10 Tax Deductions You Should Know for 2023
The IRS officially started accepting tax returns on Jan. 23, which means it’s time to dust off your receipts and gather your statements. Certain expenses qualify as tax deductions that can reduce your tax bill and increase your refund.
Read: 3 Ways Smart People Save Money When Filing Their Taxes
What Is a Tax Deduction?
A tax deduction is an expense that lowers an individual’s or business’ tax liability by reducing their taxable income. What are the three types of tax deductions? The most common is the standard deduction. The other two types of deductions are referred to as above-the-line and below-the-line deductions, depending on whether you subtract them before you calculate your adjusted gross income or after.
What Deductions Can You Take On Your Taxes?
If you don’t want to pay more than you have to this tax season, make sure you claim all the deductions available to you. Read on to learn more about the most common tax deductions.
1. Standard Deduction
The standard deduction is a fixed deduction that varies depending on your filing status, age and dependent status. This year, the standard deduction is $12,950 for those filing single or married filing separately. Married couples filing together can deduct $25,900, and heads of household can deduct $19,400.
Individuals who are 65 or older and those who are blind can claim an additional deduction. The standard deduction also increases for taxpayers who suffered a qualified loss from a natural disaster. For most taxpayers, claiming the standard deduction is easier and more lucrative than itemizing their deductions.
2. IRA Contributions
If you contributed to a traditional IRA this year, you may be able to deduct some or all of those contributions. To qualify for this deduction, you must have some earned income during the year. Income derived from interest, dividend payments, rental income and other investments do not count as earned income.
3. Student Loan Interest
If you’re still making payments on your student loans–or loans for your spouse or dependents — you can deduct up to $2,500 of the interest you paid during the year. This deduction applies to both federal and private student loans. However, this deduction currently only applies to taxpayers with private loans since federal student loan payments have been suspended since March 30, 2020, and will not resume until this summer.
4. Health Savings Account
A health savings account is a type of savings account specifically used for medical expenses. If you have a health insurance plan with a high deductible, this type of account is useful for paying medical expenses incurred before you reach the deductible. The maximum deduction this year is $3,650 for single people and $7,300 for families. Individuals older than 55 can deduct an additional $1,000.
5. Home Office
Self-employed individuals who work from home can deduct expenses for the part of the home used for business. This includes a home office, a consultation room and storage — including separate buildings on the premises, used exclusively and regularly for doing business. Home daycare facilities also qualify for this deduction, but remote workers are out of luck. The tax code specifically excludes them from this deduction.
6. Mortgage Interest
Homeowners with a mortgage can deduct the interest they pay on the loan for both primary and secondary residences. This applies to interest paid up to $1 million for homes purchased before Dec. 15, 2017, and $750,000 for homes purchased after that date. The debt must be secured by the home, and the deduction cannot include any part of the home used for business purposes.
7. Medical and Dental Expenses
You can claim a deduction for medical and dental expenses that are greater than 7.5% of your adjusted gross income if you itemize deductions. Qualifying expenses include payments to doctors and other medical professionals and the cost to diagnose, cure, treat or prevent disease. Expenses used to pay for treatments for alcohol and drug addiction, smoking cessation and weight loss also apply. Self-employed taxpayers may be able to deduct health insurance premiums as well.
8. Charitable Contributions
If you itemize deductions, you can subtract cash and noncash contributions to 503(c)(3) organizations. Noncash contributions include real estate, vehicles and other property. The IRS will also let you claim a deduction for the miles you drive for volunteer work, but you can’t claim your time as a noncash contribution. In past years, taxpayers could claim a deduction for charitable contributions even if they took the standard deduction. That’s not available this year.
9. State and Local Taxes
If you pay state and local income taxes or state and local sales taxes — including real estate and property taxes, you may be able to deduct up to $10,000, or $5,000 if married filing separately. The IRS will let you deduct one or the other from your federal income taxes.
10. Teacher Education Expenses
The educator expense tax deduction is available to instructors, counselors, principals and aides who work at least 900 hours each school year and spend their own money on supplies they need for work. They can deduct up to $300 for books, supplies, computers and computer software used in their classrooms. Pre-kindergarten teachers and daycare workers cannot claim this deduction.
Tax Deductions vs. Tax Credits
Tax deductions are not the only way to lower your tax bill. Whether you choose the standard deduction or itemize your deductions, you may be able to claim tax credits as well. A deduction lowers your taxable income and a credit reduces the amount of tax you owe. Say, for example, you earned $100,000 last year and plan to take the standard deduction as a single filer. This lowers your taxable income to $87,050. Your tax bill will be a percentage of this lower amount. If you owe $10,000 in taxes and qualify for a $2,500 tax credit, your tax bill drops to $7,500.
As you prepare for tax season this year, take time to learn about the different tax deductions you may be able to claim. You may be surprised to discover how much you can save — and you may even get a nice refund this year.
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