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Last year’s tax overhaul took aim at many popular deductions. For example, there are new limitations on how much you can deduct in state and local taxes. Other deductions also will disappear in 2018.
However, some of the most important tax breaks remain in place. Earlier this year, we briefly highlighted a few of them. But here — in greater detail — are the seven most valuable deductions and other perks that survived tax reform.
The medical expense deduction
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For a while, it looked like this tax break was on the chopping block. But not only did Congress end up preserving the deduction, it also temporarily expanded it.
For both the 2017 and 2018 tax years, you can deduct medical expenses that exceed 7.5 percent of your adjusted gross income. Under the old tax law, you could not deduct expenses until they exceeded 10 percent of income. So, more people will be able to take advantage of the break on their 2017 and 2018 returns.
The threshold jumps back up to 10 percent in 2019.
The tax rate on long-term capital gains
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Investors, rejoice! The relatively low tax rate on capital gains and dividend income long has been one of the best tax breaks for people who invest. In fact, these lower rates have been cited as a big reason why legendary investor Warren Buffett says he pays a lower tax rate than his secretary.
Tax reform left these lower rates unchanged. The rates remain either zero, 15 or 20 percent, depending on your income. And the majority of people will never see that 20 percent rate — you need to have an adjusted gross income of more than $400,000 before you owe that much in taxes.
The child tax credit
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This credit has been available since 1998. It helps poorer families by putting more money in their pockets that they can use for household expenses, savings or whatever else they deem worthwhile.
Prior to reform, this credit was worth up to $1,000 per qualifying child. In addition, it was refundable for taxpayers who earned income of at least $3,000, although the credit decreased — and eventually disappeared — as your income increased.
Tax reform kept the credit intact — and in fact, made it more generous. The new rules double the credit to $2,000 per child. However, the refundable part of the credit cannot exceed $1,400.
The tax overhaul also makes this credit available to more families. The income threshold drops by $500, to $2,500. And you can earn more income before the credit is phased out.
The capital gains exclusion when you sell a home
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Since the 1990s, homeowners have gotten an enormous tax break whenever they’ve sold their abodes. The 1997 Taxpayer Relief Act signed by President Bill Clinton shielded from capital gains up to $250,000 of the increase in your home’s value over the price you paid for it. For married couples who file jointly, that amount ballooned to $500,000.
Tax reform proponents initially put these tax breaks in the crosshairs but eventually left the perks unchanged.
2 big tax credits for student of all ages
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Students young and old can take advantage of two tax breaks that Uncle Sam offers when you are in school:
- American Opportunity Tax Credit: This allows a maximum annual credit of $2,500 per eligible student. As we have explained in the past, part of this credit is refundable.
- The Lifetime Learning Credit: This is earmarked for qualified tuition and related expenses and is worth up to $2,000 per tax return. It is not refundable.
Tax reform left these breaks intact. So sharpen your pencils and head back to the classroom!
Deductions for charitable contributions
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In truth, tax reform’s impact on charitable contributions looks to be a bit of a double-edged sword.
On the one hand, the deduction itself has become more generous. The new tax law increases the amount of charitable cash contributions you can deduct — from 50 percent to 60 percent of your adjusted gross income.
However, millions of Americans now have a sharply reduced financial incentive to give. As part of the tax overhaul, the standard deduction has been roughly doubled. That means millions fewer Americans are likely to itemize on their tax returns. And if you don’t itemize, you don’t get the charitable deduction.
Some experts are hopeful that if people have more money in their pockets — thanks to the bigger standard deduction — they will give more. Many more experts worry, however, that charitable giving will drop sharply.
Here at Money Talks News, we hope everyone remembers that the real reason to give goes far beyond a tax deduction. You cannot put a price tag on the rewards of helping out those who are less fortunate. So, if you can afford to be generous, please do so even if Uncle Sam won’t be giving you a tax break in the process.
Contributions to health savings accounts
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For a little while, it looked like tax reform might deliver the perfect prescription for people trying to save money to cover health care expenses. During the tax overhaul negotiations, there was a lot of chatter about expanding the amount of money people could save tax-free in health savings accounts. One senator even proposed removing the caps on contributions altogether.
Alas, nothing came of these pie-in-the-sky proposals. But at least health savings accounts were left intact. If you don’t know much about HSAs, check out “More Americans Are Using This Tool to Save — Should You Join Them?”
How do you plan to take advantage of the new tax law? Let us know by commenting below or on our Facebook page