Knowing about key tax breaks is essential if you want to minimize your tax bill. There are many ways to cut your taxes, but a few key deductions typically offer the most savings to the average American.
1. Deduction for taxes paid to state and local governments
The most popular itemized deduction for taxpayers is the deduction for state and local taxes. You're allowed to write off real estate taxes paid to state, county, and city governments, which are a big deal for many homeowners. You can also choose whether to deduct either your state and local income taxes or your sales taxes, although you can't write off both.
The 44.2 million people who took itemized deductions for state and local taxes in the most recent year for which IRS data is available, were able to deduct an average of $12,514 per return.
But that won't be the case for 2018. Going forward, there's now a limit of $10,000 for total state and local taxes, including both property and your choice of sales or income taxes. That won't prevent every taxpayer from claiming a full deduction, but it'll bring the average down from its current five-digit level.
2. Mortgage and investment interest
Most interest that you pay for personal debt isn't deductible on your tax return. However, the tax laws make an exception for mortgage debt, and you're also allowed to take an itemized deduction for interest incurred for investment purposes. However, tax reform reduced the value of future mortgages that are eligible for the interest deduction, taking it from $1 million to $750,000.
Out of the total of $304 billion in deductible interest, more than 95% is connected to mortgages, including standard interest payments, mortgage points, and mortgage insurance premiums that the tax laws have treated recently as deductible. With home equity loan interest no longer being deductible, these numbers could fall in 2018 and beyond.
3. Gifts to charity
Charitable gifts are common in the U.S., and they're a popular tax break. American taxpayers claimed almost $222 billion in deductible charitable gifts, with the bulk of those donations coming in the form of money or checks. Gifts of personal property, such as vehicles, clothing, or stock, are also deductible in many cases, but they're less common than cold hard cash. The typical taxpayer deducted more than $6,000 in charitable gifts in the most recent year for which IRS data is available.
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Tax reform actually boosted charitable giving, allowing people to give up to 60% of their adjusted gross income to charity, up from the 50% limit that applies in 2017. However, many are concerned that higher standard deductions will give fewer people an incentive to itemize, with the potential result of discouraging charitable giving.
