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There are two types of tax benefits, tax credits and tax deductions. While you determine which benefits you are eligible for, it is important to know what they really are and how they work.
In this comprehensive guide, we will answer “What is a tax deduction”, and discuss the various types of tax deductions that you can claim. We will also explain how tax deductions work and how you can claim them when filing taxes for this year.
So read on.
What Is a Tax Deduction?
A tax deduction or a tax write-off is a deductible amount that you subtract from your gross income to calculate your taxable income. It is a way to reduce the amount of taxes you’re supposed to pay.
However, you are supposed to figure out your tax bracket and determine whether your exact expenses qualify for deductions.
Read on to find out how tax deductions work and which tax deductions you may qualify for.
How Do Tax Deductions Work?
Tax deductions reduce your taxable income so that a reduced amount of your income is being taxed. As a result, the taxes that you are owed are also reduced. These tax deductions come from certain expenses, such as donations, interest, and business expenses.
But how to apply for tax deductions? Well, it’s actually quite simple. First, find out if you have any expenses that can be qualified as tax deductions.
Next, on a 1040 tax form or 1040 schedule form, specify which deductions you want to apply for, while carefully following the instructions. Lastly, attach any documentation that can serve as proof, such as expense receipts.
When applying for tax deductions, make sure you are choosing the right type of tax deduction.
Types of Tax Deductions
There are several different types of tax deductions. However, the most common ones include standard deductions, itemized deductions, business expense deductions, and capital loss deductions.
You can either choose itemized deductions or a single deduction of a fixed amount on your income tax returns.
What Is a Standard Deduction for Taxes?
A standard tax deduction is a standard amount from your income that you are allowed to deduct by the IRS. These deductions are allowed so that the taxpayers are left with some income that is not taxable.
The standard tax deduction amount is different for every year. It depends on your tax filing status. However, you can only choose the standard deduction or itemized deduction. You can’t apply for both in the same year.
Below, you can find the standard tax deduction amounts for the year 2023, depending on your filing status:
⦁ Single: $13,850
⦁ Married Filing Separately: $13,850
⦁ Married Filing Jointly: $27,700
⦁ Heads of Household: $20,800
⦁ Surviving Spouses: $27,700
Blind taxpayers or those who are at least 65 years old can apply for an additional standard deduction amount of $1,500 in 2023. This rises to $1,850 for heads of household and single filers.
What Is an Itemized Tax Deduction for Taxes?
Itemized deductions are specific expenses incurred by taxpayers that are deducted from the adjusted gross income (AGI). As a result, your taxable income is reduced and you end up paying less taxes.
To calculate and list all your itemized deductions, you need to use Schedule A of Form 1040.
You can either choose to opt for a standard deduction or make itemized deductions, such as donations, mortgage interest, unreimbursed medical expenses, state and local taxes, and charitable gifts.
Some other types of tax deductions that can be itemized include sales tax on certain purchases, personal property tax deductions, business expenses, and moving expenses.
You can reach out to a tax professional to determine which state or local tax deductions you are eligible for.
What Is a Pre-Tax Deduction?
A pre-tax deduction is a tax deduction where the money from an employee’s gross pay is deducted before the taxes are paid. This way, the employee’s taxable income is reduced, ultimately reducing the taxes they owe.
A pre-tax deduction reduces the taxes that are owed by employers, such as FICA, SUI, and the Federal Unemployment Tax (FUTA).
Below is a list of all the items on which pre-tax deductions apply:
⦁ Healthcare insurance
⦁ Dental insurance
⦁ Short-term disability
⦁ Long-term disability
⦁ Supplemental insurance coverage
⦁ Health savings accounts
⦁ Child care expenses
⦁ Life insurance
⦁ Medical expenses
⦁ Retirement funds
⦁ Parking permits
⦁ Vision benefits
⦁ Commuter benefits
⦁ Tax-deferred investments
Do note that the government changes the rules of pre-tax deductions nearly every year. So make sure to check the latest rules and regulations regarding pre-tax deductions before opting for them.
Conclusion
So that’s all, folks. Now that you know what tax deductions are, you can make the right decision when choosing the type of tax deduction. You will need to calculate your deductions to determine whether to opt for standard or itemized deductions. Remember, you want to choose the type that leaves you with the most savings.
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