If you don’t use tax software, it is really easy to miss some major tax deductions or even credits on your federal filing. The tax code is so complicated that most people just want to rush through the process, but there are literally savings here that could add up to thousands.
Earned Income Tax Credit is one of the biggest that get missed. It’s also a credit, which means that it actually reduces your entire tax liability and even if that liability is zero, it may push you into a refund. That’s right — free money from the government. It may apply to you if you fall in these ranges of income:
$14,880 with no children ($20,430 if married and filing jointly)
$39,296 with one child ($44,846 if married and filing jointly)
$44,648 with two children ($50,198 if married and filing jointly)
$47,955 with three or more children ($53,505 if married and filing jointly)
There is one important caveat, however. You are not eligible for this credit if your investment income exceeds $3,400. So if you are invested in anything that throws off income, be careful just how much it throws off.
Saver’s Credit. The government wants to encourage you to save, so if you are in the low-to-middle-income brackets, you can claim a credit for up to 50% of the first $2,000 you contribute to a retirement plan. Thus, if you were married filing jointly and made $38,000, and contributed $2,000 to a retirement plan, you’d pick up a full $1,000 credit.
American Opportunity Tax Credit. The government also likes to incentivize people to go to college. If you are in a four year undergrad program, you can get back up to $2,500 for what you spent on any school related expense. This credit is very generous because it doesn’t even phase out for individuals until one reaches $80,000 in income, and it’s $160,000 for married couples.
Ripped Off? Write It Off. If you have made a bad investment with someone, or made a bad loan to someone, you can deduct these losses in one of two ways. If the person was actually charged with running a Ponzi scheme, the IRS has a safe harbor wherein you can deduct all the money you lost as an itemized deduction on Schedule A. So if your cousin Frank was charged with running a Ponzi scheme, you can write off all of that $70,000 you lost.
If the person was not charged, then you can write off the investment as a long-term capital loss. So if you loaned money to your “friend” Miles for his “revolutionary exercise program,” and it turns out that he stuffed it into his mattress, and you lost it all, its either a bad investment or a “nonbusiness bad debt” which gets written off on schedule D in the year it become uncollectable.
Health Savings Account Deduction. With the costs of Obamacare soaring in most jurisdictions, many people have had to ratchet into what is known as an “HDHP” or “high deductible health plans.” If you have a plan that is designated as such, then you can open a Health Savings Account and make direct contributions to it up to $6,900 for 2018. Then you spend that money on any qualified health expense, including premiums. You can deduct that entire amount on your taxes and it will reduce your AGI
State Sales Taxes. If your deductions exceed the standard deduction, then you will have a choice to deduct state and local income taxes OR state and local sales taxes. Well, let’s say you live in a state that doesn’t have income tax. You can still elect to deduct state and local sales taxes, and that can mean quite a bit of money. This is going to be particularly impactful if you have a very large purchase, such as a car. Even if you don’t have that, you have many smaller purchases you make on a regular basis. So if you spend $50,000 and your state charges 9% sales tax, then keep your receipts and write-off $4,500.
Home Sale Exemption. If you sell your home, and you have occupied that house for two of the last five years you’ve owned it, you will not owe capital gains tax on the first $250,000 of profit from the sale (if single), and $500,000 if married. So if you are married and make a $500,000 or larger profit, you will save 23.8% in capital gains tax on that sale … a whopping $119,000.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].