As we’re in the final crunch period to complete 2018 tax returns, we’ve been answering numerous questions about tax deductions. Here are some of the most significant changes our clients are seeing and what they mean for your tax bill this year.
Are my contributions to charity still deductible?
The short answer: yes, if you itemize your deductions. However, it’s estimated that only 10% of taxpayers will itemize this year because the standard deduction is so much higher than it’s been in the past. If you’re taking the standard deduction, your charitable contributions aren’t deductible on top of that.
Although it seems like a big change, the charitable deduction is one area that isn’t radically different under the Tax Cuts and Jobs Act. You always had to itemize to deduct contributions. The difference this year is that so many people who itemized in the past won’t do so. The same can be said for many other common deductions, such as mortgage interest. Assuming 2018 and 2017 were equal in terms of your income and deductions, you’re probably still paying less tax under the TCJA, even though it feels like you’re taking fewer deductions. Believe it or not, one goal of the TCJA was to simplify the tax code. The challenge for taxpayers now is wrapping our minds around a new way of calculating our tax bill.
What if I’m paid on a W-2 and have a lot of expenses related to my job?
If you’re a W-2 employee, you may have deducted job-related expenses in past years. These could include things like:
- Union dues
- Professional development
- Work uniform
- Communication expenses
- Business meals
Beginning in tax year 2018, unreimbursed employee expenses are no longer deductible, even if they exceed 2% of your adjusted gross income. If this comes as a surprise to you, you’re not alone—we’ve heard from many tax payers who have significant expenses that their employer doesn’t reimburse them for and are surprised to learn of the change. Where possible, we highly recommend going back to your employer. Confirm that there’s no reimbursement policy in place for the expenses you’re incurring as a result of your job. You may consider requesting reimbursement, particularly if your expenses are significant.
Employee expense reimbursement policies are typically a win-win for the employee and employer because the employer can deduct those expenses against the business profits. When proper business expenses are appropriately documented, employees will see their income increase without owing additional taxes. Further, companies that begin covering all costs required for their employees to conduct business generally see a corresponding increase in employee morale.
Why can’t I deduct my tax preparation fees, investment expenses, or safe deposit box?
Unfortunately, tax preparation fees, investment expenses, and safe deposit boxes are among the deductions that are no longer allowable for individuals whose only sources of income are W-2 wages. Self-employed individuals, rental property owners, and farmers may still be able to deduct these items if they’re business expenses.
Are medical and dental expenses still deductible?
If you itemize your deductions, you can deduct qualified medical and dental expenses that are more than 7.5% of your income. Beginning in 2019, that threshold increases to 10% of adjusted gross income, which is something to keep in mind if you already know that you’ll have a lot of medical expenses this year. If you’re taking the standard deduction, you won’t deduct any medical expenses. Much like charitable contributions, you’re already taking the largest deduction available to you, and your medical expenses can’t be deducted on top of that.