What Deductions Can You Claim On Taxes

What Deductions Can You Claim On Taxes – A tax deduction is an amount you can deduct from your taxable income to reduce the amount of taxes you owe. You can choose the standard deduction – a single deduction of a fixed amount – or deduct on Schedule A of your income tax return.

If the total for your itemized expenses is greater than the standard deduction for your filing status, it makes sense to itemize. Allowable itemized deductions include mortgage interest, charitable gifts, unreimbursed medical expenses, and state and local taxes.

What Deductions Can You Claim On Taxes

Individuals can take the standard deduction — which nearly doubled under the Tax Cuts and Jobs Act — or itemize their deductions. Here’s an overview of the standard deduction amounts for the 2022 and 2023 tax years:

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Taxpayers at least 65 years old or blind can claim an additional standard deduction. For 2022, the additional amount is $1,400 ($1,750 for single filers and heads of households). Those over 65 and blind are entitled to double the additional amount ($2,800 or $3,500, depending on filing status). The amount rises to $1,500 in 2023 and $1,850 for single filers and heads of households.

You can take the standard deduction or list your deductions – you can’t do both for the same tax year.

Here are some of the more common taxes you can claim on your federal income tax return:

Most of these deductions must be entered on Schedule A of your 1040, but there are some exceptions. For example, you must use Form 8949 and Schedule D to report investment losses and Form 5498 to record IRA contributions. Contributions to an employer-sponsored 401(k) retirement account are reflected in your paycheck, so you don’t need the extra form.

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Some once common tax deductions were eliminated or limited by the Tax Cuts and Jobs Act of 2017 (TCJA). You can no longer deduct the following – at least until 2025 when the deed is due to expire:

The ranks of freelancers and gig workers are growing. According to a Pew Research study, more than 16 million Americans now identify as self-employed.

Fortunately for them, they have retained some of the tax deductions that wage earners lost in the 2017 tax reform law. Some deductions are complex because you have to determine how much of each expense is business, so deductible — and how much is personal and non-deductible.

Some of the most important deductions for the self-employed include those for half of your Medicare and Social Security taxes, the home office deduction, and the health insurance premium deduction.

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One particularly valuable deduction for the self-employed defers taxes on their contributions to retirement plans. Tax-deferred retirement plans—including the SEP-IRA, the SIMPLE IRA, and the solo 401(k)—are designed specifically for the self-employed, solo operators, and small business owners.

Contributions to traditional IRAs and qualified plans such as 401(k)s are an “above the line” deduction. That means the contribution will reduce your taxable income even if you choose to take the standard deduction instead of itemizing it.

Businesses large and small pay tax on their profits, which is their total receipts minus their total operating expenses. That means recording every expense and reporting it to the IRS. Some of the top distractions for small business owners include:

The rules for many of these deductions are complex, especially for shoestring operations. Car expenses and travel expenses, for example, must be carefully separated between deductible business use and non-deductible personal or family use.

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Tax credits reduce your total taxable income – the amount you use to calculate your tax. On the other hand, tax credits are deducted directly from the taxes you owe. Some tax credits are self-refundable, which means that if the credits reduce your tax bill to below zero, you will receive a refund for the difference.

Even if they are not refundable, a tax credit is more valuable than a tax deduction. A tax deduction can kick your taxable income down a few notches on the tax tables, but a tax credit reduces the tax you owe, dollar for dollar.

Here is an example. Consider a single taxpayer who reports an earned income of $90,000 in 2022. That puts the person in the 24% tax bracket. So her tax bill for tax year 2022 would be $15,213.50 plus 24% of the excess over $89,075 ($925) which comes to a total of $15,435.50 ($15,213.50 + $222). Like all taxpayers, this individual can choose to itemize deductions or take the standard deduction.

The taxpayer paid $10,000 in mortgage interest and contributed $6,000 to a traditional IRA. Both are deductible expenses.

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With a total of $16,000 in deductions to report, the taxpayer will owe income tax on $74,000 ($90,000 – $16,000) of earned income. Therefore, the person will owe $11,897 in taxes for the year ($4807.50 plus 22% of the excess over $41,775). That is less than the original tax of $15,435.50 shown above.

The standard deduction for a single filer is $12,950 for tax year 2022. It is important to note that the taxpayer gets the additional $6,000 deduction mentioned above for the IRA contribution. It is an “above-the-line” deduction, reducing this taxpayer’s gross income from $90,000 to $84,000. The standard deduction further reduces the filer’s taxable income to $71,050. Thus, with the standard deduction, the taxpayer will owe $11,248 ($4807.50 plus 22% of the excess over $41,775).

That is less than taxes owed after itemizing deductions. So, even with a hefty mortgage interest write-off, the taxpayer would save $649 by taking the standard deduction.

Generally, US taxpayers will choose to itemize their deductions or take the standard deduction, depending on which reduces their taxable income the most.

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Contrary to what many taxpayers may think, they can benefit the most from the standard deduction because the TCJA nearly doubled the standard amount and eliminated (or closed) many itemized deductions.

If you​​​​are​​itemizing​​it,​​you​​should​​keep​​receipts​​for​​eligible​​expenses​​through​​the​​year​​and​​organize​​them​​into​​categories. At tax time, you count and record the expenses on a Schedule A – and keep track of the receipts in case you get audited.

The standard deduction is substantially less work: You simply enter the amount of your standard deduction on line 12a of Form 1040 or 1040-SR.

Most of the 41 states that impose an income tax follow the format of the federal forms as closely as possible. However, the states set their own tax rates and standard deductions, and they may have additional allowed deductions or different restrictions on deductions.

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In any case, it’s worth reading your state’s tax forms closely to see if there are any additional deductions you may qualify for. For example, in New Mexico you are exempt from state income tax if you reach age 100. And Nevada taxpayers can get a free package of cards for submitting their tax returns.

Keep in mind that there are restrictions on some deposits. For example, current federal tax law limits the mortgage interest deduction to a maximum of $750,000 of secured mortgage debt (or $1 million if you bought the house prior to December 16, 2017). That change in 2017 was a heavy blow for the very rich and for some not so rich residents of the cities with the most expensive homes.

Then there is the limit on the healthcare deduction. When you​​​​are​​reporting​​healthcare​​costs​​​​​​​​​​​​, the expenses you paid (for yourself, your spouse and your dependents) must be a certain percentage of your adjusted gross income (AGI) to deduct. For your 2022 tax return, the medical expense threshold is 7.5% of AGI for all taxpayers.

One additional deduction that is not included in the standard or specified tax deduction is that for capital losses. These are recorded on Schedule D, along with capital gains, instead of Schedule A.

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A tax loss redirection is a legal way to change earnings for the benefit of the taxpayer. You can carry forward individual and business capital losses from previous years. You can claim up to $3,000 ($1,500 if married filing separately) in capital losses as a tax deduction starting in tax year 2022 (the tax return you file in 2023). If your​​​​losses were greater than that, you can “carry them forward” to the next year or years.

There are dozens of taxes and credits that can help lower your tax bill. Some of the most common deductions include those for mortgage interest, retirement plan contributions, HSA contributions, student loan interest, charitable contributions, medical and dental, gambling losses, and state and local taxes.

Common credits include the child tax credit, earned income tax credit, child and dependent care credit, saver’s credit, foreign tax credit, American opportunity credit, lifetime learning credit, and premium tax credit.

Whether you itemize or take the standard deduction, it helps to contribute the maximum allowable amount to a traditional (ie, non-Roth) retirement account such as an IRA or a 401(k). That way, you’ll add to your retirement savings while reducing your taxes for the year.

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If you have a substantial mortgage interest, student debt interest, medical expenses, and other deductible expenses, you may find that the total exceeds the standard deduction. In that case, you can maximize your deductions by itemizing

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