You already know that deductions reduce your tax liability. And maybe you’ve reviewed a list of 2018 tax deduction you can take in 2019.
Many taxpayers who file Form 1040, the US Individual Income Tax Return, must also complete Schedule A to report itemized deductions. If your itemized deduction total is more than the standard deduction, you can lower your tax liability by completing Schedule A.
Read on to understand how to complete Schedule A, and how recent tax law changes have impacted the calculation.
How Schedule A is connected to Form 1040
Form 1040, page 2 collects all of the data needed to calculate your tax liability.
Page 2 is where the taxpayer chooses either the standard deduction or the itemized deductions reported on Schedule A. The information on page 2 is listed in a specific order:
- Income: Lines 1 to 6 lists all of your income sources, such as wages, interest income, and income from self-employment. The last income-related line is adjusted gross income (AGI).
- Standard or itemized deduction: Next, the taxpayer deducts the standard deduction, or the itemized deduction (if that amount is larger).
- Taxable income: Income, less the deduction you choose, equals your taxable income.
Here are the standard deductions for tax year 2018:
- Single taxpayers: $12,000
- Head of household taxpayers: $18,000
- Married filing jointly tax returns: $24,000
If your itemized deductions are more than the standard deduction, use the itemized deduction amount on your return. A larger dollar amount of itemized deductions will lower your taxable income.
Understanding the Schedule A deductions
Here are the most important deductions allowed on Schedule A:
Medical and dental expenses
This deduction is complex, because you can only deduct medical and dental expenses on Schedule A if the total amount exceeds 7.5% of your AGI. The 7.5% is described as a “floor”, and if your total expenses are below the 7.5% floor, they are not deductible at all.
Keeping track of this deduction during the tax year can be challenging. If you have a large medical bill in a given year, you may be distracted by the time and anxiety of dealing with an illness.
This deduction is a good reason to have a CPA help you with your tax return. A tax professional can ask the right questions to help you maximize your deductions.
State and local taxes
You can deduct four types of nonbusiness taxes on your personal tax return:
- State, local, and foreign income taxes
- State and local general sales taxes
- State and local real estate taxes
- State and local personal property taxes
You can elect to deduct state and local general sales taxes instead of state and local income taxes, but you can’t deduct both. Most taxpayers choose to deduct income taxes, because the dollar amount is larger.
Your deduction of state and local income, sales, and property taxes is limited to a combined total deduction of $10,000 ($5,000 if married filing separately).
This is the most important tax law change for taxpayers who live in states with a high state tax rate. Because state and local taxes are now limited, some taxpayers will have much larger tax liabilities in 2018.
Home mortgage interest
If you’re considering buying a home, the tax deductibility of home mortgage interest can have a meaningful impact on your tax bill. The IRS allows you to deduct interest on acquisition indebtedness, which refers to mortgage loans used to buy, build, or improve your home.
The deductibility of interest depends, in part, on when you took out the mortgage on your home:
- For mortgages taken out before December 15, 2017, married couples filing jointly can deduct mortgage interest on the first $1,000,000 of debt. Married taxpayers filing separately can deduct mortgage interest on the first $500,000 of debt.
- For mortgages taken out after December 15, 2017, married couples filing jointly can deduct mortgage interest on the first $750,000 of debt. Married taxpayers filing separately can deduct mortgage interest on the first $375,000 of debt.
Note that the deductibility of your mortgage loan interest is now capped for tax purposes. Many real estate professionals promote the idea that “home mortgage interest is tax deductible”, but the entire amount of mortgage interest may not be tax deductible.
The charitable deduction may be the most difficult to track and document, because you may make dozens of small donations throughout the year. Keep a log of the donations you make in cash, and document the checks that you write to a charity. If you donate clothing or other items, ask the charity to give you a written receipt.
Contributions of $250 or more require a letter from the charity for tax documentation purposes. When you make a donation, ask the charity for a letter to document your contribution.
Casualty and theft losses
Casualty and theft losses refer to losses caused by theft, vandalism, fires, storms, and car accidents. Due to recent tax law changes, you can only deduct casualty and theft losses resulting from a federally declared disaster. As a result, far fewer taxpayers can take this deduction.
If you believe that you qualify for this deduction, read Form 4684 to find out about this tax issue.
Refer to the Schedule A instructions for details on other itemized deductions that may apply to you.
How to file
The IRS reports that nearly 90 percent of people now use tax software to file returns, and the software transmits Form 1040 and all supporting schedules electronically.
If, instead, you plan on filing out your tax forms manually, you can access all IRS form, instructions, and publications from the IRS.gov. The address for mailing your tax return is listed in the Form 1040 instructions.
Your 2018 personal tax return, and the payment for any tax liability, is due on April 15, 2019. If your tax situation is complex, you can request a six-month extension of time to file, but your tax liability must be paid by April 15th, to avoid interest charges.
Maximize your itemized deductions
There are several steps you can take to understand your tax filing, and to make the process less time-consuming. Use tax software to complete your return, and ask a tax accountant to review your return for accuracy. If you have a question, find the related publication on IRS.gov, and confirm that information with a tax preparer.
By investing time now, you’ll have a better understanding of how your tax return works, and you’ll be more likely to maximize your itemized deductions and lower your tax bill.