OK, last week we focused on tax credits so this week we will dive into deductions. I will try to keep this as simple as possible.
Tax Deduction: A tax deduction reduces your taxable income. By reducing your taxable income, you are reducing the amount of taxes you may owe. Let’s take a look at the different types of deductions!
Standard Deduction – This is a fixed amount that lowers your taxable income based on your status. For the tax year 2021, the amount for those filing single or married filing separately is $12,550; $25,100 for those married filing joint; and $18,800 for head of household. If you are 65 years or older or if you are blind, the standard deduction increases. You will take it if this amount is higher than your itemized deductions. So, please, if you are not great at record keeping, just take the standard deduction (just in case you’re audited by the IRS).
Itemized Deductions – These add up all of the deductions that apply to you and subtract from your adjusted gross income. If all of your itemized deductions combined is more than the standard deduction, then you will want to itemize to reduce your taxable income. In this case, some typical expenses that could be itemized are below:
If you paid a mortgage throughout the year and have interest paid
If you paid real estate taxes on your property
If you made large charitable contributions
If you have gambling losses
If you had large dental or medical expenses that were paid out of pocket
If these expenses add up to more than the standard deduction, then you will want to itemize deductions. For example, if you are filing single and the expenses above that you made throughout the year equals $15,500 and the standard deduction is only $12,550…you will want to itemize instead!
Student Loan Interest – You are able to deduct up to $2,500 for the student loan interest paid during the tax year. You will not be able to use this deduction if you are married filing separately. However, if you are married filing jointly, you can deduct the full amount if your gross income is $140K or less. The deduction amount will gradually phase out up to $170K. If you are filing using another status, then you can deduct the full amount if your adjusted gross income is $70K or less. The deduction amount will gradually phase out up to $85K. Keep in mind that you do not have to itemize deductions to take this deduction. You can take the standard deduction and the student loan interest deduction as well.
Medical Expenses – If you had qualified medical expenses that were not reimbursed (they were out-of-pocket), you can deduct them if they were over 7.5% of your AGI. So, if your AGI for 2021 is $45,600, you will not be able to deduct the first $3,420 of your medical expenses. But you can deduct the remaining.
Health Savings Account – If you contributed to a health savings account in 2021, you will be able to deduct this amount as well. However, contributions made by your employer is not tax deductible.
IRAs –We talked about this in a previous post. Your contributions to a traditional IRA are tax deductible (not a Roth IRA). It is deductible up to the $6,000 or $7,000 contributed (depending on your age) but has income limits. You will also be able to take this deduction whether or not you choose to itemize deductions or take the standard.
That was simple, right? Feel free to reach out for any questions you may have. Those were just some popular deductions that you may see when you are filing your taxes this year. Hopefully, when they pop up, you will have a better understanding of what they are. Thanks for reading as always, enjoy Super Bowl Sunday and Happy Valentine’s Day! Maybe bae will pay for you to file your taxes this year…Write to you soon!