Deductions are one of the most important tools that taxpayers have to reduce their tax bill. In this article, we examine the different types of deductions available, including the standard deduction and itemized deductions. Plus, we provide strategies for maximizing your tax savings with deductions.
Standard deduction
The standard deduction is a set amount that taxpayers can deduct from their taxable income if they do not itemize their deductions on Schedule A (Form 1040). The amount of the standard deduction depends on the taxpayer's filing status, age, and whether they are blind or a dependent of another taxpayer.
The standard deduction for 2023 is:
- $13,850 for single filers and married taxpayers filing separately
- $27,700 for married taxpayers filing jointly or qualifying widows/widowers
- $20,800 for heads of households
The standard deduction for 2022 is:
- $12,950 for single filers and married taxpayers filing separately
- $25,900 for married taxpayers filing jointly or qualifying widows/widowers
- $19,400 for heads of households
The Tax Cuts and Jobs Act of 2017 (TCJA) increased the standard deduction significantly. As a result, more than 87% of taxpayers now use the standard deduction instead of itemizing their deductions.
Here are some additional things to keep in mind about the standard deduction:
- The standard deduction is adjusted for inflation each year.
- Taxpayers who are 65 or older or blind can claim an additional standard deduction. To qualify for the additional deduction, the taxpayer must be blind or 65 or older on the last day of the tax year. They must also not itemize their deductions on their tax return.
- If you can be claimed as a dependent by another taxpayer, your standard deduction for 2022 is limited to the greater of: (1) $1,150, or (2) your earned income plus $400 (but the total can't be more than the basic standard deduction for your filing status). Read: Publication 501, Dependents, Standard Deduction, and Filing Information.
- If a taxpayer and their spouse decide to file a joint return, their tax may be lower than their combined tax for the other filing statuses, according to the IRS. Also, their standard deduction (if they don't itemize deductions) may be higher, and they may qualify for tax benefits that don't apply to other filing statuses.
- A person who is married has to meet the requirements of being considered unmarried in order to qualify for the head of household filing status. This can be complicated, and Publication 501 provides detailed information on the requirements for each filing status, including the head of household filing status. The head of household filing status allows a taxpayer to choose the standard deduction even if their spouse chooses to itemize deductions, according to the IRS. The head of household filing status is available to taxpayers who are unmarried, or considered unmarried for tax purposes, and who pay more than half the cost of maintaining a home for a qualifying person. The head of household filing status allows the taxpayer to claim a higher standard deduction than the single filing status, and it also allows the taxpayer to choose the standard deduction even if their spouse chooses to itemize deductions.
- The qualifying surviving spouse filing status entitles the taxpayer to use joint return tax rates and the highest standard deduction amount (if they don't itemize deductions), according to the IRS.
Itemized deductions
Taxpayers should itemize their deductions if their total itemized deductions are more than the standard deduction amount, or if they do not qualify for the standard deduction.
To determine whether a taxpayer should itemize, they must first calculate their itemized deductions and compare them to the standard deduction for their filing status. Taxpayers can find the standard deduction amounts in the IRS Publication 501.
If the taxpayers’ itemized deductions are more than the standard deduction, they will typically benefit by itemizing. However, if their itemized deductions are less than the standard deduction, they will typically benefit by taking the standard deduction.
There are a few specific types of expenses that can qualify for itemized deductions, including:
- Medical expenses
- State and local taxes
- Home mortgage interest and points
- Charitable contributions
- Casualty and theft losses
Taxpayers who decide to itemize their deductions need to complete Schedule A of Form 1040. Instructions for completing Schedule A can be found here. Information about the standard deduction and itemized deductions can be found in IRS Publication 17.
Increasing deductions
Many financial advisers are fond of tactics that increase the opportunities to itemize deductions, such as bunching or lumping.
Taxpayers who itemize but find that their total itemized deductions are close to what the standard deduction would provide need to know that it may make more sense to "bunch" their deductions into one tax year and take the standard deduction in the next year, said Michelle Gessner, a certified financial planner with Gessner Wealth Strategies.
For example, a taxpayer can "bunch" charitable deductions in the same tax year they plan to itemize by donating two years’ worth of planned charitable donations and giving nothing in the year that they are taking the standard deduction.
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Also, taxpayers should take full advantage of the property tax cap of $10,000 if they are itemizing. “For example, if their property tax is less than the $10,000 cap and it is due in January, pay some of it in December and the rest in January,” said Gessner. “Do the same at the end of the year. Now you have used all of the deduction.”
Another bunching tactic, according to Paul Monax, a certified financial planner with Agile Wealth, involves making an extra mortgage payment, say, your January payment before the end of December, so the taxpayer gets 13 payments and thus 13 months of interest in one year and then only 11 the following.
Stephen Maggard, a certified financial planner with Abacus Planning Group, said other expenses that could be lumped into one year include:
- Known expensive medical and dental procedures
- Multiple years' worth of charitable giving to a donor-advised fund.
- Paying property taxes early. If a taxpayer pays 2023 property taxes in January 2023, and then pays 2024 taxes in December 2023, they've doubled their 2023 property tax deduction.
According to Brian Clarke, a certified financial planner with Clarke Financial Counsel, the benefit of bunching is this: It allows the taxpayer to itemize deductions in one year and take the standard deduction in the subsequent year instead of taking the standard deduction over the course of two years.
Charitable contributions
Charitable contributions are donations that a taxpayer makes to qualified charitable organizations. The IRS rules regarding charitable contribution deductions are:
- A taxpayer may deduct charitable contributions of money or property made to qualified organizations if they itemize their deductions.
- Generally, a taxpayer may deduct up to 50% of their adjusted gross income, but 20% and 30% limitations apply in some cases.
- Carryover amounts from contributions made in 2020 or 2021 if you deduct those amounts for 2022 or later years.
- To deduct a charitable contribution, a taxpayer must itemize deductions on Schedule A (Form 1040).
- The amount of the taxpayer's deduction may be limited based on their income and the type of property they donate.
Taxpayers are better served by donating appreciated securities to charity as opposed to cash, says Thomas Scanlon, a certified financial planner with Raymond James Financial Services. “They can deduct the fair market value of the stock on the date of the donation,” he said. “By doing this, they avoid any capital gains tax if they were to sell the stock.”
Deductible taxes
Generally, according to the IRS, there are four types of deductible nonbusiness taxes, taxes that a taxpayer pays that are not related to their business:
- State, local, and foreign income taxes
- State and local general sales taxes
- State and local real estate taxes
- State and local personal property taxes
To be deductible, the tax must be imposed on the taxpayer, and the taxpayer must have paid it during your tax year. Nonbusiness taxes may only be claimed as an itemized deduction on Schedule A (Form 1040), Itemized Deductions.
Gambling losses
Gambling losses are losses that a taxpayer incurs while gambling.
According to the IRS, here's what taxpayers need to know about gambling losses:
- A taxpayer may deduct gambling losses only if they itemize their deductions on Schedule A (Form 1040) and kept a record of their winnings and losses.
- To report your gambling losses, the taxpayer must itemize their income tax deductions on Schedule A. If you claim the Standard Deduction, then you can't claim gambling losses.
- The IRS doesn't permit the taxpayer to subtract their losses from their winnings and report the difference on their tax return. They must report their winnings and losses separately.
- The amount of gambling losses a taxpayer can deduct can never exceed the winnings they report as income.
- The taxpayer can include in their gambling losses the actual cost of wagers plus other expenses connected to their gambling activity, including travel to and from a casino.
Conclusion
Deductions provide taxpayers with valuable opportunities to reduce their tax bill. Understanding the different types available, such as the standard deduction and itemized deductions can help individuals and families maximize their tax savings. By taking advantage of these tools and employing strategies like bunching deductions or donating appreciated securities, taxpayers can effectively reduce their tax burden and keep more of their hard-earned money.
Editor's Note: The content was reviewed for tax accuracy by a TurboTax CPA expert for the 2022 tax year.
Robert Powell is editor and publisher of Retirement Daily on TheStreet.
