November 16, 2023 - Hudson Business Service

Know More About Tax Deductions and Credits

Tax NewsBy TaxAct November 16, 2023

You’ve probably heard the phrase, “You can deduct that,” a lot around tax season. But what exactly does that mean?

In this article, we’ll be discussing how to reduce your tax bill with tax credits, as well as how to reduce your taxable income with tax deductions. To do this, we put together a comprehensive list of tax breaks available in 2023, including some tax-deductible items many people often overlook or aren’t sure how to use to their advantage.

How do tax deductions work?

The purpose of income tax deductions is to decrease your taxable income, which reduces the amount of taxes you need to pay to the federal government. In the end, this can result in a lower tax bill.

For example: Let’s say your adjusted gross income (AGI) for 2023 was $50,000. If you claimed a deduction amount of $5,000, your taxable income would decrease to $45,000.

What is a tax credit?

On the other hand, tax credits act as a dollar-for-dollar reduction of the taxes you owe.

Using the same example income as above, if your AGI was $50,000 in 2023 and you claimed a $5,000 tax credit, your taxable income would not change. Instead, the tax credit would reduce your tax bill. If, for example, your tax bill was $12,000, the $5,000 tax credit would reduce the amount of taxes you owe to $7,000.

What tax breaks do I qualify for?

To claim tax benefits and deductions for the current tax year, the expense generally must occur on or before Dec. 31 of that year.

A lot of federal tax deductions and credits depend on situations that occur during the year, such as:

Deductions for owning a home or a business
Deductions for medical expenses
Deductions for charitable donations
Deductions for student loan or home mortgage interest
Tax credits for adopting a child
Tax credits for qualifying dependents
Tax credits for earned income

We’ll explore the specifics of these tax benefits below.

How do I claim a tax deduction?

As you prepare to file your tax return, you can choose to take the standard deduction (most common) or itemize your deductions.

Standard deduction vs. itemized deductions

In short, a standard deduction is a fixed reduction of your AGI that everyone gets. It ensures all taxpayers have at least some income that is not subject to the federal income tax.

Here are the 2022 and 2023 standard deduction rates you could qualify for based on your filing status:

Tax filing status

Standard deduction 2023

Standard deduction 2022

Single

$13,850

$12,950

Head of Household

$20,800

$19,400

Married filing jointly and surviving spouse

$27,700

$25,900

Married filing separately

$13,850

$12,950

An itemized deduction comes from a list of expenses the IRS approved as eligible income tax deductions to help decrease your taxable income. The sum of these itemized deductions is used to lower your AGI. Depending on the amount of itemized deductions you qualify to claim, itemizing can result in a larger reduction than the standard deduction for some people.

Note: You cannot claim the standard deduction and itemized deductions in the same year.