Like most people, you probably think of deductions as a way to reduce your taxes. But that’s not quite what they are. A deduction is a tax break that allows you to take an amount of money out of your taxable income and use it to lower your overall taxable income.
These Types of Deductions can be Either Personal or Business Deductions
Personal deductions include things:
- Medical expenses (deducting them can help reduce your taxable income by up to 40% if you’re a high-income earner).
- State and local taxes (deducting them can help reduce your taxable income by up to 40%).
- Home mortgage interest (deducting it can help reduce your taxable income by up to 30%).
- Charitable contributions (deducting them can help reduce your taxable income by up to 20%).
Business deductions include things like the following:
- Business expenses (deducting them can help reduce your taxable income by up to 60% if you’re a high-income earner).
- Legal and accounting fees (deducting them can help reduce your taxable income by up to 50%).
- Workers’ compensation (deducting it can help reduce your taxable income by up to 25%).
- Rental real estate (deducting it can help reduce your taxable income by up to 45%).
Types of Deductions
Regarding taxes, itemizing your deductions can be the difference between getting a refund and paying a big tax bill. Here are five different types of deductions that you can take to help you lower your tax bill.
File a Deduction for your Home
If you’re buying a house, this is probably one of the most important deductions you can claim. To deduct the value of your home, you need to show that you paid more than the appraised value. So if your home is worth $100,000, and you paid $120,000 for it, you can deduct $20,000.
Use the Home Improvement Deduction
When it comes to home improvement, you can take a deduction for the improvements you made to your home. So if you’re putting in new kitchen appliances, you can deduct the cost, or if you’re putting in a swimming pool, you can deduct the cost of building it.
The Child Tax Credit
For every child under 17, you can claim a deduction for half of their standard deduction. For example, if a family has a total of $3,000 in deductions, they can claim an additional $1,500 for their children under 17.
Deduct Business Expenses
Running a business allows you to deduct many expenses related to running that business. These include things such as travel expenses, advertising, and the cost of running the business. You can deduct these expenses if you can prove that they were necessary.
If you’re in the 20% tax bracket, you can deduct the cost of your health insurance premiums, which means you’ll pay less in taxes. This works because health insurance is now considered an essential expense.
Get a Refund On Unused Dependents
Additionally, if you have dependents who aren’t claimed as income on your return, you can claim a refund for that money. So if your spouse didn’t file a return for 2022, you could claim the refund from them.
Claim your Refund
Now that you have all your deductions in place, you can fill out your taxes. You can use the standard deduction, which is $6,300 for singles and $12,600 for couples, or you can choose to itemize your deductions. Doing so will let you save a lot of money, but you need to be able to prove the value of what you’re taking. So if you’re planning on taking the standard deduction, you should have everything in place before your taxes.
What are Itemized Deductions?
Itemized deductions are the deductions that you can claim on your taxes. Most of the deductions that you can claim are listed on Form 1040. For example, you can deduct state and local income taxes, mortgages, charitable contributions, and student loan interest.
If you are eligible to claim any of these deductions, you will see an “other deductions” line on the form.” This is where you can list the deductions that you are allowed to claim.
Why are Itemized Deductions Important?
Itemized deductions are important because they give you an advantage over others who don’t take them.
If you are claiming the standard deduction, you will receive the same amount of money each year. And while this can save you a lot of money on your taxes, it also means that you won’t be able to take advantage of other types of deductions.
If you file your taxes in April and claim the standard deduction, you will receive a tax refund every year. But if you claim itemized deductions, you will end up paying less money each year. So if you are a high earner, you are probably more likely to benefit from itemizing than someone making less money.
When Should you Use Itemized Deductions?
The best time to claim itemized deductions is when you file your taxes. This will give you the most accurate results.
There is, however, one exception to this rule. If you live in a state with an individual income tax, you may be able to use itemized deductions to lower your tax bill even though you haven’t filed yet. For instance, if you own a home in a state with an income tax and are planning on moving to a state without an income tax, you may be able to use your itemized deductions to offset the taxes you owe in the new state.
What are Not Itemized Deductions?
Many items can be deducted from federal income taxes. However, there are also some items that you cannot. For example, you cannot deduct your medical expenses. This makes sense since most people don’t keep their medical bills on hand, and it would be difficult to prove how much they spent on medical services.
In addition, you can’t claim any type of state and local tax deductions. Again, the IRS has determined that these expenses are too difficult to determine, so they cannot be claimed as tax deductions. They can even cause you to owe money.
What about those types of deductions that are allowed? Two types are generally considered non-deductible: charitable contributions and unreimbursed employee business expenses.
Charitable Contributions
The IRS allows you to deduct your donations to charity, including donations made through your IRA. However, you cannot deduct gifts from the charity if you give directly to the charity.
Unreimbursed Employee Business Expenses
You can deduct the cost of any travel expenses incurred in connection with your job. The IRS considers this deductible because your employer doesn’t reimburse you for it. You cannot deduct any other employee business expenses.
How to Figure Out if you are Eligible for Itemized Deductions
The IRS publishes a guide that shows you the states with no income tax. You can use this to figure out which state you are living in.
For example, this website can determine if you are eligible for itemized deductions. The IRS does a good job of explaining the different types of deductions you can claim.
Conclusion
The IRS recognizes several types of itemized deductions for taxpayers who itemize, including mortgage interest, real estate taxes, and charitable contributions. This includes standard and property tax deductions.
Also, deductions that aren’t itemized include state and local general sales taxes, local and state income taxes, student loan interest, and miscellaneous expenses, such as vehicle depreciation. These are not deductible by individuals and are included in the overall deduction limit.