Tried and True Tax Breaks

We’ve all heard about the numerous tax changes created by enactment of the Tax Cuts and Jobs Act. Many are exciting and can help lower your tax bill. But that law did not make changes to many tried and true tax breaks that you can still use to reduce your taxes. Here’s a roundup of the most popular ones to consider.

Home sale exclusion

When you sell your main home, you may be able to exclude from income the gain up to $500,000 ($250,000 if you’re single). The dollar limit doesn’t change annually; it’s fixed by law.

This break can be used every two years, so if you continually trade up, you can get tax-free income regularly. To qualify, generally you must own and use your home as a principal residence for two out of five years preceding the date of sale. If you can’t meet these time requirements, you may still qualify for a partial exclusion under certain conditions beyond your control.

Qualified charitable distributions(QCDs)

If you are age 70½ or older, you can use your traditional IRA to make tax-free transfers to public charities. The transfer must be made directly from your IRA to such organizations (you can’t take a distribution and then contribute it) and you must obtain the usual substantiation for charitable donations. The annual limit on qualified charitable distributions is capped at $100,000 per individual, so married couples who are old enough and have IRAs can potentially transfer up to $200,000 each year. Like the home sale exclusion, the dollar limit on QCDs is fixed by law and does not change from year to year. The tax benefit: Besides not being included in your income, QCDs count towards your required minimum distributions (RMDs). But no charitable contribution deduction is allowed.

Roth IRAs

If you work and your modified adjusted gross income (MAGI) is below a set level that adjusts annually, you can contribute to a Roth IRA. You don’t get a current tax deduction, but the earnings in the account can become tax free in time. The contribution limit for 2019 is $6,000 ($7,000 if you are at least 50 years old on December 31, 2019).

And if your MAGI is low enough, you may also qualify for the retirement savers credit based on your Roth IRA contributions up to $2,000.

Dependent care credit

If you pay for the care of (1) your child under age 13, (2) your spouse who is physically or mentally incapable of self-care, or (3) an individual who lives with you and could be your dependent (i.e., gross income under $4,200 in 2019) and is physically or mentally incapable of self-care, you may be eligible for the dependent care credit. This is in addition to claiming the child tax credit, the earned income tax credit, or other breaks related to these individuals.

The credit percentage varies with the adjusted gross income. The applicable percentage applies to care costs up to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. These dollar limits are permanent in the tax law.

Rental losses deduction

If you have rental property in which you actively participate but its expenses exceed rental income, you may be able to deduct your loss (the excess of expenses over income) up to $25,000 each year. This is so despite the passive activity loss rules that usually limit deductions each year to the extent of passive activity income (e.g., rental income). To deduct a full $25,000, your adjusted gross income can’t be more than $100,000 for the year.

But if your rental losses are greater than $25,000, you don’t lose them. Instead, they carry forward and become deductible in the future.

Conclusion

While it’s great to look into new tax law changes that may benefit you, don’t overlook old tax breaks that can still be used to save you money.