusted gross income of $400,000 and completely phases out at $440,000 for joint filers for the 2018 tax year. This means many more taxpayers will be eligible to receive this credit.
In similar fashion, North Carolina has added the Child Deduction. If you have a qualifying dependent child, make sure you take advantage.
States are Reacting with Law Changes of Their Own
Taxpayers are given the choice of claiming the standard deduction (based on filing status) or itemizing their deductions. With the large increase in the standard deduction, the elimination of certain itemized deductions, and the limits imposed on the deduction for state income and real property taxes, many taxpayers will no longer elect to itemize. This doesn’t mean taxpayers should stop tracking their itemized deductions. Several states, such as North Carolina, now allow taxpayers to itemize on their state tax returns, even though they do not itemize on their federal return.
Sweeping Changes to the Alternative Minimum Tax (AMT)
The AMT is a parallel tax system, designed to force upper middle-class taxpayers with high deductions to pay a minimum tax. This had the effect of reducing (and often eliminating) certain itemized deductions, causing many taxpayers to cease keeping records pertaining to itemizing. For reasons beyond the scope of this post, the AMT is expected to ensnare only 200,000 taxpayers in 2018, down from 5.25 million the previous year. Taxpayers previously affected by the AMT should take a fresh look at itemizing with their accountant.
Savers Credit
The Retirement Savings Contribution Credit (or Saver’s Credit) is a lesser known credit that incentivizes low to middle income households to make contributions to IRAs, Roth IRAs, and qualified retirement plans. Your taxable income must be below $63,000 if you are filing jointly (under $47,250 for head of household and $31,500 for single filers) and you must not be a full-time student to qualify. The credit is either 10%, 20%, or 50% depending on your income and filing status. In fact, making a late IRA contribution (but before the tax return due date) may increase your credit percentage.
Have you ever changed jobs, then realized that your former employer started a 401(k) plan account on your behalf without your knowledge? Well, instead of cashing it out, roll it over into an IRA. If you instead cash out, your Savers Credit will be negatively affected in the current year and subsequent three tax years.
Residential Energy Credit
Caution! Before you embark on any home project designed to increase your home’s energy efficiency, always check to make sure the credit is available in the year you intend to make the improvement. Congress is infamous for constantly repealing and reinstating this credit. Also, make sure that the home equipment you are about to buy meets the minimum energy rating standards—you can find more information about energy ratings here.
Here’s a rundown of equipment and materials that may be used in the calculation of the residential energy tax credit for 2018 and 2019…and unless otherwise stated, installation costs should not be included when calculating the credit:
- Solar water heaters (including installation)
- Solar panels (including installation)
- Geothermal heat pumps (including installation)
- Small wind turbines (including installation)
- Fuel cells (including installation)
- Biomass stoves
- HVAC air circulating fans
- Central A/C
- Gas/Propane/Oil furnace
- Gas/Propane/Oil hot water heater
- Insulation
- Roofs
- Electric heat pump water heater
- Windows
- Doors
- Skylights
Attention Members of the Military
TCJA eliminates the moving expense deduction for all taxpayers EXCEPT active duty military members. This deduction allows military taxpayers to write off the cost of moving themselves, their families, and possessions when relocating to another military station.
Reservists may continue to deduct mileage expense for regular drilling, when travel distance exceeds 100 miles each way.
Military members that received combat pay for serving in a combat zone are given the option of including or excluding their income in the calculation of the Earned Income Tax Credit. Middle income families may be surprised to learn they are eligible for this tax credit, worth up to $6,444 in 2018.
Find the Right Tax Professional
Proactive tax planning, conducting a thorough tax interview and using questionnaires are common methods tax professionals employ to ensure their clients comply with the law and avoid missing out on opportunities. Of course, the quality of that planning and interview depends on the knowledge and expertise of that tax professional.
