Taxpayers often overlook deductions that could significantly lower their taxes, such as self-employed expenses being written off as business-related. CPA and TurboTax tax expert Lisa Greene-Lewis advises this is something many taxpayers overlook.
Capital losses can offset realized investment gains dollar for dollar, significantly lowering your tax bill. There are various strategies available to you for harvesting capital losses to maximize these losses, including “loss harvesting.”
1. Mortgage Interest Deduction
The Mortgage Interest Deduction allows homeowners to reduce their taxable income by the amount of mortgage interest paid, usually benefitting low and middle-income households who face steep housing costs. Unfortunately, however, due to changes brought about by Tax Cuts and Jobs Act which reduced mortgage limits and limited what can be deducted as itemized deductions this deduction has become less valuable to many homeowners.
To qualify, your home must be secured by a mortgage and used as your primary residence. Furthermore, mortgage proceeds should only have been used for qualifying expenses like improvements or repairs of your house; you may even deduct mortgage points paid at closing to obtain a lower mortgage rate over time.
To calculate your deduction, refer to IRS Publication 936 or contact a tax professional. Keeping in mind if your itemized deductions fall below your standard deduction amount for filing status, it may be worthwhile claiming them.
2. Medical Expenses Deduction
Medical expenses can be expensive; the good news is that some of those costs can be deducted when filing taxes.
Deduct any unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI). This may include costs related to doctor visits, dental work, prescriptions and even transportation such as mileage or toll fees when seeking treatment.
However, to maximize this tax break you must itemize deductions on Form 1040; with standard deductions increasing it may not make financial sense to itemize deductions unless your total itemized deductions surpass this higher threshold amount.
Be sure to hold onto receipts and records, and keep in mind that certain expenses such as cosmetic surgery, gym memberships, weight-loss programs or nicotine gum may not be tax deductible.
3. Qualified Dividends Deduction
Dependent upon your situation and tax bracket, qualified dividends can provide significant tax advantages to investors. They’re taxed at lower rates compared to regular dividends, and for high-income earners may even be completely tax-free!
Individuals reporting qualified dividends should report them on Form 1099-DIV box 1b. In order to be eligible for favorable tax treatment, these dividends must have been issued from either a U.S. corporation or qualifying foreign corporation and held over 60 days during the 121 days leading up to ex-dividend date.
Individual investors can leverage qualified dividends’ preferential treatment for numerous advantages, including encouraging long-term investing behavior and providing significant tax savings. Gaining more insight into how qualified versus ordinary dividends affect cost basis will enable more informed decision making when selecting investments.
4. Capital Gains Deduction
As soon as you sell something for more than you paid for it, that counts as a capital gain. This applies both to traditional investments like stocks and bonds as well as tangible assets such as jewelry or art that you sell at a profit.
The IRS taxes the difference between your sale price and cost basis. Your cost basis can be found by adding together your purchase price plus commissions as well as any costs to improve or depreciate the asset – known as depreciation.
Capital losses may be subtracted from capital gains to reduce your taxable income, up to an amount equivalent to $3,000 or 15% of your adjusted gross income (AGI). Any unused losses carry forward into future years.
Investors can protect themselves from capital gains taxes by investing in tax-advantaged accounts such as an IRA and employer-sponsored retirement plans like 401(k). By doing this, any taxes can be postponed until later when your noninvestment income will likely have decreased significantly.
