Five Common Tax Questions
Q: Does it make sense for me to itemize deductions on my taxes?
A: It depends. If your itemized deductions are over the 2020 standard deduction of $24,800 for couples, $18,650 for head of household or $12,400 for singles, then it may still make sense to itemize.1
Keep in mind, though, that some of the items you may have deducted prior to 2017, currently have monetary limits or are no longer able to be deducted. For example, state and local income taxes (SALT) are limited to $10,000, and you can only claim this deduction if you itemize your tax return. The limit applies to tax years 2018 to 2025.2
Q: How much mortgage interest can I deduct on my taxes?
A: You can deduct up to $750,000 in mortgage principal. For mortgage debt that occurred prior to Dec. 16, 2017, you can deduct up to $1 million.3
Q: Can I deduct interest from my home equity line of credit?
A: No, you can’t deduct interest on your home equity loan unless it is used to substantially improve a qualified residence or acquire a second home. So, if you use you HELOC to purchase a car, as an example, that interest will no longer qualify.
Q: What are the tax advantages to using a 529 plan to save for my child’s education?
A: Contributions to 529 plans are considered gifts for tax purposes. In 2020, gifts totaling up to $15,000 per individual will qualify for the annual gift tax exclusion. You can maximize these gifts, for example, if you and your spouse have three grandchildren (or children) you can jointly give $90,000 without gift-tax consequences, since each child may receive $15,000 in gifts from you and $15,000 in gifts from your spouse. By using a “front-loading” method, you can contribute as much as $75,000 to a 529 plan in 2020 if you treat the contribution as if it were spread over a five-year period. The five-year election must be reported for each of the five years. For example, a $50,000 529 plan deposit in 2020 can be applied as $10,000 per year.4
You can also receive state income tax credits or deductions, and the amount varies by state. Over 30 states, including the District of Columbia, currently offer a deduction or tax credit. For example, New York residents are eligible for an annual state income tax deduction for 529 plan contributions up to $5,000 ($10,000 if married filing jointly).5
Q: What are the tax advantages of giving gifts and transferring wealth?
A: You can give a gift of up to $15,000 without being taxed, and your lifetime gift tax exclusion is $11.58 million in 2020.6
Your federal estate tax exemption is the same as your lifetime giving limit—$11.58 in 2020, so giving large gifts may increase the chance that your estate will owe tax when it’s passed on. Consider consulting with an estate planning lawyer if you’re using annual gifts to transfer your estate before your death.
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