Key Takeaways
• Tax deductions reduce your taxable income whereas tax credits reduce your tax liability on a dollar-for-dollar basis.
• Some tax deductions, called above-the-line deductions or adjustments to income, can be taken from gross income to arrive at adjusted gross income.
• Tax deductions taken after your adjusted gross income are called below-the-line deductions and lead to your taxable income for the year.
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What is a tax deduction?
A tax deduction is an amount of money that reduces your income subject to taxation, resulting in a lower tax bill.
After you calculate your total gross income for the year, you can deduct certain adjustments to income, such as:
- student loan interest payments
- educator expenses
- self-employed health insurance payments
- certain alimony payments
- contributions to a retirement account
These adjustments to income are also known as above-the-line tax deductions, meaning they reduce your gross income to arrive at your adjusted gross income (AGI), the figure the Internal Revenue Service (IRS) generally uses to determine your eligibility for certain other tax deductions and credits.
After determining your AGI, you subtract tax deductions to arrive at your taxable income. Tax deductions subtracted from your AGI are called below-the-line deductions. They allow you to reduce your adjusted gross income to determine your taxable income.
When talking about above-the-line and below-the-line deductions, AGI is the “line.”
The most popular tax deduction is the Standard Deduction, a below-the-line lump sum amount that can be used to reduce your taxable income by a fixed amount. Most other below-the-line deductions are itemized deductions that vary from person to person such as:
- Medical expenses
- State and local taxes
- Mortgage interest
- Donations of goods to charities
In addition to itemized deductions, the Qualified Business Income deduction is also a below-the-line deduction.
Above-the-line deductions tend to be less restrictive than below-the-line deductions since they often don’t have limitations related to your level of adjusted gross income. For example, deducting qualified self-employed health insurance premiums is allowed regardless of your adjusted gross income.
Popular tax deductions to claim on your tax return
1. Standard Deduction
The Standard Deduction allows most taxpayers to shelter at least some portion of their income from federal income tax. The Standard Deduction generally increases each year due to inflation. You typically have the option of claiming either the Standard Deduction or itemizing your deductions. Tax reform in 2018 significantly increased the Standard Deduction for almost everyone, often making the choice more straightforward for many Americans. Several states incorporated a similar type of deduction for their state income tax rules.
The amount of your Standard Deduction depends on your filing status, age, and other factors. In 2022 for example, standard deductions amount to the following:
- single taxpayers and married taxpayers who file separate returns: $12,950
- married couples filing jointly: $25,900
- head of household filers: $19,400
2. IRA contributions deduction
If you’re interested in saving for retirement in a tax-smart manner, you might consider making contributions to a traditional individual retirement account, or IRA. Often, you can deduct these contributions from your gross income, effectively lowering the current taxes you pay on investments you make toward retirement. These tax-deferred accounts don’t require you to pay tax on the contributions or any interest, dividends, or other gains the account earns until you withdraw the money, usually in retirement.
In some cases, the amount you can deduct is limited by whether you or your spouse:
- contributes to an employer-sponsored retirement plan, such as a 401(k) or 403(b), and
- your Modified Adjusted Gross Income (MAGI) exceeds annual limits.
If both you or your spouse are not covered by a retirement plan at work, you can deduct your contribution as long as you earn income during the year. For purposes of the IRA deduction, earned income excludes interest, dividends, and similar types of investment income.
Roth IRA accounts function in the opposite manner as traditional IRAs, allowing you to make after-tax contributions (no current deduction). These accounts don’t typically require you to pay taxes on the contributions you made or on any gains you realize in the account when you withdraw the money in retirement.
3. Health savings account (HSA) deduction
A Health Savings Account (HSA) is an account for pre-taxed money that is saved for medical expenses. To qualify, you need a high-deductible health care plan. For 2022, the contribution limit is $3,650 for singles or $7,300 for families. If you're over 55, you can contribute an additional $1,000.
HSAs offer three tax benefits:
- Contributions to HSAs are tax deductions and withdrawals aren’t subject to federal income taxes if used for qualifying medical expenses. Your contributions may not be a deduction for state-level income taxes in some states.
- Some HSA accounts allow you to invest your contributions or earn interest on your balance. These earnings are generally tax-free.
- When you take distributions from an HSA to pay for qualified medical expenses, these funds are generally tax-free
If you made contributions to your HSA, you’ll likely receive a Form 5498-SA from your HSA provider. Likewise, if you used funds from your HSA you should receive a Form 1099-SA from your provider. Form 8889 is used to report HSA information on your federal income tax return.
4. State and local taxes deduction
When you make state and local tax payments, including sales tax, real estate tax, property tax, and local and state income tax, these are generally deductible from your federal income. You can only deduct state and local income tax or state and local sales tax. You can’t deduct both.
The deduction for state and local taxes is an itemized deduction and is limited to $10,000.
5. Medical expenses deduction
If you spent a considerable amount of money paying for medical expenses, including miles driven for medical reasons (at 18 cents per mile in the first half of 2022 and 22 cents per mile in the second half), these expenses may be tax-deductible. To claim these medical expenses as a deduction on your return, they’ll need to exceed 7.5% of your taxable income. You can only claim this deduction if you itemize your tax deductions.
If a medical professional prescribes treatment for a medical condition that results in expenses such as purchasing exercise equipment, a spa, or a swimming pool, these may be tax-deductible as well.
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6. Home office deduction
If you’re self-employed and you meet certain criteria for maintaining and using a home office, you may be eligible to claim the home office deduction. Employees who work from home aren’t allowed to claim this deduction anymore due to changes made by the Tax Cuts and Jobs Act in 2017.
If you qualify for the deduction, you can claim it either using the Direct Method or the Simplified square footage method. The Direct Method has you calculate the direct expenses paid for by the business and then the percentage of indirect expenses you paid for both personal and business use but which can be directly attributed to your trade or business. The Simplified square footage method assigns a flat $5 per square foot rate to your home office up to 300 square feet, or $1,500 per year.
With either method, the qualification for the home office deduction is determined each year. Your eligibility may change and you can change methods from one year to the next.
7. Student loan interest deduction
If you make interest payments on a qualified student loan, you may be able to claim all or a portion of the interest you pay as a tax deduction. Your tax deduction is limited to interest up to $2,500 or the amount of interest you actually paid, whichever is less. You’ll also need to meet some other criteria to claim this deduction on your return:
- You file taxes under any filing status but married filing separately
- You and your spouse, if filing jointly, can’t be claimed as dependents on someone else’s return, or
- You are a single filer with tax year 2022 income under $70,000. However, your full deduction phases out between $70,000 and $85,000 ($145,000 and $175,000 married filing jointly). If your income falls above those limits, the student loan interest is not tax-deductible.
To claim the student loan interest deduction, you don’t need to itemize your deductions. Because student loan interest counts as an above-the-line deduction or an adjustment to income, you may be able to claim the deduction without itemizing if you meet the requirements above.
If you paid $600 or more in student loan interest to a single lender during the year, you should receive a 1098-E form showing your interest payments during the year. You can use this information to prepare your federal tax return.
8. Mortgage interest deduction
If you have a mortgage, you may be able to lower your tax bill by claiming the mortgage interest deduction. Often, mortgage interest represents one of the largest home-related deductions you can claim on your tax return.
For mortgages originating prior to December 16, 2017, you can claim mortgage interest equivalent to the first $1 million of principal balance as a deduction on your return. If you have a mortgage from December 16, 2017, onward, you can claim mortgage interest related to the first $750,000 of mortgage principal as a deduction.
You can claim the mortgage interest on your primary and secondary residences. If you paid interest during the tax year, your lender should send you a Form 1098 declaring how much interest you paid on your mortgage.
The funds from your mortgage have to be used to buy, build or substantially improve it. Otherwise, you generally can’t deduct the interest associated with the mortgage.
9. Charitable contributions tax deduction
If you made cash or non-cash donations to a 501(c)(3) organization, your contributions may be tax deductible. Typically, you need to itemize your tax deductions to claim the charitable contribution tax deduction. The CARES Act and subsequent legislation made it possible to deduct charitable cash contributions up to $300 on your 2020 taxes as any filing status even if you do not itemize your deductions. And for 2021, you can deduct charitable cash contributions up to $600 if you file jointly ($300 if you file as any other status). These amounts are in addition to your Standard Deduction.
While you can’t deduct the value of your time when you volunteer, you can typically deduct cash and non-cash donations as well as 14 cents per mile driven for volunteer work in addition to any parking and tolls you paid.
10. Educators expense deduction
You won’t find many teachers who don’t purchase necessary items for their classrooms and students out of their own pockets. The tax code recognizes this and offers qualified K-12 educators the chance to deduct up to $300 for classroom materials as an adjustment to your income meaning that you don’t need to itemize your tax deductions to claim it. You can claim it in addition to the Standard Deduction.
Should I itemize my deductions?
The decision to itemize deductions typically comes down to whether your eligible itemized deductions exceed the value of your applicable Standard Deduction. If you have minimal expenses, you’re generally better off claiming the Standard Deduction.
If you have a significant amount of expenses that can be used as itemized deductions that exceed the Standard Deduction, you might be better off itemizing your deductions.
Even if you don’t itemize, you may have the ability to claim several above-the-line deductions, further reducing the income subject to federal taxation. By using the popular tax deductions listed above, you can start reducing your tax bill.
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