For many individuals, tax time brings a mixture of apprehension and confusion, especially when it comes to deductions.
“Is this deductible?”
“Does this increase my chances of an audit?”
These are common questions we get regarding a plethora of scenarios our clients face. Understanding how to effectively utilize deductions is key to potentially lowering your tax bill and maximizing your refund. Whether you’re a first-time filer or looking to better understand your tax options, this article will help clarify the deduction process and provide practical tips to help you make the most of your tax return.
Standard vs. Itemized Deductions:
You have two options when reducing your taxable income: taking the standard deduction or itemizing deductions. The standard deduction is a set amount that varies by filing status (single, married, etc.) and is adjusted yearly for inflation. Itemizing involves listing eligible expenses you’ve paid during the year, like mortgage interest, state taxes, and charitable donations.
Example: Let’s say Jack, a single filer, has the following expenses: $6,000 in state taxes, $4,000 in mortgage interest, and $1,500 in charitable donations. This totals $11,500. Since the standard deduction for a single filer in 2022 is $12,950, Jack would be better off taking the standard deduction, as it gives him a higher amount to deduct from his taxable income.
Mortgage Interest Deduction:
Homeowners can deduct interest paid on mortgages. This deduction applies to loans up to $750,000 used to buy, build, or improve your home.
Example: Amy and Bob bought a house and took out a $500,000 mortgage. This year, they paid $15,000 in interest. They can deduct this $15,000 from their taxable income, meaning they pay taxes on less income because of this deduction.
State and Local Taxes (SALT):
You can deduct state and local taxes, including income, sales, and property taxes, up to $10,000.
Example: Suppose Greg paid $4,000 in state income tax and $7,000 in property tax. While his total state and local taxes are $11,000, he can only deduct up to $10,000 on his federal tax return due to the SALT deduction cap.
Charitable Contributions:
Donations to qualified charities, whether cash or items like clothes or stocks, are deductible. Keep all receipts and donation acknowledgments.
Example: Emily donated $500 to a wildlife charity and also gave bags of clothes valued at $300 to a local shelter. She needs to keep the receipt from the wildlife charity and a donation acknowledgment from the shelter to claim a total deduction of $800.
Medical and Dental Expenses:
Medical expenses that exceed 7.5% of your adjusted gross income (AGI) are deductible. This includes payments for doctors, surgeries, dental work, and unreimbursed insurance premiums.
Example: Chris had major dental work costing $5,000. His AGI is $40,000, so 7.5% of that is $3,000. He can deduct the amount that exceeds $3,000, which in his case is $2,000 ($5,000 – $3,000).
Education Expenses:
Educational expenses, such as tuition and fees, may be deductible. Additionally, tax credits like the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit can offset education costs.
Example: Natalie, a university student, paid $4,500 in tuition. While she can’t deduct tuition fees directly, she can claim the AOTC, which gives her a credit of up to $2,500 for her educational expenses.
Work-Related Deductions:
Unreimbursed work expenses, particularly for self-employed individuals, can be deductible. This includes travel, tools, home office expenses, and continuing education.
Example: Tom, a freelance photographer, bought a new camera for $2,000 and spent $500 on a photography course. He can deduct these expenses on his tax return, reducing his taxable income from his photography business.
Having an understanding of tax deductions can significantly impact your financial outcomes during tax season. While this guide provides a foundation, remember that tax laws are intricate and subject to change. Staying informed and considering your unique financial situation when applying these deductions is key to optimizing your tax return. Always feel empowered to seek additional resources or professional advice to ensure you’re making the most informed decisions for your financial wellbeing.
How We Can Help
At Spartan Tax Group, we understand that managing taxes can be complex and often overwhelming. We are here to provide comprehensive tax services tailored to your individual needs. Whether it’s guiding you through possible deductions, offering strategic tax planning, or handling complex tax situations, we’re committed to ensuring clarity and maximizing your benefits. Reach out to us for personalized, expert advice to navigate your taxes with confidence and ease.
