American taxpayers can use deductions to reduce their taxable income and liability. Deductions include expenses a taxpayer takes on during the year that they “claim” when tax season comes around, or contributions to accounts with tax benefits. In general, you have two options when it comes to lowering your tax bill: taking the standard deduction or itemizing your deductions. The route you take will fully depend on your financial situation, along with how much work you want to put into your taxes to get the lowest bill possible.
Tax codes are subject to federal and state rules, which is why it can be helpful to work with a skilled tax professional to determine the deductions you are eligible for. Here is some helpful information on 3 types of tax deductions that can save you money on your taxes.
The IRS allows eligible taxpayers to take the standard deduction if they do not itemize their deductions using Schedule A, meaning you cannot itemize and take the standard deduction—you have to pick one. Other factors like filing status, age, disabilities, and your dependent status also play a role in determining the amount of a person’s standard deduction. For the 2021 tax year, the standard deduction is $12,550 for singles—or married individuals filing separately—and $25,100 for married couples filing jointly.
The standard deduction is a fixed-level deduction that ensures all taxpayers have some income that is not subject to federal income tax. If you have simple taxes and don’t have a lot of specific expenses or circumstances that would make it beneficial to itemize, taking the standard deduction can be a great idea. It’s easier to claim than itemized deductions and provides a significant tax break.
Itemized deductions are essentially a list of expenses the IRS allows taxpayers to claim. Unlike the standard deduction, itemized deductions are not a fixed, base-level amount, meaning they will vary depending on the eligible expenses you list. In some cases, itemizing your expenses can exceed the standard deduction, making a significant difference in your tax bill. Some of the eligible expenses the IRS allows taxpayers to claim when itemizing include:
- Unpaid medical expenses
- Gambling losses
- Home office expenses
- Self-employment expenses
- Mortgage interest
This is not a comprehensive list, and there are certain rules and limits to the amount you can itemize in some of these categories. In order to itemize properly, you need to understand the rules, which is why it can be beneficial to have a tax professional on your side. Additionally, itemizing is usually a much more involved process than taking the standard deduction, as it requires filling out Schedule A on Form 1040 and providing proof of the expenses you list.
Above-the-line deductions are among the best tax breaks provided by the IRS, as they are subtracted from your gross income to arrive at your adjusted gross income (AGI). From your AGI, either the standard deduction or itemized deductions are subtracted. This final income number determines the amount of tax a person will pay for the year. Some examples of above-the-line deductions include:
- Contributions to a health savings account (HSA).
- Contributions to retirement accounts, such as a 401(k) or Roth IRA
- Student loan interest payments
These are just a couple of examples of above-the-line deductions. The best way to understand the deductions you are eligible for and how to achieve the lowest tax bill possible is to work with a skilled tax professional.
Consult a Skilled Tax Resolution Attorney
Filing your taxes can be complicated. If you are struggling to figure out the deductions you are eligible for, it can be helpful to work with a skilled tax attorney.
At Morgan Sebastian Law, Attorney Becky Sebastian is eager to help you navigate the complexities of your tax situation. We understand the challenges of navigating deductions and are here to help you properly handle your taxes. To schedule a consultation with an experienced tax resolution lawyer, call 877-938-1350 or fill out our online contact form.