Taxes are a part of life, whether we like them or not.
No one particularly likes paying taxes. So one thing many of us do is look for ways to lower the amount of taxes we have to pay.
There are different things you can do to reduce your taxes (we’re talking legal ways, of course!). And one common one you may have heard of is a tax deduction.
But exactly what are tax deductions? How can you use them to lower your tax bill?
We’ll answer these questions below and also share some examples of things you can deduct from your taxes.
What Are Tax Deductions?
A tax deduction is an item that can be deducted from your taxable income to reduce the amount of taxes you owe the government. A tax deduction can reduce the amount of income that is subject to taxation by both the federal and state governments.
You deduct the amount of the tax deduction from your income, resulting in a reduction in your total taxable income. The lower your taxable income, the lower your tax bill will be.
Both the standard deduction and itemized deductions will lower a taxpayer’s adjusted gross income (AGI) and reduce the amount of taxes owed. However, which one to use will depend on the taxpayer’s specific financial circumstances.
Ways To Deduct Taxes
Depending on your situation, you can take the standard deduction (a single deduction with a fixed amount) or itemize deductions on Schedule A of your income tax return. All federal income taxpayers can take either the standard deduction or itemize various deductions, lowering their taxable income due to their decision.
The standard deduction is, in essence, a one-time, one-dollar reduction in your adjusted gross income (AGI). The amount of deductions you are eligible for is determined by your filing status.
Those filing separately and single filers will be able to take advantage of the $12,950 standard deduction in 2022. Meanwhile, for those filing jointly, married couples can deduct $25,900. In this case, the amount is $19,400 for the head of the household.
People over the age of 65 and those who are blind are entitled to a larger standard deduction.
100s of Potential Tax Deductions
When itemizing tax deductions, you can reduce your taxable income by taking advantage of any of the hundreds of available tax deductions you are eligible to receive. The more you can deduct from your income, the less you’ll have to pay taxes.
Itemizing your expenses makes sense if the value of your itemized expenses exceeds the value of the standard deduction for your filing status.
Mortgage interest, charitable contributions, unreimbursed medical expenses, and state and local taxes are acceptable itemized deductions.
According to the Internal Revenue Services or IRS, the following are tax-deductible:
- Business expenses
- Business use of car
- Business use of home
- Form 2106, Employee Business Expenses
- Standard deduction and itemized deductions
- Deductible taxes
- State and local tax deduction limit
- Property tax
- Real estate tax
- Sales tax
- Charitable contributions
- Gambling loss
- Miscellaneous expenses
- Interest expense
- Home mortgage interest
- Moving expenses
- Student loan interest
- Work-related educational expenses
- Teacher educational expenses
Health Care Deductions
- Medical and dental expenses
- Health Savings Account (HSA)
Investment Related Deductions
- Sale of home
- Individual retirement arrangements (IRAs)
- Capital losses
- Bad debt
- Opportunity zones
- Debt related to one’s residence is forgiven in cases of foreclosure, repossession, abandonment, or a loan modification or short sale.
In conclusion, tax deductions are an important way to save money. As you can see, there are many things that qualify as tax-deductible. In the next tax season, it is definitely worthwhile to look into what you can deduct from your owed amount.