Knowing what you can deduct when you’re doing your taxes each year is important if you want to reduce your tax liability. Some common deductions, like the mortgage interest tax deduction, are well known, but if you’re going to do itemized deductions, you should know all the details. For help on your taxes and other financial questions, consider working with a financial advisor.
How Tax Deductions Work
A tax deduction lets you deduct (subtract) certain expenses from your taxable income. That leaves you with a smaller tax bill. It is important to note the difference between a deduction and a tax credit: a tax credit directly reduces your tax bill, while a deduction reduces your tax bill indirectly. So if you have a $2,000 bill and then you take a $1,000 credit, you now owe just $1,000. A $1,000 tax deduction reduces your taxable income by that amount. The higher your marginal tax rate, the more valuable a tax deduction will be. For example, 22% of $1,000 is more than 12% of $1,000.
The biggest federal income tax deduction out there is the home mortgage interest tax deduction. For a while, both mortgage interest and credit card interest were tax deductible, but a 1986 tax reform eliminated the deduction for credit card interest. If you’re a renter, the mortgage interest tax deduction might be one factor that you consider when deciding whether to rent or buy.
The Standard Deduction
The first thing to decide when filing your taxes is whether you’ll take the standard deduction or itemize your deductions. The IRS gives a standard deduction that knocks a little off your taxable income. The size of the standard deduction you can claim depends on whether you’re filing as an individual or jointly with your spouse. It also depends on your age, your spouse’s age (if applicable) and your income(s). If you think that your deductions will add up to more than the standard deduction, you’ll probably want to itemize your deductions.
For tax year 2022 (what you file in early 2023), the standard deduction is $12,950 for single filers, $25,900 for joint filers and $19,400 for heads of household. For tax year 2023, which you will file in 2024, the standard deduction will go up to $13,850 for single filers, $27,700 for joint filers and $20,800 for heads of household.
Tax Deductible Expenses
The IRS provides a list of all tax credits and deductions for individuals and businesses. If you’re taking the DIY approach to filling out your tax returns, you can go through the tax deductions list and find the ones that apply to you. If you’re using tax preparation software, that software will walk you through potential deductions to make sure you’re claiming everything you can. (We’ve done a roundup of the best tax software for this year.)
The tax deductions relevant to your situation will depend on what you spent and how you earned your money during the tax year. If you’re a teacher who spent money out of pocket on classroom expenses you can deduct that (up to $300 in 2022). Work from home? You may be able to deduct some of the expenses involved in setting up and running your home office. Got student loans? You may be able to deduct up to $2,500 of the interest you paid. If you’ve filed before, it’s worth going through the list anew.
The more complicated your financial situation the more likely it is that you’ll need help to minimize your tax bill, particularly if you own your own business. Whether that help comes in the form of an accountant or a tax software program is largely a matter of personal preference and budget.
Tax Deductible Donations
Donating to charity is a way to decrease your tax liability while helping to fund your favorite causes. Donations to qualified charities are tax deductible. For the very wealthy, regular giving – of money, stock, art and other valuables – is a tried and true way of minimizing taxes. To qualify for the deduction, the charity must be eligible and you must be able to document that you received no goods or services in exchange for your donation. Providing donors with the proper documentation is standard practice for any charity worth its salt. If you’re concerned that you might not get the paperwork you need, make sure to ask questions of the charity before you part with your donation.
Bottom Line
Tax liability can be tough to predict. That’s one reason to keep a well funded emergency fund that you can draw on in the event that your tax bill is bigger than you anticipated one year. You should go into tax season with a plan – not just for how you will pay your taxes but for what you’ll do with any refund you get. Will you pay off debt or save for retirement? Or maybe invest in your professional development? Having a plan for your tax refund increases the chances that you’ll put it to good use rather than letting that money bleed into your regular spending.
Tips for Tax Time
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For help with taxes and other financial questions, consider working with a financial advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Another important part of your finances is your housing costs. Use SmartAsset’s mortgage calculator to see what you might owe if you buy a new home.
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