Understanding Common Tax Deductions

The following is presented for informational purposes only and is not intended as tax advice.

Depending on how last year went, tax time can be complicated. So complicated, you may even need to pay someone else to figure out how much you owe (or, hopefully, how much the government owes you).

One areas of complexity that's worth the time to understand is tax deductions. Tax deductions can help reduce your taxable income, in turn lowering the amount of income subject to taxation. The more deductions you qualify for, the less taxable income you'll have, and the less you'll (presumably) have to pay in taxes.

So if you're worried about your tax bill it's in your best interests to know which deductions you can claim. Here are some most commonly used tax deductions, how they work, and how you can claim them:

Standard deduction 

The standard deduction is a fixed dollar amount. You can choose to take the standard deduction or itemize your deductions, depending on which is ultimately higher. If you claim the standard deduction you won't be able to claim any additional itemized deductions. Unless you had significant qualifying expenses, you're most likely to use the standard deduction. 

The standard deduction amount for taxpayers for 2023 are:

• $27,700 – Married Filing Jointly or Qualifying Surviving Spouse

• $20,800 – Head of Household

• $13,850 – Single or Married Filing Separately

There are also additional standard deduction amounts for taxpayers who are 65 and older or blind. These are in addition to the amounts above:

• $1,850 for Single or Head of Household

• $1,500 for married taxpayers or Qualifying Surviving Spouse

Itemized deductions

Using itemized deductions only makes sense when the total exceeds the standard deduction. There are quite a few available, but here are some of the most common examples.

Mortgage interest deduction

Homeowners can deduct the interest paid on their mortgage loan, subject to certain limits. The deduction for mortgage interest is generally limited to interest on the first $750,000 of mortgage debt for loans incurred after December 15, 2017 (or $1 million for loans incurred before that date).

Charitable contributions

Donations to qualified charitable organizations are deductible. There are limits for charitable contributions, depending on the type of property donated and the organization receiving the donation.

Excess contributions can often be carried forward for up to five years, meaning that if you exceed the limit for one tax year, you may still be able to claim the overage the next year.

Medical expenses

Certain medical expenses that exceed a percentage of your adjusted gross income (AGI) can be deducted. For 2023, eligible medical expenses need to exceed 7.5% of your AGI.

If your AGI was $100,000 you would need to spend more than $7,500 on qualified medical expenses before you would be eligible for the deduction. Fortunately, most medical expenses qualify.

Per the IRS, "Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body." Be sure to keep track of your expenses, as well as your receipts.

State and Local Taxes (SALT) deduction

You can deduct state and local income taxes, or sales taxes, and property taxes paid. Currently the cap is $10,000, which applies to both single and joint filers.

Educational expenses

Interest on student loans and qualified education expenses may be deductible. Although there are income limits: single filers with an adjusted gross of $90,000 and joint filers with an AGI of $185,000 or more may not qualify for a deduction. Those who do qualify may be able to deduct up to a maximum of $2,500 of interest paid on their student loans. Eligible students should receive a 1098-T form before the end of January. 

Education-related credits, such as the American Opportunity Credit or the Lifetime Learning Credit, can also help reduce your tax liability. The American Opportunity Tax Credit provides a credit of up to $2,500 per student enrolled in the first four years of higher education, while the Lifetime Learning Credit provides a credit of up to $2,000 for payment of qualifying higher education expenses for any year of higher education, regardless of whether or not the student is still pursuing a degree.

Work expenses

Certain unreimbursed job-related expenses, like work-related travel, education, or home office expenses, may be deductible.

If you're self-employed, you can deduct business-related expenses, such as office supplies, business travel, and a portion of your home expenses if you have a home office.

In both cases keep accurate records.

Health Savings Account (HSA) contributions

Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free.

Retirement contributions

If you're 18 or older, not claimed as a dependent on someone else's tax return, and not a student, you may be eligible for the Retirement Savings Contribution Credit (better known as the Saver's Credit). Depending on your adjusted gross income and filing status, your credit can equal as much as 50% of your contribution amount of that tax year. The AGI limits are pretty low, however, and if your AGI exceeds $73,000 (married filing jointly) or $36,500 (single) you aren't eligible for the credit at all.

Taxes are complicated. If you're unsure about your tax situation, consult with a tax professional. And if you're worried about being saddled with a tax bill that you can't afford, let us help. We provide free financial counseling, online and over the phone. We can help you tackle debt, balance your spending, and start building your savings.