03/2020 KIPLINGER’S PERSONAL FINANCE 45line tax breaks is the deduction for
contributions to an IRA. If you’re not
covered by a retirement plan at work,
you can deduct up to $6,000 in contri-
butions to an IRA, or $7,000 if you’re
50 or older. Even if you’re covered by
a workplace plan, you may be eligible
to deduct all or a portion of your con-
tributions, depending on your income
(see the box on page 46).
Another above-the-line deduction
could provide relief for taxpayers
with student loans. You can deduct
up to $2,500 in student-loan interest
for you, your spouse or a dependent
if your MAGI is less than $85,000
($170,000 if filing a joint return). The
deduction starts to phase out at MAGI
of $70,000 (for singles) and $140,000
(for joint filers). A former student can
claim this deduction even if Mom and
Dad are making the payments.
ADVICE FOR ITEMIZERS
With the larger standard deduction,
many taxpayers will be able to do a
quick, back-of-the-envelope determi-
nation to see whether they’ll itemize.
Plus, if you claimed the standard de-
duction last year and your situation
hasn’t changed, it’s unlikely you’ll
itemize on your 2019 tax returns.
But some taxpayers will still benefit
by calculating their taxes both ways to
see which delivers the lower bill. (Tax
software makes this task pretty easy,
as long as you have all the necessary
documents.)
Homeowners who have a large
mortgage are still good candidates
for itemizing. For loans acquired after
December 15, 2017, you can deduct
interest on a mortgage (or mortgages)
of up to $750,000. (For loans taken
out before that date, you can deduct
interest on mortgage debt of up to
$1 million.)
High property taxes could also raise
the likelihood that you’ll benefit from
itemizing. The tax overhaul capped
deductions for state and local taxes,
but you can still claim a deduction for
up to $10,000.
Charitable contributions remain a
StrategiesIf You’re Self-Employed
If you work for yourself, either by choice or necessity, the task of preparing your tax return
is considerably more complex, even if you didn’t earn a lot of money last year. The same
goes for people who are independent contractors, a status that’s increasingly common in
today’s workforce.
While employees split the tax for Medicare and Social Security with their employer,
people who work for themselves must pay the entire 15.3% tax themselves. That often
comes as a shock to newly self-employed workers, says Dina Pyron, of Ernst and Young’s
TaxChat mobile tax-preparation service. “It’s a big chunk of additional tax on top of your
income tax,” she says.
The good news is that you can deduct half of what you pay in self-employment taxes,
even if you don’t itemize. And that’s just one of a long list of deductions available to those
who work for themselves, whether it’s a full-time job or a side hustle. All of your business-
related expenses—everything from mileage to postage stamps—are deductible (you need
to save the receipts). Health insurance premiums are also deductible. And if you use a room
or other space in your home or apartment exclusively for business, you can claim a home-
office deduction. You can deduct the actual costs, based on a percentage of insurance,
utilities and so on, or use a simplified method developed by the IRS: Write off $5 for every
square foot that qualifies for the deduction. For example, if you have a 300-square-foot
home office (the maximum size allowed for this method), your deduction would be $1,500.A big money-saver. Once you’ve tallied up these deductions, it’s time to determine
whether you’re eligible for a new tax break that could save you a lot of money. The new
tax law allows eligible self-employed taxpayers to deduct up to 20% of their qualified
business income—net income after they’ve claimed business deductions—before they
calculate their tax bill. For example, if you’re self-employed and earn $100,000 in quali-
fied business income this year, you could be eligible to deduct $20,000. If you’re in the
24% tax bracket, that would reduce your tax bill by $4,800.
The deduction is subject to various limitations if your taxable income is $160,700 or
more ($321,400 or more for spouses filing jointly). Above those thresholds, the write-off
phases out if you provide personal services, such as financial planning or accounting. But
if your income is below the thresholds (which is the case for many people who are newly
self-employed or have part-time income) you can claim the full deduction no matter what
your business. To help alleviate confusion about this tax break, the IRS is providing a sep-
arate form this year (Form 8995 or Form 8995-A) to report qualified business income,
along with new guidance, says Christina Taylor, head of operations for Credit Karma Tax.■ SELF-EMPLOYED?
YOU MAY BE ELIGIBLE
FOR A GENEROUS
NEW TAX BREAK.