When you file your taxes each year, the Internal Revenue Service lets you reduce your taxable income through a variety of tax deductions if you choose to itemize your expenses. Deductions are different from tax credits because deductions reduce your taxable income, and your actual savings depends on your marginal tax rate. Although according to TurboTax, approximately two-thirds of taxpayers take the standard deduction instead of itemizing, it might pay off for you to take individual deductions through itemization.
Here’s what you need to know about qualifying for the available income tax deductions you can use to lower your tax bill.
Types of Tax Deductions
There are a number of different types of tax deductions that fall under the following major categories. Here’s a list of the types of tax deductions you can take:
Contributions to a traditional IRA can reduce your tax bill, even if you make your IRA contribution at the last minute. You don’t even have to itemize to claim the deduction. But if you or your spouse have access to an employer-sponsored plan, like a 401k, you can’t claim a deduction if your income is too high based on your filing status.
Several types of interest you pay could lower your income taxes, including student loan interest, mortgage interest and investment interest. Each deduction has specific rules. For example, you can only claim mortgage interest if you opt for itemized deductions. With student loan interest, you can claim it even if you don’t itemize. To qualify, your income can’t be too high, and you’re limited to only deducting the first $2,500 of interest.
Learn More About: Tax Deductions You Don’t Know About
When you own your own business, you get to deduct the costs of doing business, such as costs of goods sold, advertising and overhead. You can write off the expenses on a business tax return or, if it is a pass-through entity like a sole proprietorship, you can write off expenses on your personal tax return as self-employment tax deductions.
Employees who paid for business expenses they weren’t reimbursed for, including certain expenses while looking for work in 2017, can include the amount by which those expenses exceed 2 percent of their adjusted gross income when itemizing deductions. From 2018 to 2025, however, unreimbursed employee expenses will no longer be deductible.
State and Local Taxes
When you itemize your deductions, you can also write off various state and local taxes, including property taxes, real estate taxes and either income or sales taxes. In most states, deducting state and local income taxes is the way to go, but if you live in a state with no state income tax, you might be able to deduct your sales tax paid if applicable. For the 2017 tax year, these deductions are uncapped; starting in the 2018 tax year, however, you’ll be limited to deducting only the first $10,000 of state and local taxes.
It’s possible to lower your tax bill with deductible medical expenses, but only if you itemize and have a large number of healthcare expenses relative to your income. When your health insurance premium is paid by your employer, you generally can’t include those costs, but you can include the portion of your health care deductible you pay each time you go to the doctor. In 2017 and 2018, only the portion of your medical expenses that exceed 7.5 percent of your adjusted gross income is deductible; starting in 2019, the threshold increases to 10 percent.
You can deduct contributions you make to qualified charitable organizations — as long as you itemize your deductions. Qualified charities include many nonprofits like schools, hospitals, religious groups, food pantries and libraries, but you can ask to see the charity’s determination letter from the IRS if you’re unsure. Just because you’re helping others, however, doesn’t entitle you to a deduction. You can’t deduct gifts you make to individuals, no matter how needy they are, and you also can’t write off the value of your time.