A tax break is regarded as an additional benefit provided to individual and corporate taxpayers from the government to lessen their gross tax liability. You can claim a tax deduction or credit to save on your taxable income. So which approach can benefit you the most?
What is a tax deduction?
A tax deduction is an expense that get reduced from the amount of gross income, thereby lowering your taxable income and tax bill. Therefore, an income tax deduction lessens your overall tax liability.
The total amount of tax you can save up to depends on the type of tax benefit you claim from or your income tax return bracket.
You, as a taxpayer, have the option to use a tax deduction approach in either of the two ways — Standard tax deduction and Itemized tax deduction.
Standard Tax dDeductions for 2022 and 2023
|Filing Status||2022 Standard Deduction||2023 Standard Deduction|
|Married Filing Separately||$12,950||$13,850|
|Heads of Household||$19,400||$20,800|
|Married Filing Jointly||$25,900||$27,700|
What is a tax credit?
A tax credit lowers your tax liability on a dollar-for-dollar basis on your tax bill. A tax credit is carried on the final amount of tax you pay after all the deductions are taken off your taxable income.
Popular tax deductions and credits to claim
Here’s a list of some common tax deductions and tax credits plans.
Student loan interest deduction
Without itemizing your deductions, you can deduct up to $2,500 from taxable income, if you pay interest on a qualified student loan.
IRA contributions deduction
When you plan to save smartly for retirement, you should consider contributing to a traditional IRA. The deduction amount or tax will be dependent on your gross annual income and whether you or your spouse is contributing to any retirement plan at work.
State and local income taxes deduction
You may deduct up to$10,000 for a combination of property taxes when you make state or local tax payments (including sales, real estate, and property tax. Select between state and local income taxes or state and local sales taxes, as you can’t opt for both.
When you opt for the standard deduction method, the tax deduction depends mostly on your filing status and age, and other factors. For example, in 2022, standard deductions amount were:
- single and married taxpayers who file separate returns: $12,950
- married couples filing jointly: $25,900
- head of household filers: $19,400
Medical expenses tax deduction
To claim this deduction, you have to itemize your tax deduction. You only qualify if your unreimbursed medical expenses are more than 7.5% of your adjusted gross income of the tax year.
Child tax credit
While tax credit can be refundable and non-refundable, you can acquire up to $2,000 per child. Of this, $1,500 of the tax credit is feasibly refundable.
Home office tax deduction
If you’re self-employed and use a part of your home for office and business-related activities, you can claim home office deduction. The IRS lets you write off associated rent, property taxes, repairs, maintenance, and other related expenses.
Health Savings Account (HSA) deduction
This method of deduction is applied when you have a high-deductible health care plan since it is used to save money for medical expenses.
In 2022, the contribution limit varies:
- For singles – $3,650, and for families – $7,300.
- For people above 55 years old – an additional $1000 needs to be contributed.
Charitable contributions tax deduction
Donations or gifts paid by you to any charitable organizations in cash or non-cash format and your contributions will be counted as tax deductible. Typically, you need to itemize your tax deductions but now you can even opt for a standard deduction method to deduct up to 60% of your adjusted gross income.
Child and dependent care tax credit
You can generally cover up to 35% of $3000 of expenses for one dependent and $6000 for two or more. It covers tax credits for daycare costs for a child under 13, spouse, or parent unable to care for themselves.
Lifetime learning credit
For qualified tuition or education-related expenses, you can claim 20% of the first $10,000 you paid toward tuition and fees, for a maximum of $2,000 depending on your gross income.
Mortgage interest deduction
If you carry a mortgage, you can lower your taxable income by claiming the mortgage interest deduction. If you pay mortgage premiums, and interest on your mortgage, you can claim the mortgage interest on all your primary and secondary residences and it can make homeownership more affordable.
Filing income tax returns is mandatory. With proper planning, you can reduce your tax liability and lower your taxable income. Understand how tax break approaches work and learn how to use the opportunity to maximize the value of tax deductions and credits.