Think of tax deductions as small (and sometimes not so small) gifts from the IRS. First, its value is subtracted from taxable income, and then the tax bill is calculated based on what's left.
For example, if you earned $100,000 and claimed $15,000 in deductions as an individual, that would reduce your taxable income to $85,000. Therefore, this deduction change may put you in a lower tax bracket.
The IRS offers several options for deductions. You can claim the standard deduction for your filing status or itemize your deductions, but you cannot do both. Then there are "above-the-line" deductions, and you can add them to your standard or itemized deductions.
Standard Deduction
The amount of standard deduction you are entitled to depend on your filing status. The adjustments for the 2022 tax year described below (in the center column) generally apply to tax returns filed in early 2023.
As the standard deduction is indexed to inflation, it increases each year gradually. Indexing the different components of the tax code prevents you from being pushed into a different tax bracket by inflation rather than income growth.
Special rules for dependents, the elderly, and the blind
Persons over the age of 65 and blind persons may benefit from an additional deduction in addition to the standard deduction.
These additional amounts for the fiscal year 2022 are:
$1,750 if you are single or head of household
$1,400 if you are married and you or your spouse is blind or over 65
$2,800 if you are married and you and your spouse is blind or over 65
Observation
These numbers do not apply if someone else can claim you as a dependent. In this case, your standard deduction is the greater of $1,150 or your earned income plus $400 for the 2022 tax year. You cannot exceed the standard deduction amount for an individual taxpayer.
In 2023, these numbers have increased to:
$1,850 if you are single or head of households
$1,500 if you are married and you or your spouse is blind or over 65
$3.00 if you are married and you and your spouse is blind or age 65 or older
Itemized Deductions
Itemized deductions allow you to convert taxable income to non-taxable income if you spend money on certain taxable items. If you choose to itemize, add the various item-by-item deductions on Schedule A, enter the total on Form 1040, and complete Schedule A with your tax return.
Some of the itemized deductions available include:
Medical expenses: medical, dental, prescription drug, and other health care expenses, including certain insurance premiums, that exceed 7.5% of adjusted gross income (AGI).
Taxes Paid: You can claim state and local income or sales taxes, property (owners) taxes, or personal property taxes up to $10,000. This threshold is reduced to $5,000 for married taxpayers filing a separate return.
Charitable Contributions: Contributions and donations may be solicited from eligible organizations up to 60% of AGI. Most excess charitable contributions can be reported on subsequent years' tax returns.
Gambling losses: As long as what you lost does not exceed the total amount of gambling winnings you report, you can deduct them using Schedule A.
Observation
Many eligible deductions have changed as a result of the Tax Cuts and Jobs Act, effective from the fiscal year 2018. For example, deductions for items such as moving expenses, job search, and employee expenses have been eliminated, along with the deduction for alimony payments, tax preparation fees, and home office expenses. In addition, interest on home loans became non-deductible, as well as deductions for uninsured credit.
Changes to the Jobs Act and Tax Cuts
The debate between itemizing or claiming the standard deduction became more complicated after the passage of the Tax and Jobs Cuts Act (TCJA) in December 2017. The TCJA eliminated certain itemized deductions, including those related to work-related expenses, and it restricted others. On the other hand, the standard deduction has almost doubled.
Where previously you could get an itemized deduction for accident and theft, accident and theft claims are now limited to those that occur in a federally declared disaster area.
Above-the-line deductions
Above-the-line income adjustments include expenses for educators, contributions to certain qualified pension plans, and interest on student loans. These are subtracted from your initial earnings to determine your AGI. You can claim them in addition to your standard deduction or itemized total deductions, which are then deducted from your AGI.
Itemize or Standard?
Standard
A fixed amount you can deduct from taxable income.
Depending on your marital status, dependents, and year
Easier to calculate, but it could mean you miss out on savings.
Itemize
The more specific amount you can deduct from taxable income
Depending on multiple circumstances/personal expenses
Easier to calculate but can save you money
The IRS reports that many people may find it more beneficial to take the standard deduction rather than itemize it.
Observation
The total of your itemized deductions in all categories may be a few dollars more than the standard deduction amount for your filing status if it exceeds the standard deduction amount. However, if that is not the case, you'll save more on taxes if you put the time and effort into itemizing.
Ultimately, it depends on your personal tax situation and which option reduces your taxable income the most. You'll need to run the numbers to determine if the amount you can itemize exceeds the standard deduction. Working with an accountant or a tax professional can help.
And here's a caveat: if you and your spouse file separate returns, you must both take the standard deduction or itemize. So your income should match accordingly.
Summary
The standard deduction for the 2022 tax year ranges from $12,950 to $25,900, depending on your filing status. In 2023, the range is $13,850 to $27,700.
Itemizing your deductions may benefit you if the amount of your deductions exceed your standard deduction.
You can itemize a variety of expenses, including medical expenses, certain taxes paid, mortgage interest, and charitable contributions.
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