What Are Tax Deductions?
A tax deduction is an expense that you can subtract from your taxable income that will lower your taxes. Tax deductions are different from tax credits which are an amount that you can deduct from the taxes you owe. It is important to remember when you do your taxes that, the IRS only allows you to deduct certain expenses. You can find out more about what expenses you can deduct on the IRS website.
How do tax deductions work?
You may be wondering exactly, “How do tax deductions work?”. When you are doing your taxes, you will likely need to decide whether you want to take the standard deduction, which is a set amount you can deduct based on your filing status, or itemize, which is deducting your actual expenses. Whether you choose to itemize or take the standard deduction, your deductions will lower the amount of your taxable income, so you will pay less in taxes. Most taxpayers will choose whichever method will result in lower taxes.
Benefit from tax deductions and how to claim them
Anyone who has to pay taxes will benefit from tax deductions because they will lower their tax bill.
If you choose to take the standard deduction, you will deduct the amount of the standard deduction listed for your filing status. The standard deduction for the 2022 tax year for single taxpayers is $12,950, and for married taxpayers, it is $25,900. Whereas for the head of households, it is $19,400, and for married taxpayers who file separately, it is $12,950.
It is important for married individuals filing separately to remember that if your partner itemizes deductions, you cannot take the standard deduction. You must itemize your deductions as well.
If you choose to itemize, you will need to keep your receipts for your expenses. You will then record them on Schedule A after you group them into the appropriate categories. Although, if you have business expenses, you will record these on Schedule C. Be sure to keep your receipts in case you are audited.
Common tax deductions
There are a number of very common tax deductions you might choose to take if you itemize. One of the most common personal deductions is the mortgage deduction. This can be a very good deduction. But before you make your final decision to itemize, be sure that the mortgage deduction combined with your other deductions is greater than the standard deduction.
Another common deduction is a deduction for an Individual Retirement Account (IRA). This is actually an above-the-line deduction, meaning you can take this deduction even if you choose to take the standard deduction.
Another very common deduction often taken by self-employed individuals, people who own a small business, or people who use their car for charity or medical purposes is the mileage deduction.
If you use your vehicle for one of these purposes, you can deduct the mileage from your taxes. You just keep track of the miles you drive your vehicle for one of these purposes and multiply this number by the IRS standard mileage rate. However, to do this, you need to carefully track your mileage.
The easiest way to track your mileage is to use a mileage tracker app to track it for you, such as Driversnote. Driversnote can track your mileage automatically, and the app makes it easy to categorize trips, thus making tax time easier.
Mileage reimbursement in the US — rates and rules for employees, self-employed and employers in the US.
The standard mileage rate for business will be 67 cents per mile, effective Jan. 1st, 2024 - up 1.5 cents from the 2023 rate of 65.5 cents.
Find out if you fall into one of the groups of employed individuals who can claim mileage on taxes in the US in 2024.