The Complete Guide to Tax Deductions
Are you receiving all the tax deductions you are entitled to claim? A crucial part of doing your taxes is understanding what is deductible, so you don’t pay more taxes than you should. In this guide, we will explain what tax deductions are, how they work and what’s available to you.
What is a tax deduction?
A tax deduction is an amount that you can subtract from your taxable income. When you are filling out your taxes, you can take the standard deduction or itemize your deductions. The standard deduction is the easy option because your taxable income is automatically reduced by a set amount. According to the IRS, about 90% of taxpayers go this route. Itemizing takes more work because you must list your deductions one by one, and you need proof to back up your claims.
Additionally, you can save money on your taxes by claiming above-the-line deductions.
What are above-the-line deductions?
Above-the-line deductions are expenses you can deduct from your gross income, even if you do not itemize. They are also known as “adjustments to income”. When you subtract your above-the-line deductions from your gross income, what you are left with is your adjusted gross income (AGI). These deductions are important because your AGI determines your eligibility for various tax credits and deductions that can help lower your tax bill. Having a lower AGI means you will qualify for more tax breaks and get bigger savings. Here are some popular above-the-line-deductions.
Alimony: If your divorce was in effect on or before December 31, 2018, your alimony payments are deductible.
Educator expenses: Eligible educators can deduct up to $300 ($600 if married filing jointly and both educators) of unreimbursed expenses on their tax return. Qualified expenses include professional development courses, teaching supplies, books, and equipment. This deduction is available to kindergarten through 12th grade teachers, instructors, counselors, principals, or aides who work at least 900 hours during the school year.
Health Savings Account (HSA) Deduction: You can claim a tax deduction for contributions made to your HSA. The 2023 HSA contribution limit is $3,850 for self-only coverage and $7,750 for family coverage. Those aged 55 and older can make an additional $1,000 catch-up contribution.
IRA Deduction: Individuals can contribute up to $6,500 to an IRA for 2023. The limit jumps to $7,500 if you are aged 50 or older. Contributions made to a traditional IRA are deductible. However, if you ARE covered by a plan at work, your modified AGI may affect the amount of your deduction. See the chart below:
| Filing Status | Modified AGI | Deduction Amount |
|---|---|---|
| Single or Head of Household | $73,000 or less | Full amount up to your contribution limit. |
| Single or Head of Household | more than $73,000 but less than $83,000 | A partial deduction. |
| Single or Head of Household | $83,000 or more | No deduction. |
| Married Filing Jointly or Qualifying Surviving Spouse | $116,000 or less | Full amount up to your contribution limit. |
| Married Filing Jointly or Qualifying Surviving Spouse | more than $116,000 but less than $136,000 | A partial deduction. |
| Married Filing Jointly or Qualifying Surviving Spouse | $136,000 or more | No deduction. |
| Married Filing Separately | less than $10,000 | A partial deduction. |
| Married Filing Separately | $10,000 or more | No deduction. |
If you are NOT covered by a retirement plan at work, use the chart below to determine if your modified AGI will affect your deduction.
| Filing Status | Modified AGI | Deduction Amount |
|---|---|---|
| Single, Head of Household or Qualifying Surviving Spouse | Any amount | Full amount up to your contribution limit. |
| Married Filing Jointly or Separately with a spouse who is not covered by a work plan | Any amount | Full amount up to your contribution limit. |
| Married Filing Jointly with a spouse who is covered by a work plan | $218,000 or less | Full amount up to your contribution limit. |
| Married Filing Jointly with a spouse who is covered by a work plan | More than $218,000 but less than $228,000 | A partial deduction. |
| Married Filing Jointly with a spouse who is covered by a work plan | $228,000 or more | No deduction. |
| Married Filing Jointly with a spouse who is covered by a work plan | less than $10,000 | A partial deduction. |
| Married Filing Jointly with a spouse who is covered by a work plan | $10,000 or more | No deduction. |
Moving expenses: If you are a member of the Armed Forces and have to move due to a permanent change of station, your moving expenses are deductible.
Penalty on Early Withdrawal of Savings: If you pay an early withdrawal penalty for taking money out of your Certificate of Deposit (CD) before the maturity date, you can deduct the full amount. Your Form 1099-INT or Form 1099-OID will show you the amount you were charged.
Self-Employed Health Insurance Deduction: If you are self-employed, you may be able to deduct the health insurance premiums paid during the year for you, your spouse, and your dependents.
Self-Employed SEP, SIMPLE, and Qualified Plans: If you are self-employed, you can deduct the contributions made to your own SEP, SIMPLE and Qualified Plans.
Student Loan Interest Deduction: You can deduct up to $2,500 of the interest you paid on a qualified student loan. For tax year 2023, the maximum deduction begins to phaseout when your modified adjusted gross income exceeds $75,000 (or $155,000 for married couples filing joint).
Your adjustments to income must be reported on Schedule 1 and attached to your Form 1040.
What is the standard deduction?
The standard deduction is a set dollar amount that you can subtract from your taxable income. It eliminates the need to keep track of what you spent on deductible expenses like you would if you itemized. Your standard deduction amount is determined by your filing status, age, income, and whether you can be claimed as a dependent on someone else’s tax return. Each year, the IRS adjusts the amount of standard deduction to account for inflation. Taxpayers who are blind or aged 65 and older are entitled to a higher standard deduction. You cannot take the standard deduction if you are married, but filing separately and your spouse chooses to itemize. Both parties must do the same thing.
Standard deduction for 2022
Here is the 2022 standard deduction for tax returns due April 18, 2023.
| Filing Status | Standard Deduction |
|---|---|
| Single or Married Filing Separately | $12,950 |
| Head of Household | $19,400 |
| Married Filing Jointly or Qualifying Surviving Spouse | $25,900 |
Filers who are over the age of 65 or blind can claim an additional standard deduction of $1,400. The amount increases to $1,750 if you are unmarried and not a surviving spouse.
The standard deduction for dependents is limited to the greater of $1,150 or your earned income plus $400.
Standard deduction for 2023
Here is the 2023 standard deduction for tax returns filed in 2024.
| Filing Status | Standard Deduction |
|---|---|
| Single or Married Filing Separately | $13,850 |
| Head of Household | $20,800 |
| Married Filing Jointly or Qualifying Surviving Spouse | $27,700 |
Taxpayers who are over the age of 65 or blind can claim an additional standard deduction of $1,500. The amount increases to $1,850 if you are unmarried and not a surviving spouse.
The standard deduction for dependents is limited to the greater of $1,250 or your earned income plus $400.
What are itemized tax deductions?
Itemized deductions also known as "below-the-line" deductions are expenses that can be subtracted from your AGI to reduce your taxable income. You should only itemize if your deductible expenses are more than the standard deduction.
What can you claim as a deduction on your taxes? Available deductions include:
Casualty and theft losses: You can deduct personal casualty and theft losses that were the result of a federally declared disaster. Each casualty or theft loss must be more than $100, and the total of all the losses must exceed 10% of your adjusted gross income.
Charitable contributions: You can deduct charitable contributions made to qualified organizations during the year. The limit is 60% of your adjusted gross income.
Home mortgage interest: If you took out your home loan before December 15, 2017, you can deduct the mortgage interest on $1,000,000 ($500,000 if married filing separately) of that debt. The Tax Cuts and Jobs Act of 2017 lowered the deduction limit for homeowners who bought their place after December 15, 2017. They can only deduct the interest paid on $750,000 ($375,000 if married filing separately) of mortgage debt.
Medical and dental expenses: You can deduct unreimbursed medical and dental expenses for you, your spouse and your dependent that are more than 7.5% of your AGI. This includes payments for preventative care, medical treatments, surgeries, prescription medications, and more.
State and local taxes: You can deduct up to $10,000 of your state and local taxes ($5,000 if married filing separately). The combined limit applies to income taxes, real estate taxes and personal property taxes paid during the year. Taxpayers also have the option of deducting state and local general sales taxes instead of income taxes, but you cannot choose both.
Taxpayers must use Schedule A to calculate their itemized deductions.
Should I itemize or take the standard deduction?
It’s recommended that you run the numbers both ways to see which one saves you the most money. In general, most people who have minimal expenses take the standard deduction.
What is the Qualified Business Income deduction?
The Qualified Business Income (QBI) deduction reduces your AGI like your standard or itemized deduction. Eligible business owners can deduct 20 percent of their QBI including qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Alternatively, they can deduct 20% of their taxable income minus capital net gain. The deduction is limited to the lesser amount.
What is the difference between a tax credit and a tax deduction?
Both tax credits and tax deductions can save you money on your taxes, but they work differently. Deductions reduce your taxable income. So, if you earned $25,000 during the year and claim a $1,000 deduction, your taxable income drops to $24,000. How much of an effect it will have on your tax bill depends on the highest tax rate for your tax bracket. If you get a $1,000 deduction and your tax rate is 12 percent, your tax bill will be reduced by $120.
Tax credits are more valuable for most people because they reduce the amount of taxes you owe, dollar-for-dollar. For example, a $500 tax credit will shave exactly $500 off your tax bill.
How do I claim deductions?
IRS Form 1040 is the main document U.S. taxpayers use to file their annual income tax return. If you plan to take any above-the-line deductions, you will also need to complete Schedule 1. Use schedule A to report your itemized deductions. There are several ways to do your taxes. You can:
- File taxes online using tax software,
- Hire a tax preparer if your situation is complicated, or
- Prepare IRS Form 1040 or Form 1040-SR by hand and mail it.
How you choose to file it is up to you, but e-filing is the fastest way to get your tax refund.
When are taxes due?
Each year, you are required to file your federal tax return by April 15th unless it falls on a weekend or a holiday. In that case, the deadline will be extended to the next business day.
What happens if I forget to take a deduction on my taxes?
If you missed your chance to claim a deduction or discover other mistakes, you can file an amended return using Form 1040-X. Typically, you must make your corrections within three years of the original filing deadline.
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