A tax deduction, also known as a write-off, is a legitimate expense you subtract from your taxable income to help lower the amount of taxes you owe. Deductions basically lower your taxable income and can help you save on taxes owed. When you file your tax return, you have a choice between taking the standard deduction or itemizing your deductions.
When you claim a standard deduction, the IRS allows you to deduct a preset amount of money from your taxes. Here are the standard deductions for 2021 and 2022 filings.
|Filing Status||Tax Year 2021||Tax Year 2022|
|Single Taxpayers/Married filing separately||$12,550||$12,950|
|Married Couples filing jointly||$25,100||$25,900|
|Heads of Household||$18,800||$19,400|
You are allowed an additional standard deduction if you are age 65 or older at the end of the tax year. Tap to learn more about IRS standard deductions.
Itemizing Common Tax Deductions
If your potential deductions equal more than the standard deduction amount mentioned above, itemizing your deductions may be able to lower your taxable income even more. Here are some common tax deductions to consider when itemizing:
- Mortgage Interest – Deductible mortgage interest is any interest you pay on a loan secured by the main home or second home that was used to buy, build, or substantially improve your home. You can deduct the interest you pay on the first $750,000 of home loans ($375,000 or less if married filing separately) on homes purchased after December 15, 2017. For mortgages that existed before that date, the maximum interest deduction allowed is based on a loan of up to $1 million. Read more specifics on deductible mortgage interest in IRS Publication 936.
- Property Taxes – The property tax deduction allows a homeowner to deduct the state and local taxes paid on a property from their federal income taxes. The Tax Cuts and Job Act capped the deduction for property taxes at $10,000 ($5,000 if you are married filing separately).
- Charitable Contributions – You may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. Generally, you may deduct up to 50 percent of your adjusted gross income. In some cases, 20 percent and 30 percent limitations apply. Ordinarily, individuals who take the standard deduction cannot claim a deduction for charitable contributions. The IRS now permits individuals to claim a limited deduction on their 2021 federal tax returns for cash contributions made to certain qualifying organizations. Individuals, including married individuals filing separately, can claim a deduction of up to $300 for cash contributions. The maximum deduction for married individuals filing joint returns is $600. Tap to learn more about charitable contributions and identify the deduction limitations.
- Medical & Dental Expenses – If you are itemizing your deductions and your unreimbursed medical and dental expenses exceed 7.5 percent & of your adjusted gross income, you may qualify to deduct those medical expenses. According to the IRS, medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payment for treatments affecting any structure or function of the body. Tap for a complete listing of deductible medical and dental expenses.
- Casualty or Theft Losses – Generally, you can deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return If the loss is caused by a federally declared disaster. You may not deduct casualty and theft losses covered by insurance. A casualty loss can result from damage or destruction from an unusual event, such as flood, hurricane, tornado, or fire to name a few. Theft must be illegal in nature under the law in the state where it occurred and must have been done with criminal intent. Tap for IRS details.
When to itemize deductions
Itemizing your deductions may work out better if you had large uninsured medical or dental expenses, paid substantial interest and taxes on your home, made large charitable contributions, or had significant uninsured casualty losses due to a federally declared disaster. Just to recap, a deduction or write-off is a legitimate expense that lowers the taxable income on your return. Learning the ins and outs of common tax deductions can be a big way to save on taxes.
Want to learn how to put your refund to good use? Read the Benchmark Federal Credit Union blog post on “7 Strategic Uses of Your Tax Refund”.