A tax deduction decreases your taxable income, which in turn can lower your tax bill. There are generally two ways you can claim deductions on your federal income tax return: you can itemize deductions, or you can take the standard deduction.
A review of the standard deduction amount and what qualifies for itemizing can help you determine which is right for you.
When it comes to deductions, you generally want to choose the option that lowers your taxable income the most.
The standard deduction is a fixed amount, while itemized deductions are made up of a list of eligible expenses.
The standard deduction amount varies based on your income, age, filing status, and whether you’re blind, and changes each year.
If you’re married and filing jointly, your standard deduction for the 2023 tax year will be $27,700 (plus $1,500 per person age 65 or older). If you’re single or filing as an individual, your standard deduction will be $13,850 (plus $1,850 if age 65 or older).
The rate at which your income is taxed can play a role in whether you choose standard or itemized deductions.
There are seven tax brackets, ranging from 10-37%. The highest bracket for single filers and married couples filing jointly for tax year 2023 starts with taxable incomes over $578,125 and $693,750, respectively.1
Expenses that qualify for itemized deductions include qualified mortgage interest, state and local income taxes, medical and dental expenses, and charitable contributions.
Small donation amounts may not be enough of a deduction to take advantage of itemizing. If the tax benefits are an important consideration, you may want to approach your giving strategy differently. For example, if you bunch your donations into one year instead of multiple, you’re more likely to exceed the standard deduction.
There’s no substitute for running the numbers. Use IRS Schedule A form to itemize your mortgage interest expense, charitable donations, medical expenses, state taxes and other itemizable expenses.
This is where significant out-of-pocket medical expenses or charitable donations could play a big role.
If your deductions put you over the standard deduction threshold, then itemizing will work for you. If you’re below the threshold, taking the standard deduction will make more sense.
Tax planning shouldn’t be a once-a-year activity. Consider these 6 year-round tax tips that could help lower your tax bill in April.