Taxpayers can deduct certain amounts from their taxable income, called tax deductions. Tax deductions reduce your taxable income, which ends up saving you tax to pay. Tax credits, on the other hand, reduce the taxes you owe to the government.
When using tax deductions, you can either choose the standard deduction or itemized deductions. After the 2017 Tax Cuts and Jobs Act, most taxpayers use the standard deduction because it is now higher than before. If you think that itemizing deductions will reduce your taxable income more, you may choose to itemize.
With the tax filing deadline extended from April 15 to July 15, 2020, taxpayers now have an additional 3 months to file. Here’s a quick look at the 2020 standard deduction and itemized deductions shared by The Motley Fool.
“The standard deduction for 2020
First, let’s take a look at the standard deduction. Remember, this is the amount that American taxpayers can choose to use instead of itemizing their deductions.
Here’s a look at the standard deduction for the 2019 and 2020 tax years:
|Tax Filing Status||2019 Standard Deduction||2020 Standard Deduction|
|Married Filing Jointly||$24,400||$24,800|
|Head of Household||$18,350||$18,650|
|Married Filing Separately||$12,200||$12,400|
DATA SOURCE: IRS.
To be perfectly clear, if your itemized deductions (which we’ll list in the next section) are greater than the standard deduction for your tax filing status, it’s worthwhile to itemize. If not, you’ll get a lower tax bill (and save time) by using the standard deduction.
2020 itemized deductions
The Tax Cuts and Jobs Act got rid of quite a few itemized deductions. For example, the deduction for unreimbursed employee expenses was eliminated, as was the deduction for tax preparation fees, just to name a few. The Act wasn’t just designed to give most Americans a tax cut, but to also simplify the tax code. And in the case of deductions, things have certainly become more straightforward.
For most Americans (we’ll discuss some special deductions later on), there are just a few itemized deductions that are still available:
- Mortgage interest
- Charitable contributions
- Medical expenses
- State and local taxes
One quick way to gauge whether itemizing deductions might be worthwhile for you is to estimate your qualifying expenses from these four categories. If the total is at least close to your standard deduction, it’s worth calculating your itemized deductions on your tax return to see which is the better method for you.
Each of these deductions has its own restrictions, rules, and qualifications, so let’s take a closer look at each one.
The 2020 mortgage interest deduction
Mortgage interest is still deductible, but with a few caveats:
- Taxpayers can deduct mortgage interest on up to $750,000 in principal.
- The debt must be qualified personal residence debt, which generally means the mortgage is backed by either a primary residence, second/vacation home, or by home equity debt that was used to substantially improve one of these residences.
- Investment property mortgages are not eligible for the mortgage interest deduction, although mortgage interest can be used to reduce taxable rental income.
- Home equity debt that was incurred for any other reason than making improvements to your home is not eligible for the deduction.
Deducting charitable donations
There are quite a few rules when it comes to deducting your charitable contributions, especially when it comes to documentation requirements, so be sure to check out this guide to the charitable deduction if you need more information.
The general idea is that charitable contributions are deductible (with a few exceptions) up to 60% of the taxpayer’s adjusted gross income or AGI. In practice, few taxpayers need to worry about the limit — this means that someone with AGI of $100,000 could deduct as much as $60,000 in charitable donations.
Deducting medical expenses in 2020
Medical expenses are tax-deductible, but only to the extent by which they exceed 10% of the taxpayer’s adjusted gross income. The Tax Cuts and Jobs Act lowered this threshold to just 7.5% of AGI, but this was only through the 2018 tax year. This was extended for the 2019 tax year, but the threshold is set to return to 10% for 2020. It’s entirely possible that it will be extended once again, but it hasn’t happened as of early 2020. https://www.irs.gov/pub/irs-pdf/f1040sa.pdf
Here’s how it works. Let’s say that your AGI is $100,000 in 2020 and that you have $15,000 of qualified medical expenses for the year. Since 10% of your AGI would be $10,000, you can deduct the portion of your medical expenses ($5,000) that exceeds this amount.
The 2020 SALT deduction
The SALT deduction (which stands for State and Local Taxes) was perhaps the most controversial part of the changes to the individual tax code made by the Tax Cuts and Jobs Act.
There are two components to the SALT deduction:
- Property taxes — If you paid property taxes on real estate, a car, or any other personal property, it can be included as part of the SALT deduction.
- State taxes — Taxpayers can choose to deduct their state and local income taxes or their state and local sales taxes. In most cases, the state income tax deduction is more beneficial, but this can be a big benefit for taxpayers in states that don’t have an income tax.
Here’s where the controversial part comes in. The SALT deduction is limited to a total of $10,000 per return, per year. Taxpayers in high-tax states such as California or New York can easily exceed this limit, even if they have a relatively modest income.
You might have noticed that there are some well-known deductions I haven’t discussed yet, such as the student loan interest deduction and the deduction for IRA contributions. There’s a good reason for that. These deductions fall into a different category, and taxpayers can use them whether they itemize deductions or choose to take the standard deduction.
In fact, these technically aren’t deductions at all, but are considered to be ‘adjustments to income.’ This is where the term adjusted gross income, or AGI comes from. These adjustments are subtracted from your gross income to calculate — you guessed it — your adjusted gross income.
These are informally known as above-the-line tax deductions, and here are some of the most common:
- Traditional IRA deduction
- HSA/FSA deduction
- Dependent care FSA contributions
- Student loan interest deduction
- Teacher classroom expenses
- Self-employed tax deductions
- Alimony deduction
- Moving expense deduction (for armed forces)”
If you’re starting your tax planning for 2020, you now know the amount of standard deduction you can deduct and expenses that you can put under itemized deductions. If you believe many of your expenses come under itemized, then it is worthwhile to keep the receipts of all those expenses so that when the tax time comes, you will have everything you need.