Justin Smith, CPA
The 2020 federal standard deduction is $12,400 for single (and married-separate) filers, $18,650 for heads of household and $24,800 for married filers. The standard deduction is an amount of money, based on your filing status, that you can earn tax free each year. Congress permits up to this amount of earnings to be exempted from income tax.
While fewer people itemize their deductions than before the 2017 Tax Cuts 7 Jobs Act (TCJA), millions of taxpayers will still itemize their deductions. Even if you claim the standard deduction on your federal tax return, you may still itemize on your state tax return, so you should track and provide your deductions to your preparer.
Many itemized deductions include medical expenses, mortgage interest and property taxes, and charitable contributions. Additionally, state and local taxes such as income tax, property tax and ad valorem tax on your automobiles can provide a maximum total of $10,000 of deductions this year.
Additionally, some tax deductions are referred to as “adjustments to income.” These do not require you to itemize deductions to get a tax break. Popular adjustments to income include the following:
1. Up to $300 in charitable contributions for 2020, which is a new deduction from the CARES Act. You normally are required to itemize deductions on your tax return to claim charitable contributions, but for 2020, up to $300 is available as an adjustment to income if you take the standard deduction.
2. Teachers can claim a deduction on the first $250 of educator expenses they incur ($500 if married and both spouses are teachers).
3. College tuition and fees – up to $4,000 to help cover higher education. This deduction is perfect for taxpayers with children in dual enrollment courses who don’t want to use the American Opportunity Credit because their kids aren’t fulltime college students yet.
4. Student loan interest up to $2,500.
5. Contributions to traditional Individual Retirement Accounts (IRAs) – up to $6,000 per taxpayer, or $7,000 if you are over 50 years old.
6. Self-employment taxes – you can deduct 50% of SE taxes paid.
7. Self-employed medical insurance – you can deduct the value of medical, dental and vision insurance premiums if you are self-employed and pay these costs.
8. Qualified Income Business Deduction (QBID) – the small business owner’s best friend. You can deduct up to 20% of your company profits. This is the third year of the new deduction and has proven incredibly valuable for small business owners. This deduction turbocharges your deductions and has proven to give many taxpayers significant refunds.
Key itemized deductions may still inflate your state tax refund even if you take the larger federal standard deduction:
1. Charitable contributions up to 60% of your adjusted gross income.
2. Mortgage interest – you can deduct the interest on up to $750,000 of your home mortgage debt for loans taken out after Dec. 15, 2017. If the loan is older, the older $1 million limit still applies.
3. Private Mortgage Insurance in addition to your mortgage interest is deductible through 2020.
4. Home equity loan interest – only deductible if you use the loan for your home or related improvements.
5. Medical/Dental costs – deductible above 7.5% of your adjusted gross income for 2020 (4% for Alabama – so even if you cannot claim the deduction on your federal tax, it may prove helpful on your state tax return).
6. Automobile ad valorem taxes – don’t forget to snap a photograph of your car registration. This is a commonly overlooked deduction that can pad your refund.
Tax laws are complicated, and there are income limits, rules and other considerations to each item listed above, so it’s important to keep in mind that your federal and state taxes have different rules. If in doubt, ask your tax preparer to determine whether a particular item is deductible.
Justin Smith is a licensed Certified Public Accountant in Opelika, specializing in individual and small business tax and accounting. He can be contacted at 334-400-9234 or www.Justin@JSmithCPA.net. His website is www.jsmithcpa.net.