Tax deductions have long been near and dear to American taxpayers for many reasons, specifically those that involve family, homes, charities, and other things many taxpayers value. A tax deduction is a legal means to reduce a taxpayer's taxable income. Tax deductions are taken out of taxable income (also known as adjusted gross income), thus lowering a taxpayer's overall tax liability.
Tax deductions can result from a variety of transactions and other events over the course of the year. It's important for taxpayers to grasp how tax deductions work and how they may or may not apply to their tax filing.
Two major tax deductions: Standard and itemized
When reporting federal income taxes, individuals and households typically choose between standard or itemized deductions.
A standard deduction is a single deduction at a fixed amount and varies depending on your income, age, and filing status, among other factors, and it changes each year.
An itemized deduction is a tax deduction that you take for various expenses you incurred during the tax year. These deductions include a range of expenses that are only deductible when you choose to itemize.
According to the IRS website, "You should itemize deductions if your allowable itemized deductions are greater than your standard deduction or if you must itemize deductions because you can't use the standard deduction."
If you itemize deductions, it's important to have the appropriate forms. You must file an IRS Form 1040 or 1040(SR) and a Schedule A, Itemized Deductions. This form includes entries for medical and dental expenses, home mortgage interest, contributions to charity, and more.
Standard deductions require only forms 1040, which is a consolidated form.
For 2023, the standard deduction for single taxpayers and married couples filing separately is $13,850, up $900 from the previous year; for married couples filing jointly, the standard deduction is $27,700, up $1,800 from 2022; and for heads of households, the standard deduction is $20,800, up $1,400 from the previous year.
Itemizing vs. standard deduction
Most taxpayers claim the standard deduction when filing federal tax returns because it's often larger than deductions they could itemize.
Itemizing tax deductions requires a little more work, but it can also potentially lead to some savings on your total tax bill.
Mortgage interest, personal property taxes
Taxpayers may be able to deduct home mortgage interest and points1, but mortgage insurance premiums deductions were banned as of 2022. Homeowners can deduct home mortgage interest on the first $750,000 of their mortgage ($375,000 if married and filing separately). But if a homeowner bought a house before December 16, 2017, they're still eligible for the higher limitation of the first $1 million of the mortgage ($500,000 if married and filing separately).
Deductible personal property taxes are based on the value of the taxpayer's personal property, such as a boat, RV, or car. The tax must be charged to the taxpayer on a yearly basis, even if it's collected more than once a year or less than once a year. However, it's important to note the amount of deductible state and local income, sales, and property taxes is capped at total deduction of $10,000 ($5,000 if married and filing separately).
Donations to charity
Charitable contributions to qualified organizations may be deductible, but there are limitations based on adjusted gross income. Check with the IRS's Exempt Organizations Select Check or with a tax professional to see if an organization qualifies as a charitable organization for income tax deductions.
Education expenses, student loan interest
For 2023, taxpayers can deduct up to $2,500 of interest they paid on a qualified student loan during the year. According to the IRS, the deduction is gradually reduced and eventually is eliminated by phaseout when a taxpayer's modified adjusted gross income amount reaches the annual limit for their filing status.
Medical and dental expenses
Taxpayers may deduct only the amount by which their total qualified medical and dental expenses exceed 7.5% of their adjusted gross income.
Home office and business travel expenses
If you are a business owner who uses part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and it applies to all types of homes. You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
Some deductible expenses when you travel include the cost of travel between your home and your business destination, using your car while at your business destination, taxi fare, meals, lodging, tips, and even dry cleaning.
Other deductible oddities
If something is used to benefit their business and a taxpayer can document the reasons for it, they can generally deduct it off their business income. For example, a junkyard owner might be able to deduct the cost of cat food that encourages stray cats to hang around and keep rats away. A bodybuilder may be able to deduct body oil used in competition.
Whatever a taxpayer's income or family situation, tax deductions can get complicated quickly, so consider consulting with a tax professional if you any questions.
1The fees a borrower pays a mortgage lender in order to trim the interest rate on the loan.
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.0623-37JM