A Beginner’s Guide to Tax Deductions

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With the holidays all wrapped up, tax season has made its way back around. And that means right now, through April 15, 2024 you can file your 2023 tax return. From tax bracket changes to standard deductions updates, here are some key things to know as you get ready to file your taxes.

How Do Tax Deductions Work?

Tax deductions reduce your taxable income for the year, which is another way of saying it subtracts expenses from your earnings. For example, if you made $50,000 and got a $5,000 tax deduction then you will only be taxed for $45,000.

The main takeaway to remember is deduction = subtraction, and there are only two ways to take deductions on a federal tax return; itemized deductions or the standard deduction. 

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Standard vs. Itemized Deductions

A standard deduction is a maximum lump sum you can subtract from your adjusted gross income (taxable income). It's based on your age, earnings and filing status. Itemizing your deductions allows you to subtract individual eligible expenses. 

Example: Think of the deductions as two restaurants; the standard deduction has a three-course meal for one set price. The itemized deduction offers that same meal but you pay for each course individually. Sometimes it's best to go with the itemized and for others the standard deduction gives you more bang for your buck. 

What Are Itemized Deductions?

Itemized deductions are eligible expenses taxpayers can deduct from their total taxable income. Many see this as the more difficult option because it requires you to track and list out each expense on your tax return. Also, these deductions are very specific. 

Not all expenses count as deductions—they have to fall in line with what the IRS deems an “eligible deduction.” Below are some common examples of individual and business deductions.

Examples of common deductions include: 

• Charitable donations: Money or property you donate to a charitable organization.
• Education expenses: This includes costs such as tuition, student loan interest, educational assistance and continuing education courses.
• Health expenses: Costs you paid out of pocket toward healthcare that weren't covered by your insurance, which could include prescriptions, insurance premiums for long-term care or contributions to a health savings account.
• Investments: Some investment expenses are tax deductible, like the expense of investment interest, capital losses or the cost basis after you sell.
• Business expenses: Business owners can write off expenses that are incurred to support the operation of their company. These include advertising, travel expenses and supplies to name a few.
• Business use of a home or car: If you use a home office for business, you're likely eligible to write off a portion as a tax deductible expense. The same applies to a vehicle used for work.

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Who Qualifies for an Itemized Deduction?

The IRS details that taxpayers who are poised to receive a bigger tax deduction through writing off expenses individually should itemize. They also list some clear candidates that would benefit most:

• Can't use the standard deduction or the amount you can claim is limited
• Had large unreimbursed medical and dental expenses
• Paid mortgage interest or real property taxes on your home
• Had large "Other Itemized Deductions" (line 16 on Schedule A (Form 1040)
• Had large unreimbursed casualty or theft losses from a Federally declared disaster
• Made large contributions to qualified charities

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What Is a Standard Deduction?

A standard deduction is a predetermined, flat-rate amount of your income that is counted as tax free by the IRS. This is also known as the “simple” way to take tax deductions due to it being less time intensive than individually tracking annual expenses. 

Who Qualifies for a Standard Deduction?

Anyone can opt for a standard deduction, even those who could benefit more from itemizing (which isn’t the optimal choice). The better question would be “who is not allowed to take the standard deduction?”. The IRS has clear rules we’ll list below

• A married individual filing as married filing separately whose spouse itemizes deductions.
• An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
• An individual who was a nonresident alien or a dual-status alien during the year. (Nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction.)
• An estate or trust, common trust fund or partnership.

Standard Deduction for Tax Year 2023

For tax year 2023, the standard deduction amounts are:

• Individuals: $13,850
• Married couples filing jointly: $27,700
• Heads of household: $20,800

Business Deductions for Tax Year 2023

Some small business owners have the opportunity to deduct up to 20% of their income known as their qualified business income (QBI). To qualify, total taxable income (not just business income) needs to be at our below these thresholds:

• Single filers: $182,100
• Joint filers: $364,200

This deduction is for eligible small businesses registered as S corporations, partnerships, limited liability companies or sole proprietorships. Consult a tax expert for more information to see if you qualify.

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2023 Tax Year Tax Brackets

Tax brackets represent the different tax rates that are enforced based on your income. Here are the tax brackets for 2023:

Capital Gains Tax Rates

Capital gains are the amount you earn from the sale of an asset like property or stocks. For example, if you bought a home and sold it for a $15,000 profit, that profit is now subject to a capital gains tax. How much you pay is determined by how long you owned the asset. If it was a year or less, you typically pay a higher tax known as short-term capital gains. If you held it for over a year you pay a less expensive long-term capital gains tax. 

Here are the adjustments to capital gains taxes for 2023:

Maximizing Your Tax Deductions

Having an optimized tax strategy gives you an advantage when it comes time to file your tax return. In order to receive the highest potential refund or the lowest tax bill you need to understand tax deductions and how they apply to you. 

Staying abreast of what deductions are available to you is only half of the battle, for the full benefit you also need to be up to date with any annual changes the government makes. 

FAQs

• Can you get a tax deduction for donating to thrift stores?

  Yes, donations to thrift stores are tax deductible as charitable contributions if they are a charitable organization. Depending how much you donate, you may need to fill out an IRS form and keep receipts.

• Can landlords get income tax deductions for multiple properties?

  Yes, landlords get income tax deductions for multiple properties. Deductions include expenses deemed “ordinary and necessary” to operate the properties such a property taxes, insurance and repairs.

• What are the 2023 tax brackets?

  10%: All income below $11,000 Individual | $22,000 Married

  12%: $11,000 Individual | $22,000 Married

  22%: $44,725 Individual | $89,450 Married

  24%: $95,375 Individual | $190,750 Married

  32%: $182,100 Individual | $364,200 Married

  35%: $231,250 Individual | $462,500 Married

  37%: All income above $578,125 Individual | $693,750 Married

• What is adjusted gross income?

  Adjusted gross income (often abbreviated as AGI) is the income you earn actively from working (like salaries and tips) or passively from other sources (such as investment properties and dividend incomes) minus any allowed deductions. Some qualified deduction examples include retirement contributions or student loan interest.