A tax deduction lowers your taxable income, which lowers your tax bill. These include up to $500 in teacher expenses, contributions to health savings accounts, part of your self-employment tax, health insurance premiums, alimony paid and contributions to traditional individual retirement accounts (IRAs). What are tax credits? If you have a honking big mortgage or big medical bills, it may be worthwhile to itemize your deductions.Ī few deductions are called above-the-line deductions, which means you can take those deductions even if you take the standard deduction or your itemized deductions. The tax law lets you deduct a myriad of expenses, the most common of which are mortgage interest and medical expenses. You should figure out your itemized deductions before you take your standard deduction. How do I know if I should take the standard deduction or itemized deduction? A person with $63,850 in gross income, for example, can reduce their taxable income to $50,000. The standard deduction for couples filing jointly will rise to $27,700 in 2023, up from $25,900 the prior year. Single taxpayers can deduct $13,850 from their gross income, up from $12,950 the previous year. Most people take the standard deduction, which is available to all taxpayers. (If you’re self-employed, your taxable income is all the money you’ve received for doing that thing you do.) You also owe income taxes on certain other income, such as interest from bank accounts, which is reported on Form 1099-INT, as well as dividends and capital gains, which are also reported on Form 1099. What are deductions?ĭeductions are expenses that you’re allowed to deduct from your gross income, which is what you’ll find in box 1 of your W-2 form. Taxable income is what you’ve earned minus deductions and credits. You may notice we’re talking about taxable income above. ![]()
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