Here’s important information every investor should have on how you might be able to deduct stock market losses.
Investments you own, such as stock, other securities, real estate, or a business, are considered "capital assets." Any time you sell a capital asset for less than you bought it for, you incur a capital loss. You realize a capital gain whenever you sell a capital asset at a profit—that is, you sell it for more than you paid for it.
However, until you sell a capital asset, you have neither a gain nor a loss. The only time you actually get a deduction is when you sell your stock or other capital asset for a loss. Paper losses aren’t deductible.
To calculate your loss on a stock, you subtract the share's adjusted basis from the amount you sold it for. The adjusted basis is the share's original purchase price plus brokerage fees and any other fees incurred.
If your stock split since you purchased it, you must reduce its adjusted basis to reflect the fact that you own additional shares. For example, if you got two shares for one, you reduce your basis by 50%.
The two types of capital losses are short-term and long-term. A capital loss is short-term if you owned the stock for less than one year. The loss is a long-term capital loss if you owned the stock for more than one year. You need to calculate your short-term and long-term capital losses separately.
To figure out your short-term capital gain or loss for the year, you add up all the losses from all the shares you owned for less than one year and you add up all the gains from all the shares you owned for less than one year. You then subtract your overall losses from your overall gains. If you had no gains (only losses), you don't need to do any subtraction. The total overall gain or loss is your short-term capital gain or loss for the year. To figure out your long-term capital gain or loss, you do the same thing with all the shares you owned for more than one year.
If you have gains or losses from selling other types of capital assets—rental property for example—include them in these calculations.
You can deduct net losses of either type (short-term or long-term) from the other kind of gain. For example, you can deduct any net short-term capital loss from net long-term capital gains and vice versa. The result is your total net capital loss or gain for the year.
You can deduct up to $3,000 ($1,500 if married filing separately) of your total net capital losses against any other income you earned. This other earned income can be from any source, such as a job or interest or dividend income.
If you're unfortunate enough to lose more than $3,000 during the year, you can carry forward your unused losses indefinitely to future years. Each year, you get to first apply the carried forward losses against capital gains and then use any remainder (up to $3,000) to reduce your ordinary income.
Example. Dave purchased 100 shares of XYZ Corp. six months ago and sold them for a $12,000 loss, which is a short-term capital loss. He also sold his shares in the ABC Mutual Fund that he purchased 20 years ago. Although the ABC fund has declined in value this year, Dave still earned a $7,000 profit on the sale—a long-term capital gain. Dave subtracts his $12,000 short-term loss from his $7,000 long-term gain, resulting in a $5,000 net capital loss. Dave may deduct $3,000 (the limit) of the loss from his salary income for the year. Dave is in the 24% income tax bracket, so this saves him $720 in federal income taxes. He carries forward the other $2,000 in losses to deduct in future years.
To claim this deduction, complete IRS Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D, Capital Gains and Losses and include these with your tax return.
Deducting capital losses is called “tax loss harvesting” and is a commonly used as year-end tax planning strategy. Sometimes when investors harvest their losses at the end of the year, they buy back the same stock or other securities. This way they benefit from their capital loss but can continue to own the security.
If you do this, however, you must be careful not to run afoul of the wash-sale rule. Under this rule, if you buy back the same stock or other security within 30 days after the sale, you can’t claim the losses on your tax return for the year. The wash sale rule also applies if you buy shares within 30 days before you sell them.
Tax loss harvesting is purely a strategy to save on taxes without regard to the underlying value of the investment. Even if a stock you've purchased has gone down in value, harvesting your loss this year may not be your best long-term investment decision. Also, remember that capital gains or losses don’t apply to tax-deferred accounts, such as your 401(k) or IRA, so tax loss harvesting isn’t possible for investments held in these accounts.
To get more information on capital gains and losses, see IRS Topic no. 409, Capital gains and losses. You can find additional information on capital gains and losses in IRS Publication 550 and Publication 544.
If you need more help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS.
]]>Unfortunately, dog expenses are ordinarily personal expenses that aren't tax deductible. However, in some instances, your dog can save you money on your taxes.
Seeing-eye dogs used by the blind and other service dogs used by the disabled are a deductible medical expense. You must register the dog with an agency declaring it is a service animal.
If you do so, you can deduct as an itemized medical deduction expenses such as pet food, training, medication, and vet bills.
If you use a guard dog to guard your business premises, you can deduct the cost as a business expense. However, you can't claim your family pet is a guard dog. It should be a certified guard dog and be a member of a traditional guard dog breed, such as a Rottweiler, German Shepherd, or Doberman Pinscher.
If you used a certified guard dog for your business, you can take a current deduction for the cost of dog food, vet bills, training, and other expenses of keeping the dog. However, the cost of the dog itself must be depreciated over seven years or deducted in one year using IRS Code Section 179.
A person in the business of breeding and selling dogs may deduct all their business-related expenses, just like any other business. This category would include things like dog food and veterinary care, as well as rent, advertising, and other business expenses.
The breeding activity must be a legitimate business, not a hobby.
A farmer or shepherd who uses a dog to herd or guard cattle, sheep, pigs, or other farm animals can deduct the cost of keeping the dog as a business expense. The cost of the dog itself must be depreciated over seven years or deducted in one year using IRS Code Section 179.
If you donate money or property to a tax-exempt dog shelter or other tax-exempt charity that helps dogs, you may deduct the amount as a charitable deduction if you itemize your deductions. If you donate property, you can deduct the fair market value of the item. For example, if you donate dog food, you can deduct the price of the food.
However, you may not deduct:
You can deduct unreimbursed expenses you pay out of your own pocket while volunteering for a dog shelter or other dog-related nonprofit. For example, if you use your car to help deliver supplies for a shelter, you can claim unreimbursed parking fees, tolls, and gas or deduct a flat rate for each mile you drive. If you foster dogs in your home, you may deduct reasonable expenses you pay, such as dog food expenses and veterinary bills.
If you need more guidance about tax deductions, talk to a tax professional, such as a certified public accountant or a tax attorney.
You should itemize if your total itemized deductions are worth more than the standard deduction. Because the Tax Cuts and Jobs Act (TCJA) roughly doubled the standard deduction starting in 2018, fewer taxpayers than ever itemize.
Even if you don't itemize, you might be able to take "above-the-line" deductions, which are adjustments to your taxable income, lowering the amount of tax you have to pay. You can claim these deductions even if you take the standard deduction
If you don't itemize, you can forget about deducting things like charitable contributions. But you can take some tax deductions (again, known as "above-the-line" deductions) without itemizing.
Technically speaking, these above-the-line deductions aren't deductions at all, but "adjustments to income" (See federal Form 1040, Schedule 1). But, just like a deduction, they reduce your taxable income.
The TCJA eliminated the above-the-line deduction for employee moving expenses during 2018 through 2025. This deduction is scheduled to return in 2026. The domestic production activities deduction was also eliminated.
The above-the-line deductions that remain under the TCJA include the following:
Self-employed health insurance. People who are self-employed can deduct health insurance premiums up to the amount of the profit from the business.
Health savings account contributions. You can deduct Health Savings Account (HSA) contributions you make with personal funds.
Retirement plan contributions by self-employed taxpayers. These include annual contributions made by self-employed people to their retirement plans, such as SEP-IRAs, SIMPLE IRAs, Keogh plans, and solo 401(k) plans.
IRA contributions. Contributions to IRA accounts (subject to annual threshold limits) may be deductible, depending on your income.
50% of self-employment taxes. If you’re self-employed, you can deduct half of the 12.4% Social Security tax on net self-employment income, up to an annual ceiling, and a 2.9% Medicare tax on all net self-employment income.
Penalty on early savings withdrawals. You can deduct from your income penalties you had to pay to banks and other financial institutions because you withdrew your savings early from certificates of deposit or similar accounts.
Student loan interest. Up to $2,500 of student loan interest is deductible from your gross income provided that your AGI—before subtracting any deduction for student loan interest—is below a ceiling amount.
Tuition and fees. Depending on your income, you may deduct up to $4,000 in higher education tuition and fees you pay for yourself, your spouse, or a dependent. However, this deduction is not allowed if the American Opportunity tax credit or Lifetime Learning Credit is claimed.
Alimony. You can also subtract amounts you paid in alimony, that is, a court-ordered payment to a separated spouse or divorced ex-spouse. You can’t include child support payments. For more details, see IRS Publication 504, Divorced or Separated Individuals. The TCJA eliminates this deduction starting in 2019 for any divorce or separation agreement executed after December 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the TCJA applies).
Moving Expenses for Armed Forces members. Members of the Armed Forces on active duty (or their spouse or dependents) who move pursuant to a military order and incident to a permanent change of station may deduct their moving and storage expenses.
Be sure to keep good records of all such expenses, even if you don’t itemize.
Find out about IRS audit rates and the odds of being audited in What Are the Triggers of IRS Tax Audits?
Read about the Earned Income Tax Credit, a refundable tax credit, which means you might be able to get free money from the federal government.
Get information about common tax deductions for individuals.
Hiring the right tax professional is important because getting good tax help can translate into more money in your pocket. To learn more about tax deductions, talk to a tax lawyer or other tax adviser.
]]>The IRS administers the EITC, but you don't have to owe or pay any federal income taxes to qualify for it. However, you must file a tax return to get the credit and specifically claim the EITC.
Many people who qualify for the EITC don't get it because they fail to file.
The EITC is a refundable tax credit for taxpayers with lower earnings. This tax credit gives you a dollar-for-dollar reduction in the amount of taxes you owe. If the amount of the EITC is greater than the amount of tax you owe, then you can get a refund.
If you have low or moderate earnings, you can get the EITC, whether or not you have qualifying dependents.
To qualify for the EITC, you must:
The income limit depends on your family size. The more "qualifying children" you have, the larger your income may be for qualifying purposes.
A qualifying child can include your son, daughter, adopted child, stepchild, foster child, or a descendant of any of these, such as your grandchild, or your brother, sister, half-brother, half-sister, stepbrother, step-sister, or a descendant of any of them, like a niece or nephew.
The child must live with you for at least half the year and be younger than 19 (24 if a full-time student).
For 2023 (the tax return you'll file in 2024), you qualify for the credit if your earned income is less than:
Check the IRS website for the annually adjusted amounts.
If you have income other than earned income, such as unemployment payments, taxable Social Security payments, alimony, investment income (which can't exceed $11,000 for 2023, increasing to $11,600 in 2024), or retirement benefits, you must add it toward the limit. You don't have to add government assistance you receive, such as food stamps, Medicaid, or Supplemental Security Income (SSI).
Your investment income must be $11,000 or less in 2023. In 2024, that amount rises to $11,600.
The maximum credits for 2023 are:
If you owe any taxes for the year, your credit will first be subtracted from this amount, and the rest will be paid directly to you. If you owe no taxes, you'll be paid the full amount of the credit. Some workers have their credits prepaid through their employers as “negative withholding” from their paychecks.
If you can claim the EITC on your tax return, be aware that your refund might be delayed. The earliest the IRS will issue your refund is mid-February.
The IRS has an EITC Assistant tool on its website that you can use to see if you might qualify.
Use the IRS EITC calculator to determine your eligibility for the credit and get an estimate of the credit amount you might get. (The calculator provides just an approximation and using it doesn't guarantee you'll get the credit.)
To claim the EITC, you must file an IRS income tax form, either Form 1040 or 1040-SR. If you have one or more qualifying children, you must complete Schedule EIC and attach it to your tax return. Schedule EIC provides the IRS with information about the qualifying children, including their names, ages, Social Security numbers, relationship to you, and the amount of time they lived with you during the year. If you use tax software, the program will help complete the forms for you.
More than half the people who qualify for the EITC use a tax preparer to prepare their returns. You can use a paid preparer—many preparers will deduct their fee from your EITC payments rather than make you pay upfront. However, if you qualify for the EITC, you probably also qualify for free tax preparation through the IRS Volunteer Income Tax Assistance program (VITA).
The VITA Program offers free tax help from IRS-certified volunteers. There are thousands of VITA sites located at community and neighborhood centers, libraries, schools, shopping malls, and other locations. To find a site, use the online VITA Locator Tool or call 800-906-9887.
You can get more information on claiming the EITC at the IRS website. You can also learn more about tax deductions and credits by talking to a tax lawyer or other tax adviser.
]]>One easy way to pay no income tax is to have little or no taxable income. About half of the Americans who pay no income tax do so because their incomes are too low.
As a result of the Tax Cuts and Jobs Act, which took effect in 2018, single taxpayers receive a standard deduction of $13,850 for singles and $27,700 for marrieds filing jointly. For 2024, the amounts are $14,600 for singles or marrieds filing separately and $29,200 for marrieds filing jointly. Personal and dependent exemptions were eliminated.
If your income is below these levels, you won't have to pay any income tax.
Lower-income working families with dependent children can avoid paying income taxes because they're given special tax breaks: the child tax credit, the earned income tax credit (EITC), or the child and dependent care credit.
For example, a family of four (two spouses and two children over six) with an income of $30,000 would receive $2,000 (2023) tax credits for each child. For the 2024 tax year (tax returns filed in 2025), the child tax credit is also $2,000 per qualifying child. They'd also get a $6,604 earned income tax credit (2023). For 2024, this amount is $6,960. When combined with their standard deduction, they end up with no income subject to income tax. Indeed, because the child tax credit and EITC are refundable, they get money back from the IRS.
Families like these account for one-seventh of those who pay no taxes.
More than one-fifth of those who pay no income taxes are retirees with relatively modest incomes, although not living in poverty, who benefit from tax breaks for seniors. The most significant exemption among these is the tax exemption for most Social Security benefits.
Taxpayers with high incomes can avoid paying income taxes by having lots of itemized deductions. Unfortunately, as a result of the Tax Cuts and Jobs Act, itemized deductions are harder to come by than in the past. They only include deductions for:
As a result of these changes, only about 11% of taxpayers will be able to itemize instead of taking the standard deduction. Still, higher-income taxpayers who make substantial charitable contributions and/or have large uninsured health expenses can still avoid paying income taxes.
Finally, it's quite easy to pay no income taxes if you're extremely rich. In our tax system, money is only subject to income tax when it is earned or when an asset is sold at a profit. You don't have to pay income taxes on the appreciation of assets like real estate or stocks until you sell them.
Moreover, there is no tax on consumption or on borrowed money. So, the simple strategy of the super-rich is to buy assets like real estate and stocks and hold on to them, and to borrow against them when needed to finance their lifestyles. They don't have to pay any taxes at all on their borrowed income. Some politicians have proposed imposing a tax on assets owned by the wealthy, but so far, it hasn't happened.
The rich also avoid paying taxes by earning substantial interest income from tax-free municipal bonds. They also sock money away in individual retirement accounts where it grows tax-free. There aren't that many rich people, so the number of super-wealthy taxpayers who actually take advantage of these strategies is quite small.
]]>For tax purposes, a hobby is an activity you engage in primarily for a purpose other than to make a profit. The IRS commonly classifies inherently “fun” activities like creating art, photography, crafts, writing, antique or stamp collecting, or training and showing dogs or horses as hobbies. Even if you occasionally make money doing such an activity, it is a hobby if your prime motivation is having fun, not earning a profit.
Because hobbies are not businesses, hobbyists have never been allowed to take the tax deductions to which businesspeople are entitled. However, for decades the tax law did permit hobbyists to claim as an itemized deduction their hobby-related expenses up to the amount of income the hobby earned during the year. This was not a very generous deduction because of the limitations on itemized deductions, but it was better than nothing.
Unfortunately for people who earn income from hobbies, the TCJA completely eliminates the itemized deduction for hobby expenses, along with all other miscellaneous itemized deductions. The prohibition on deducting these expenses goes into effect for 2018 and continues through 2025. This means that taxpayers will not be able to deduct any expenses they earn from hobbies during these years, but they still have to report and pay tax on any income they earn from a hobby! The deduction is scheduled to return in 2026.
Example: Charles paints part-time as a hobby. He earns $3,000 from selling paintings in 2018 and has $2,000 in expenses. He must report and pay tax on his $3,000 in hobby income, but he may not deduct any of his hobby expenses, even if he itemizes his personal deductions.
The TCJA roughly doubled the standard deduction to $12,000 for singles and $24,000 for marrieds filing jointly, so this makes up somewhat for the loss of the deduction for hobby expenses and other miscellaneous itemized deductions. The fact that you can’t deduct your expenses doesn’t mean you shouldn’t continue to earn money from a hobby; but you might want to minimize your expenses during 2018 through 2025.
If you engage in an expensive activity like raising horses and want to be able to deduct your expenses, you should take steps to convert the activity into a business for tax purposes. A “business” is an activity you engage in primarily to earn a profit. You can enjoy doing it, but enjoyment is not your primary motivation, profit is. You don’t have to earn a profit every year—or even for many years—but making a profit must be the main reason you do the activity. You must work regularly at the activity and carry it on in a businesslike manner—for example, keep good records, have a business plan, and obtain expertise in the activity. Although you don’t have to earn a profit for the activity to be a business, it helps a lot. In fact, the IRS will presume that an activity is a business if you earn a profit at it during any three out of five consecutive years.
Prior to passage of the TCJA, hobby expenses were deductible only as a Miscellaneous Itemized Deduction on IRS Schedule A. This meant they could be deducted only by taxpayers who itemized their personal deductions. Moreover, hobby expenses were deductible only if, and to the extent, they exceeded 2% of the hobbyist’s adjusted gross income (total income minus business expenses and a few other expenses). And, such expenses were deductible only up to the amount of hobby income--if you had no income from a hobby, you got no deduction.
]]>Ponzi schemes were named for Charles Ponzi, an Italian immigrant who carried out a notorious investment scam involving postal reply coupons in the 1920s. However, such schemes have been around for centuries. By far the most famous Ponzi scheme was the one perpetrated by securities trader Bernard Madoff, which was discovered in 2008 and ended up costing hundreds of investors an estimated $65 billion in losses. However, much smaller Ponzi schemes go on all the time. Like Madoff’s scheme, which went on for over 20 years, they often last for some time before being discovered.
In reaction to the terrible losses suffered by Madoff’s victims, the IRS has enacted some special tax rules that make it much easier for Ponzi scheme victims to deduct their losses from their income taxes. Such deductions don’t make up for all the losses suffered through Ponzi schemes, but they do help.
Under the IRS rules, an investor in a Ponzi scheme is entitled to deduct his or her losses as a theft loss, instead of a capital loss from an investment. This is good for the investors because the deduction for capital losses from investments is normally limited to a maximum of $3,000 per year. There is no such limit for theft losses. In addition, investment theft losses are not subject to the limitations applicable to personal casualty and theft losses. The loss is deductible as an itemized deduction. It is not subject to the 10% of adjusted gross income reduction or the $100 reduction that applies to many personal casualty and theft loss deductions. A theft loss deduction that creates a net operating loss for the taxpayer can be carried back three years and forward 20 years. This enables a victim to get a refund on prior taxes paid for those prior years.
The theft loss is deductible in the year the fraud is discovered, except to the extent the investor has a claim against the Ponzi schemer with a reasonable prospect of recovery. The IRS says that determining the year of discovery and applying the “reasonable prospect of recovery” test to any particular theft is highly fact-intensive and can be the source of controversy.
To help Ponzi scheme victims, the IRS has created a special “safe-harbor rule” under which it will automatically accept Ponzi-type theft losses. Under this rule, the IRS will deem the loss to be the result of theft if: (1) the scheme’s promoter was charged under state or federal law with fraud, embezzlement, or a similar crime; or (2) the promoter was the subject of a state or federal criminal complaint alleging commission of such a crime, and (3) either there was some evidence of an admission of guilt by the promoter or a trustee was appointed to freeze the assets of the scheme.
The amount of the theft loss includes the investor's unrecovered investment, including income as reported in past years. Defrauded investors generally can claim a theft loss deduction not only for the net amount invested, but also for the so-called “fictitious income” that the scheme’s promoter credited to the investor’s account and which the investor reported as income on his or her tax returns for years prior to discovery of the scheme. For more details, see IRS Revenue Ruling 2009-9 and IRS Revenue Procedure 2009-20.
]]>You are disabled if you have:
Major tax benefits for the disabled include:
If you are legally blind, you may be entitled to a higher standard deduction on your tax return. The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. For details, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
Military service-connected disability payments are not taxable. However, if you receive a disability pension based on years of service, in most cases you must include it in your income.
Other disability-related payments that are not taxable include:
See IRS Publication 525, Taxable and Nontaxable Income.
Also, most of an individual's Social Security disability benefits are not taxed. For more information, see Nolo's article on the taxation of Social Security disability benefits.
If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. These are expenses for care and other disability-related services at your place of work or outside of your workplace that are also needed for you to do your work. For example, a blind person could deduct the cost of employing a reader for work and a deaf person could deduct the cost of a sign language interpreter used during work meetings.
If you qualify for this deduction, your impairment-related work expenses are not subject to the 7.5% of adjusted gross income limit that applies when you deduct medical expenses as a personal itemized deduction.
See IRS Publication 529, Miscellaneous Deductions.
You may be entitled to a tax credit if you were permanently and totally disabled when you retired. This credit is for lower income individuals--for example, a single disabled person does not qualify if his or her adjusted gross income exceeds $17,500. For information on this credit, see IRS Publication 524, Credit for the Elderly or the Disabled.
Disabled people who itemize their deductions can deduct their medical expenses as a personal itemized deduction. Eligible expenses include both health insurance premiums and out-of-pocket expenses not covered by insurance. However, this deduction is limited to the amount that such expenses exceed 7.5 % of adjusted gross income during 2017 and 2018, 10% of AGI during 2019 and later. See the Nolo article Deducting Medical Expenses.
Disabled individuals who work but have low incomes may also qualify for the Earned Income Tax Credit. See the Nolo article The Earned Income Tax Credit: A Valuable Credit for Low Income Earners.
Since 2015, disabled individuals and their families have been allowed to establish a special tax-advantaged savings account: the ABLE Account (named for the Achieving a Better Life Experience). The accounts give disabled people the ability to save money to help pay for their expenses without jeopardizing their eligibility to receive government assistance. Disabled individuals or their families may establish a single ABLE account, and family and friends may contribute a total of $14,000 into the account each year. The Tax Cuts and Jobs Act increases the total amount that may be contributed to an ABLE account during 2018 through 2025. After the $14,000 annual limit is reached, the disabled individual may make an additional contribution equal to the lesser of:
For more details on ABLE accounts, see the Nolo article ABLE Bank Accounts for People with Special Needs.
]]>If you own a business, subscriptions to professional, technical, and trade journals that deal with the business are deductible as a business expense. Make sure the subscription is related to your business. This is a matter of common sense. For example, an accountant could deduct the cost of subscribing to the CPA Journal, but not to a daily newspaper or general interest magazine. On the other hand, a freelance journalist could deduct subscriptions to newspapers and magazines to which he or she has, or wishes to, sell articles.
If you prepay for a subscription for more than one year, you must prorate the cost for each year. You can do this by determining what you pay per month for the subscription. For example, if you pay $240 for a two-year subscription that starts in July, you may deduct $10 per month over the life of the subscription. You would get a $60 deduction the first year, a $120 deduction the following year, and a $60 for the final six months of the subscription.
Before 2018, it was possible to deduct subscriptions even if they were not purchased for a business. For example:
However, these expenses were deductible only as miscellaneous itemized deductions, which means they were deductible only if, and to the extent, that they, along with your other miscellaneous itemized deductions, exceeded 2% of your adjusted gross income.
Unfortunately for people who pay for expensive subscriptions, the Tax Cuts and Jobs Act enacted by Congress in 2017 completely eliminates all miscellaneous itemized deductions subject to the 2% of AGI threshold, including those for investment expenses, unreimbursed employee expenses, job search expenses, and hobby expenses. Thus, subscriptions purchased for these purposes are no longer deductible. The prohibition on deducting these expenses went into effect for 2018 and continues through 2025. These deductions are scheduled to return in 2026.
]]>Specifically, the TCJA suspended for 2018 through 2025 a large group of deductions lumped together in a category called “miscellaneous itemized deductions” that were deductible to the extent they exceeded 2% of a taxpayer’s adjusted gross income. These include the following deductions:
Unreimbursed job expenses. These are work-related expenses an employee pays out of his or her own pocket. They include:
None of these expenses are deductible during 2018 through 2025. Thus, you should seek to have your employer reimburse you for them. This reimbursement is tax-free as long as you properly document your expenses. Alternatively, you could seek a pay raise to help pay for these expenses, but such a raise would be taxable.
Investment Expenses. Expenses you pay for personal investing are also not deductible as a personal itemized deduction during 2018 through 2025. This includes:
Tax preparation fees. Tax preparation fees are likewise not deductible for 2018 through 2025. This includes costs for hiring a tax pro or buying tax preparation software or tax publications. It also includes any fee you pay for electronic filing of your return. If you have a tax pro prepare both your personal and business taxes, ask for a separate bill for your business return. Reason: The fees to prepare your business return remain a fully deductible business expense—they are not a personal itemized deduction.
Fees to fight the IRS. During 2018 through 2025, you may not deduct as an itemized deduction attorney fees, accounting fees, and other fees you incur to determine, contest, pay, or claim a refund of any tax.
Hobby expenses. A hobby is an activity you engage in primarily for a reason other than to earn a profit—for example, to have fun. Before 2018, hobbyists were permitted to deduct their hobby-related expenses up to the amount of hobby income they earned each year (but only expenses over 2% of AGI were deductible). The TCJA eliminates the itemized deduction for hobby expenses for 2018 through 2025. This means that you will not be able to deduct any expenses you earn from hobbies during these years. However, you still have to report and pay tax on any income you earn from a hobby! However, if your hobby involves selling goods to customers, you may deduct your costs of goods sold when calculating your hobby income. For example, if your hobby is making and selling pottery, you can deduct the cost of making each pot you sell from your hobby income.
A few miscellaneous itemized expenses remain deductible during 2018 though 2025 for taxpayers who itemize.
Gambling losses. The deduction for gambling losses has not been affected by the TCJA. These remain deductible up to the amount of your gambling winnings for the year. You cannot simply reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. These losses are not subject to the 2% limit on miscellaneous itemized deductions.
Investment interest. If you borrow money to purchase an investment, the interest you pay on the loan is called investment interest. Investment interest remains deductible for taxpayers who itemize. However, the deduction is limited to the amount of taxable investment income you earn each year, such as dividends, royalties, or interest. Any disallowed investment interest is carried over to deduct in future years. Ordinarily, investment income does not include any capital gains or qualifying dividends that enjoy favorable tax treatment. However, you can make an election to include long term capital gain and qualifying dividends in your investment income. This can allow you to deduct a larger amount of investment interest. When you do this, however, your long-term capital gain and qualifying dividends must be taxed at your ordinary income tax rates, not the usually lower capital gains rates.
]]>If you're an employee, it's easy to know how much state and local income tax you paid during the tax year--the amount of state and local tax withheld will be shown on the Form W-2 provided by your employer. If you made mandatory contributions to the California, New Jersey, or New York Nonoccupational Disability Benefit Funds, Rhode Island Temporary Disability Benefit Fund, or Washington State Supplemental Workmen's Compensation Fund, the amount is added to your state income taxes. The same goes for mandatory contributions to the Alaska, California, New Jersey, or Pennsylvania state unemployment funds; and mandatory contributions to state family leave programs, such as the New Jersey Family Leave Insurance program, and the California Paid Family Leave program. Car inspection fees, assessments for sidewalks or other improvements to your property, tax you paid for someone else, and license fees (marriage, driver's, dog, and so on) are not included.
Determining how much sales tax you paid during the year is another matter. One way is to keep receipts for all the sales taxed purchases you made during the year and add up the total amount of sales tax you paid. (You can't include taxes on gasoline.) You need to be a fanatical record keeper to go this route.
Since figuring out how much you actually paid in sales tax is likely impossible, the IRS has estimated how much sales tax people at various income levels pay on average in each state based on that state's sales tax rates. Its results are contained in the sales tax tables in the instructions to IRS Schedule A. Thus, for example, a single taxpayer in California with an income of $50,001 would get a $759 deduction. The same person would get a $561 deduction if he or she lived in Massachusetts.
But you may be thinking "Wait a minute, some years I pay way more than the average sales tax." This would likely be true, for example, in a year you purchased a car, motor home, or boat. Luckily, the IRS has thought of this. You are allowed to add the actual sales tax you pay for:
Note that the "general sales tax rate" is the sales tax charged throughout your state, and doesn't include any additional sales taxes imposed by your local government (county or city), or any additional sales tax charged on purchases of particular types of products or services. Some states charge a lower sales tax on purchases of food, clothing, medical supplies, and motor vehicles. However, the IRS allows you to deduct these purchases at the higher general sales tax rate.
To make things as easy as possible for you, the IRS has created an online sales tax deduction calculator you can use instead of its printed tables and worksheet.
If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, you don't pay any income taxes and may only deduct your sales taxes if you itemize.
$10,000 Annual Cap on State and Local Tax Deduction
Before 2018, you could deduct the full amount of sales tax or state income tax you paid without any limit. However, the Tax Cuts and Jobs Act imposed a $10,000 annual limit on the state and local tax deduction for all taxpayers. For 2018 through 2025, you may deduct a maximum of $10,000 for:
Thus, for example, if you pay $10,000 or more in property tax, you’ll get no deduction for your state sales tax or income tax because you’ll already be over the cap. Because of the cap, depending on the amount of your sales tax deduction and how much property tax and income tax you paid, in some cases it won’t make any difference whether you deduct sales tax or state income tax.
Example: Sam, a California taxpayer, paid $6,000 in property tax and $4,000 in state income tax. His sales tax deduction based on IRS tables is $5,000. It makes no difference whether he deducts his sales tax or state income tax; either way, his deduction is limited to $4,000 so his total deduction is no more than $10,000.
On the other hand, in some cases you could still benefit from deducting sales taxes instead of state income tax.
Example: Assume that Sam from the above example paid only $4,000 in property tax. He’ll now benefit from deducting his $5,000 in sales taxes instead of his $4,000 in state income taxes—he’ll get a total deduction of $9,000 instead of $8,000.
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