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One of the ways to reduce your liability this tax year is to decrease your taxable income. And, the best way to do this is by taking advantage of tax deductions. There are some common tax deductions you can take “above the line” that reduce your Adjusted Gross Income on your tax return and others will be considered “below the line”.
Wondering what might apply to you? Check out our list of common and valuable tax breaks.
What is a tax deduction?
If you’re wondering, “What are deductions on taxes” we’ll weigh in now! As briefly stated above, a tax deduction reduces the amount of income subject to taxation from the Internal Revenue Service (IRS), ultimately reducing your overall tax liability by lowering your total income tax bill.
As noted above, there are two types of tax deductions: above-the-line deductions and below-the-line or itemized deductions. We’ll give you a brief description of both as we dive in and later a side-by-side comparison. [Insert jump link]
Deductions for taxes: A list of helpful options
From gig worker perks like the home office deduction, to retirement contributions, here’s a tax deduction list.
Above-the-line deductions:
Deductions subtracted from your gross income to calculate your adjusted gross income are known as “Above-the-line” deductions.
1. Retirement contributions and Traditional IRA deductions
If you contribute to a tax-advantaged traditional retirement account (IRA, 401(k), etc.), you may owe less tax than if you didn’t contribute. With a 401(k), you might not even realize you’re receiving an exclusion if you have your contribution automatically made in conjunction with your paycheck. The money comes out before the taxes do, resulting a reduction of your taxable income.
With a Traditional IRA, you can still get a tax deduction without requiring access to an employer plan. However, your tax break may be limited if you also participate in an employer plan. For self-employed taxpayers, SEP IRA and SIMPLE IRA contributions are “above the line” tax deductions. See the other self-employed deductions below.
2. Student loan interest deduction
Did you know you can deduct up to $2,500 of your student loan interest? This education expense deduction is “above the line,” so you don’t have to itemize in order to take advantage of it, but you need to make below a certain level of income to qualify.
3. Self-employment expenses
With working side hustles becoming more popular recently, it’s no surprise that self-employment expenses are more common. For example, if you pay for your own qualified health insurance, that may count as an “above the line” deduction. Also, you can deduct one-half of your self-employment tax above-the-line.
On top of that, you can deduct business expenses like internet costs, office supplies, advertising, and business travel from your business income. And, for qualifying individuals, you can take the home office deduction!
4. Home office tax deductions
Speaking of self-employment, if you’re self-employed and have a home office that meets IRS standards, you can take a tax write-off for it – called the home office deduction. For example, if your home office represents 4% of your home’s total square footage, you may be eligible to deduct 4% off that property’s utilities, insurance, and property taxes. Just remember there are strict rules around what constitutes a home office with “regular and exclusive use.”
5. HSA contributions
Health Savings Accounts (HSAs) are gaining in popularity as health care costs rise and as more employers seek to put more of the cost of insurance on employees. Your after-tax HSA contributions are tax-deductible. Not only does the money grow tax-free when you use it for qualified health care costs, but you can use your contributions to reduce your tax liability to boot!
6. Alimony paid
If you pay alimony, you could take an above-the-line tax deduction. Generally, alimony is not deductible if your divorce was finalized after 2018. To qualify for the alimony tax deduction:
- You must make the payment in cash, not property
- The spouse must receive the payment under a divorce or separation agreement. The agreement can’t specifically exclude the payment from being:
- Included in the recipient’s income
- Deducted by the payor spouse
- You can’t reside in the same household as your former spouse when the payment is made if divorced or legally separated.
- Liability for payments must end upon the death of either spouse.
7. Educator expenses
Teachers who incur out-of-pocket expenses can reduce their AGI by offering a tax deduction of up to $300 (for 2023) for qualified K-12 education items that are used for the classroom. The deduction rises to $600 (for 2023) if an educator is married to another eligible educator and filing under the status Married Filing Jointly.
Below-the-line deductions:
It is beneficial to claim below-the-line or itemized deductions if your total deductions are more than your standard deduction.
8. Charitable donations deduction
You will need to itemize your deductions if you want to deduct your charitable donations. Many people find it worth itemizing these deductions—particularly if you give regularly to a church or other charity.
It’s also possible to deduct the current fair market value of goods you donate to charity. Make sure you get a receipt for your donations, whether they are cash or goods. And don’t forget to keep track of your mileage if you drive on behalf of a charity; that’s tax-deductible, too.
9. Mortgage interest deduction
If you own a home and itemize, you can deduct the qualified interest you pay on your mortgage. It’s also possible to deduct refinancing points and other aspects of your home ownership costs, including property taxes.
10. State and local taxes
State and local taxes are a federal tax write-off. The current limit for the SALT deduction is $10,000. State and local taxes include income, real estate, and personal property taxes.
11. Medical expense deduction
If you’re itemizing deductions, you can take a medical expenses deduction if you have unreimbursed expenses that are more than 7.5% of your Adjusted Gross Income. Learn more about the medical expense deduction.
Tax deduction examples — above & below the line
Here’s a deeper dive on the difference between above-the-line and below-the-line tax deductions.
- Above-the-line deductions: Above-the-line tax deductions, or adjustments to income, are calculated by subtracting them from your gross income to arrive at your adjusted gross income (AGI). Reducing AGI can impact other items on your return, such as taxable Social Security and eligibility for credits. You can claim these tax breaks regardless if you claim the standard deduction or itemize your deductions.
- Below-the-line deductions: Below-the-line tax deductions, also known as itemized deductions, are expenses that are deducted from your AGI to reduce your taxable income and your tax liability. These deductions are reported on Schedule A of your tax return (Form 1040).
What doesn’t count as a tax deduction?
While there are many tax deductions that can help offset your tax bill, these (unfortunately) don’t qualify:
- Car inspection fees
- Customs duties
- Employee business expenses (eliminated in 2017 tax law)
- Federal excise tax
- Federal income tax
- Gas tax
- License fees
- Gift tax
- Personal expenses
- Social Security, Medicare, FUTA, and RRTA taxes
- Real property improvements
- Tax paid for someone else
Remember to document!
No matter what tax deduction(s) you take, be sure to properly document them. This is especially true with self-employment expenses and with charitable donations. Keep receipts to back you up. Before you take a deduction, make sure you can prove that you are entitled to it, and consider consulting a tax professional to make sure you’re qualified for every tax credit or deduction you take on your tax return.
Get help claiming tax deductions
Understanding tax deductions is crucial if you want to maximize your potential tax refund and lower your tax bill at tax time.
Need help determining which tax credits or deductions apply to you? Whether you choose to file with a tax pro or file with H&R Block Online, we can help you navigate your taxes. We’ll help you find potential tax credits and breaks, and you can rest assured that we’ll get you the biggest tax refund possible.
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