When you file your taxes with the IRS by April 18, 2018, the return you file may be the last you submit under current tax rules. Congress is working hard on a tax bill they're hoping to pass before Christmas that would fundamentally alter the way many Americans do their taxes.
Popular deductions are on the chopping block or subject to major modifications in the tax plans under consideration, and a big increase in the standard deduction means more people are likely to itemize than ever before.
Since the future of tax reform remains up in the air, developing your tax strategy for income you'll earn in 2018 will need to remain on your to-do list until a final tax bill passes. But, since current rules remain in effect for the return you'll file in 2018 on last year's income, you have plenty of chances to take advantage of deductions that could net you a larger refund.
Read on to find out about five tax deductions that could save you big bucks in 2018 and remember, for some of these deductions, it may be your last time to claim them -- so don't miss out.
1. Mortgage interest deduction
If you're a primary borrower on a mortgage for a house, a condo, an apartment, a boat, a mobile home, or another structure classified as a house, you can deduct the interest paid on your mortgage in 2017. You'll need to itemize to claim the mortgage interest deduction, but can claim it no matter how much money you make since there are no income limits.
The mortgage interest deduction can be claimed on a primary or secondary mortgage, a home equity loan, and a home equity line of credit used to buy, build, or improve a first or second home. However, your deduction is limited to a maximum of $1 million in mortgage debt, or $500,000 if married filing separately. You can also deduct up to $100,000 in home equity debt, or $50,000 if married filing separately, no matter how you use the proceeds of the loan.
The rules for this deduction could change under tax reform, with the final Republican proposal aiming to cap the deduction at $750,000. However, if the rules change, the new cap will apply to new homes only.
2. SALT deduction
When you pay taxes to your state and local government, you can deduct taxes paid from taxable income when you file with the IRS, as long as you itemize. Under the current rules that apply, you can deduct 100% of your local property and real estate taxes.
You also have the option to either deduct your state income tax or to deduct state sales tax, either by keeping receipts on purchases throughout the year or by taking a standard sales tax deduction determined based on average consumption levels for someone with your same filing status, gross income, and number of dependents.
You cannot deduct both state income taxes and state sales taxes, so you'll need to choose which will give you the greater deduction. The IRS has an online calculator you can use to calculate your standard sales tax deduction if you don't want to add up all your receipts.
Claim this deduction while you can. The tax reform proposal would caps the amount of state and local taxes at $10,000.
3. Student loan interest deduction
If you paid student loans in 2017, you can reduce your tax bill by deducting up to $2,500 in interest paid over the year. You do not have to itemize to take this deduction, but there are income limits.
The deduction begins to phase out once your modified adjusted gross income hits $65,000 for singles and $130,000 for married couples filing jointly. If you file as married filing separately or if you're claimed as a dependent on someone else's tax return, you cannot claim this deduction at all.
This deduction appears to have survived tax reform. When you file your return, be sure to claim it if you paid interest on a qualifying student loan in 2017 so you can make the refund the IRS sends you in 2018 a little bigger.
4. Charitable contribution deduction
If you've supported causes you care about, you can get a tax break for your contributions -- provided you itemize. You can deduct both cash donations and, in most cases, can also deduct for the fair market value of donated property. However, you cannot typically deduct more than 50% of your adjusted gross income for charitable contributions, or more than 30% if you donated to certain private foundations, fraternal societies, veterans organizations, or cemetery organizations.
To be eligible to take a deduction for charitable giving, you must have made your donation to a qualifying organization. Charitable gifts should be deductible if given to a state for public purposes, a religious organization, a war veteran's organization, volunteer firefighters, civil defense organizations, domestic fraternal societies, or a nonprofit cemetery, provided the funds are for the care of the cemetery as a whole and not for a particular plot.
While tax reform would preserve the deduction for charitable contributions, charities expect far fewer people will claim it if tax reform goes forward because the doubling of the standard deduction means fewer people will itemize. If itemizing no longer makes sense for you next year, the tax return you file in April 2018 may be the last chance you have to pay less in taxes thanks to your charitable contributions.
5. IRA deduction
If neither you nor your spouse have a retirement plan at work, you can deduct for up to $5,500 per person if you made contributions to a traditional IRA or Roth IRA over the course of the year. If you or your spouse is covered by a workplace plan, there are income limits to IRA contributions.
Table data source: IRS
A traditional IRA saves you money immediately because you'll be investing with pre-tax dollars -- so you can cut the tax bill you need to pay in 2018. A Roth IRA won't save you on taxes now because you'll contribute with after-tax dollars. However, when you retire you should be able to withdraw money tax-free.
When you contribute to an IRA, you don't need to itemize to take your deduction. You also have until the day your taxes are due to make IRA contributions for the prior year. If you didn't max out your IRA contributions for 2017 and find that you want to slash the amount of taxes you'd need to pay in April 2018, you can still contribute to your 2017 IRA through April 18, 2018.
Being able to make contributions to your IRA even when the year is over gives you the flexibility to respond to unexpected circumstances, like discovering you owe more in taxes than expected.
While tax reform doesn't change your ability to take deductions for IRA contributions, it would end the option to re-characterize a Roth IRA to a traditional IRA . This could mean losing the flexibility to change how IRA contributions are treated by the IRS once contributions have been made.
Finding way to save on taxes
With the tax code in flux, finding ways to take advantage of every deduction is more important now than ever. Make sure you claim these five tax deductions that could save you big bucks in 2018 when you file your returns this April, before you forever lose the chance to get some of these generous tax breaks.
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