Know More About Tax Deductions and Credits
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You’ve probably heard the phrase, “You can deduct that,” a lot around tax season. But what exactly does that mean?
In this article, we’ll be discussing how to reduce your tax bill with tax credits, as well as how to reduce your taxable income with tax deductions. To do this, we put together a comprehensive list of tax breaks available in 2023, including some tax-deductible items many people often overlook or aren’t sure how to use to their advantage.
How do tax deductions work?
The purpose of income tax deductions is to decrease your taxable income, which reduces the amount of taxes you need to pay to the federal government. In the end, this can result in a lower tax bill.
For example: Let’s say your adjusted gross income (AGI) for 2023 was $50,000. If you claimed a deduction amount of $5,000, your taxable income would decrease to $45,000.
What is a tax credit?
On the other hand, tax credits act as a dollar-for-dollar reduction of the taxes you owe.
Using the same example income as above, if your AGI was $50,000 in 2023 and you claimed a $5,000 tax credit, your taxable income would not change. Instead, the tax credit would reduce your tax bill. If, for example, your tax bill was $12,000, the $5,000 tax credit would reduce the amount of taxes you owe to $7,000.
What tax breaks do I qualify for?
To claim tax benefits and deductions for the current tax year, the expense generally must occur on or before Dec. 31 of that year.
A lot of federal tax deductions and credits depend on situations that occur during the year, such as:
- Deductions for owning a home or a business
- Deductions for medical expenses
- Deductions for charitable donations
- Deductions for student loan or home mortgage interest
- Tax credits for adopting a child
- Tax credits for qualifying dependents
- Tax credits for earned income
We’ll explore the specifics of these tax benefits below.
How do I claim a tax deduction?
As you prepare to file your tax return, you can choose to take the standard deduction (most common) or itemize your deductions.
Standard deduction vs. itemized deductions
In short, a standard deduction is a fixed reduction of your AGI that everyone gets. It ensures all taxpayers have at least some income that is not subject to the federal income tax.
Here are the 2022 and 2023 standard deduction rates you could qualify for based on your filing status:
|
Tax filing status |
Standard deduction 2023 |
Standard deduction 2022 |
|
Single |
$13,850 |
$12,950 |
|
Head of Household |
$20,800 |
$19,400 |
|
Married filing jointly and surviving spouse |
$27,700 |
$25,900 |
|
Married filing separately |
$13,850 |
$12,950 |
An itemized deduction comes from a list of expenses the IRS approved as eligible income tax deductions to help decrease your taxable income. The sum of these itemized deductions is used to lower your AGI. Depending on the amount of itemized deductions you qualify to claim, itemizing can result in a larger reduction than the standard deduction for some people.
Note: You cannot claim the standard deduction and itemized deductions in the same year.
2022 and 2023 personal tax credits and deductions
Ready to dive into the world of tax breaks? Below is a list of personal tax deductions and tax credits available for tax year 2022 and 2023:
Tax credits for those with dependents
Tax breaks for students with education expenses
Tax benefits for homeowners
- Mortgage Interest Deduction
- Mortgage Points Deduction
- Deduction for real estate taxes / property taxes
- Residential Energy Credit
Retirement plan tax breaks
Other deductions and credits
- Earned Income Tax Credit
- Deduction for Charitable Contributions
- Gambling Losses Deduction
- Deduction for medical expenses
2022 and 2023 deductions for business expenses
Use Schedule C to report all of your small business deductions even if you are self-employed.
Below is a list of business deductions:
Tax calculator
Curious how certain tax deductions and credits will affect your taxes? Check out our helpful income tax calculator.
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