A tax deduction is an amount that you can deduct from your taxable income to lower the amount of taxes that you owe to the government. These deductions are also known as “tax write-offs” as it offers you a small benefit. It benefits you as it allows you to withhold some amount from the taxes that you pay. However, you will need to itemize your tax deductions to use the benefit.

In this article, you will learn some general details about what tax deductions mean in the United States. Furthermore, we will also give a small description of how tax savings work in the first place. Then, we will share with you the various types of tax deductions that you can get in 2023. Hence, to learn more about tax deductions, read on through to the end of the article.

What Does A Tax Deduction Mean?

Before you find out about the types of tax deductions, it is important for you to know what it means. According to Investopedia,

“A tax deduction is an amount that you can deduct from your taxable income to lower the amount of taxes that you owe. You can choose the standard deduction—a single deduction of a fixed amount—or itemize deductions on Schedule A of your income tax return.”

Here, you will need to understand that if the total amount of your itemized expenses turn out to be greater than the standard deduction of your filing status, only then you must itemize your tax deductions. Some of the major itemized deductions include state and local taxes, non-reimbursed medical expenses, mortgage interest, and charitable gifts.

Standard Deductions – Various Rates Of Tax Deductions In 2023

In terms of tax deductions, an individual can either choose between itemization of the deduction or standard deduction. Furthermore, the rates of standard deduction have nearly doubled after the Tax Cuts and Jobs Act last year. The following are the rates of the standard deduction in 2023:

Furthermore, there is also an additional standard deduction for taxpayers who are at least 65 years old or blind. These taxpayers, as of 2023, are entitled to $1500 in 2023 and $1850 for people who are filing singly or are heads of households. Depending on the status of the filing, the amount can double as well.

In addition to this, there are tax deductions for the self-employed as well. As per the information from Investopedia,

“Some of the most important deductions for the self-employed include those for half of your Medicare and Social Security taxes, the home office deduction, and the health insurance premiums deduction. One particularly valuable deduction for self-employed people defers taxes on their contributions to retirement plans.”

These tax-deferred retirement plans include the SEP-IRA, the SIMPLE IRA, and the Solo 401(k). These plans are specifically made for self-employed people, as the number of self-employed, small businesspersons, and solo operators are growing with time.

Different Types Of Tax Deductions And Their Benefits

According to the Forbes Advisor,

“Taxpayers may be able to take advantage of numerous deductions and credits on their taxes each year that can help them pay a lower amount of taxes—or receive a refund from the IRS… Additionally, you may be entitled to write-offs on your state taxes, so check your state tax department’s website to see if you qualify.”

Tax deductions reduce that part of your income that is subject to taxation. This results in a lower tax bill for you. The following are some of the major types of tax deductions that you will generally get:

1. Standard Deduction

With the help of the standard deduction, you will be able to save at least some amount of your income from federal income tax. We have already discussed the standard deduction. Here, you will need to understand that the Standard Deduction increases every year due to an increase in inflation.

Furthermore, the 2018 Tax Reforms also increased the Standard Deduction for almost every American, which made using the tax deduction an obvious choice for everyone. When it came to the state income tax rules, many states even used incorporated similar types of tax deduction schemes for their locales.

According to Nerdwallet.com,

“The standard deduction has gone up significantly in recent years, so you might find that it’s the better option for you now even if you’ve itemized in the past. Your tax software or tax advisor can run your return both ways to see which method produces a lower tax bill.”

However, the amount of standard deduction for which you are eligible depends on a lot of factors like age, marital status, disability, family status, etc. The amount of standard deduction that you are eligible for is given in the previous section of the article.

2. Contributions To The Individual Retirement Account

You need to contribute to IRA if you are interested in saving for your retirement smartly with the help of taxes. In such cases, the government allows you to deduct these contributions from your gross income. This effectively lowers the current tax that you pay based on your retirement investments. 

Here, you will not need to pay taxes on your interest contributions or your dividends and other gains on your account until you withdraw your retirement money.

According to Intuit TurboTax,

“Traditional individual retirement accounts, or IRAs, are tax-deferred, meaning that you don’t have to pay tax on any interest or other gains the account earns until you withdraw the money. The contributions you make to the account may entitle you to a tax deduction each year.”

Here, you will need to understand that the IRS (Internal Revenue Service), the body which is responsible for collecting taxes, provides restrictions with regard to who has a claim to tax deduction.

3. State And Local Taxes Deductions

State and local tax payments include taxes like sales tax, property tax, real estate tax, local and state income tax, etc. When you make such tax payments, these get deducted from your federal income. As per the rules, you can only deduct state and local income tax or the state and local sales tax, not both. The latter tax deduction is an itemized deduction, and you can limit that deduction to only $20K.

According to IRS.gov,

“State and local income taxes withheld from your wages during the year appear on your Form W-2, Wage and Tax Statement. You can elect to deduct state and local general sales taxes instead of state and local income taxes, but you can’t deduct both. If you elect to deduct state and local general sales taxes, you can use either your actual expenses or the optional sales tax tables.”

4. Health Savings Account Deduction

In the Health Savings Account (HSA), you store the pre-taxed money that you save for your medical expenses. To qualify for this deduction, you will need to have a high-deductible healthcare plan. As per the rules of 2022, the limit of contribution is:

• For singles: $3650
• For families: $7300

Furthermore, if you are over 55 years old, you shall be able to contribute an additional amount of $1000.

There are three types of benefits that you will get with HSAs. These are explained below:

1. The amount that you contribute to HSAs is eligible for tax deduction. Furthermore, the withdrawals that you make from these accounts are not applicable to federal income taxes. Even more, some states also allow the exemption of these withdrawals from state income taxes.
2. You can also choose some HSA accounts, where you will be able to invest your contributions and can earn interest on your account balance as well. You can enjoy these earnings without paying taxes for them.
3. If you qualify for medical expenses and you take distributions from your HSA to pay for these expenses, these funds are also exempted from taxes.

Once you have made contributions to your HAS, your HAS provider will give you a Form 5498-SA. After you have used funds from your HAS, your provider will give you Form 1099-SA. To report your HAS information on your federal income tax return, you will need Form 8889.

5. Medical Expenses Deduction

You can get tax deductions if you spend a large amount of money on your medical expenses, including the miles covered for medical reasons and more. If you want to claim tax deductions for these claims, you will need to show that these expenses exceed more than 7.5% of your taxable income.

However, you will need to itemize these tax deductions if you want to claim deductions for your medical expenses. Furthermore, if your doctor or medical professional prescribes medical treatment for you where you need to purchase exercise equipment, a swimming pool, a spa, etc., these expenses are tax-deductible as well.

6. Student Loan Interest Deduction

Qualifying for a student loan will allow you to claim tax deductions on the interest that you pay. It lets you claim all or a portion of your owed interest for tax deductions. However, the deduction in the interest is limited up to $2500, or the amount of interest that you pay, whichever is the lesser amount. To know more about the criteria, go to the Students Aid website.

Here, you will not need to itemize your tax deductions. This is because student loan interest is considered as an above-the-line deduction.

7. Home Office Deduction

Suppose you are a self-employed individual; you shall be able to avail of home office deductions, provided you meet the required criteria for using and maintaining a home office. If you are an employee who is in “work-from-home,” you are not eligible for claiming this deduction anymore. This is due to the changes made in the 2017 edition of the Tax Cuts and Jobs Act.

However, you must know here that who is able to qualify for a home office deduction is determined every year. You might be eligible this year, but your eligibility might change next year. Furthermore, you can change methods every year with the change in rules.

8. Charitable Contributions Taxes

If you have made cash donations to an organization that comes under 501(c)(3), your contributions are eligible for tax deductions. However, you will need to itemize your deductions here. Charitable cash contributions are applicable for tax deductions under the CARES Act and subsequent legislation.

Furthermore, as per the law, you can get tax deductions for cash and non-cash donations as well. You will also get 14 cents for every mile you drive for volunteer work and for parking and tolls too.

9. Mortgage Interest Deductions

Tax deductions are also available for mortgage interest, and some of them are considered large home-related deductions that allow you to claim on your tax return. You can also claim mortgage interest on your primary and secondary residences.

Furthermore, you will also need to ensure that the funds that you get from your mortgage are used for buying, building, or substantially modifying it. Otherwise, tax deductions are not possible here.

10. Educators Expenses

There are many teachers who purchase the necessary stuff for their classrooms. So do the students, sometimes from their own pockets. If you qualify under K-12 educators, you can get tax deductions of up to $300 for your classroom materials. 

These deductions are adjustments to your income, and you will not need to itemize your tax deductions to claim them. You can claim them with Standard Deductions as well.

Wrapping Up

Hope you have learned the essential details about tax deductions. A tax deduction is basically the amount that you can subtract from your taxable income. By doing so, you can lower the amount of tax that you need to pay to the government. You can itemize your tax deductions on Schedule A of Form 1040 or choose the standard deduction method. 

Although there are more types of deductions, the aforementioned deductions are the most popular types of deductions. However, if you know about other useful tax deductions, consider recommending them in the comments section below.

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