As tax season rolls around, one of the first things to do is pay attention to changes in tax deductions and tax credits you can claim when filing your income tax return with the Internal Revenue Service.
Read on to learn about what’s changed with taxes for this year’s filing and how you can take advantage of those tax law changes and tax breaks for 2018.
Tax Credit vs. Tax Deduction
A tax credit is a dollar-for-dollar reduction on your income tax. Tax credits are categorized as either nonrefundable or refundable.
A nonrefundable tax credit means you will receive credit worth the amount of your tax bill. For example, if you have a tax credit of $1,000 but your tax bill is $900, you will only receive the amount for the $900 tax credit. You will not receive a refund for the excess credit. But a refundable tax credit means you will receive a refund if your tax credit is more than your tax bill.
A tax deduction, however, reduces the amount of your taxable income. The standard deduction is based on your applicable filing status. See below to understand how a tax deduction and tax credit affect your tax bill.
|Tax Credit vs. Tax Deduction|
|Tax Deduction||Tax Credit|
|Adjusted Gross Income (AGI):||$65,000||$65,000|
|*Figures provided are illustrative and not representative of actual tax rates or brackets as the U.S. uses a progressive tax system.|
New or Improved Tax Credits and Breaks for 2018
Below are some of the new and improved tax credits and breaks that might change how you file, what you owe or what you get back from the IRS.
1. Tax Brackets Are Wider
The federal income tax system uses a progressive tax structure, which means that as you earn more income, your tax rate goes up as well. The IRS tax brackets increase each year with inflation, however. For example, the 10 percent tax bracket — the lowest bracket — includes all income up to the following amounts for each tax filing status:
- Married filing jointly: $19,050 — up from $18,650 in 2017
- Married filing separately: $9,525 — up from $9,325
- Head of household: $13,600 — up from $13,350
- Single: $9,525 — up from $9,325
IRS Federal Tax Brackets: Frequently Asked Tax Questions and Answers
2. Standard Deduction Increases
The standard deduction almost doubled for the 2018 tax year for all filing statuses. The increase could impact whether you claim the standard deduction or itemize. For 2018, the standard deduction for each filing status is as follows:
- Married filing jointly: $24,000 — up from $12,700 in 2017
- Married filing separately: $12,000 — up from $6,350
- Head of household: $18,000 — up from $9,350
- Single: $12,000 — up from $6,350
3. Earned Income Tax Credit Increases
The earned income tax credit underwent several increases in 2018. First, you can now have up to $3,500 worth of investment income for the year and still qualify for the EITC. Second, the maximum income you can have and still qualify for the EITC also increased for each filing status:
Married Filing Jointly
- No qualifying children: $20,950 — up from $20,600 in 2017
- One qualifying child: $46,010 — up from $45,207
- Two qualifying children: $51,492 — up from $50,597
- Three or more qualifying children: $54,884 — up from $53,930
All Other Filing Statuses
- No qualifying children: $15,270 — up from $15,010 in 2017
- One qualifying child: $40,320 — up from $39,617
- Two qualifying children: $45,802 — up from $45,007
- Three or more qualifying children: $49,194 — up from $48,340
If you qualify for the EITC, the maximum tax credit amount varies depending on how many qualifying children you have. These amounts also increased slightly for 2018:
- No qualifying children: $519 — up from $510 in 2017
- One qualifying child: $3,461 — up from $3,400
- Two qualifying children: $5,716 — up from $5,616
- Three or more qualifying children: $6,431 — up from $6,318
To claim the earned income tax credit, you must file Schedule EIC with your income tax return.
4. Higher Income Limits for Retirement Savings Contributions Credit
The retirement savings contributions credit rewards qualified taxpayers who save for retirement with a tax credit equal to a portion of their contributions to qualified retirement plans, including IRAs, 401k and 403b plans.
For the 2018 tax year, you can claim a credit equal to 10 percent of your contribution if your income falls into the following brackets:
- Married filing jointly: $41,001 to $63,000 — up from $40,001 to $62,000 in 2017
- Head of household: $30,751 to $47,250 — up from $30,001 to $46,500
- All others: $20,501 to $31,500 — up from $20,001 to $31,000
For other qualifying income levels, you can claim a saver’s credit of 20 percent or 50 percent of your contribution. For these brackets, check here.
5. Increased Employer-Paid Parking or Transit Tax Breaks
Income and benefits you receive from your employer are typically included in your taxable income, except for qualified parking or transportation benefits. For 2018, the adjusted maximum monthly excludable amount your employer can provide is no more than $260 in qualified parking or transportation benefits. The applicable amount is already excluded from your taxable income.
6. Adoption Tax Credit
This is a nonrefundable tax credit for any taxpayer with a qualified adoption and qualified adoption expenses. Although the tax credit is nonrefundable, “any credit in excess of your tax liability may be carried forward for up to five years,” according to the IRS. The maximum amount for 2017 was $13,570 per child, but has increased to $13,810 for 2018. Restrictions, however, do apply for taxpayers with higher incomes.
For 2018, if you have a modified adjusted gross income above $247,140, you cannot claim this credit.
7. Green Energy Tax Credit
Known as the residential energy efficient property credit, this credit is for taxpayers who made green improvements to a place they used for a personal residence in 2017. According to the IRS, “you may be able to take a credit of 30 percent of your costs.”
8. Education Credits
There are two education credits that can reduce your tax bill: the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC). The maximum credit you can receive is up to $2,500 per eligible student under the AOTC and up to $2,000 per return for the LLC. Although the LLC is not a refundable credit, 40 percent of the AOTC is. These credits, however, are not available if someone claims you as a dependent.
9. HSA Contribution Limits
A health savings account is a type of savings account that is designated to pay for qualified medical expenses for you, your spouse or your dependents. Any money contributed to your HSA is tax deductible or pretax.
In order to qualify for an HSA, you have to be enrolled in a high-deductible health plan (HDHP). According to the IRS, you can “claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions.” In addition, any contributions that your employer makes to your HSA may be excluded from your gross income.
|HSA Contribution Limits|
|Additional catch-up amount for people 55 or older||$1,000||$1,000|
10. Personal Exemption Eliminated
The personal exemption, which allowed you to deduct a specific amount of money for yourself and your dependents, remains at zero for 2018 and 2019 under the Tax Cuts and Jobs Act of 2017.
Click through to read more about whether or not you can claim your boyfriend or girlfriend on your taxes.
More on Taxes
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- These 15 Countries Pay More in Taxes Than Americans
- How Much Money You Would Have If You Never Paid Taxes
- Watch: Crime Doesn’t Pay — Tax Evasion Penalties Explained
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