Some of the biggest misconceptions in taxes come from deductions. People are told they can deduct this expense or that expense, but often find they cannot when it comes tax time. Exactly what is deductible depends on the type of deduction and what kinds of income you have. This post will hopefully clarify what is deductible.
What is a Deduction?
In general, a deduction is something you can use to reduce your taxable income. This is different from a credit (discussed in another post) which gets applied to taxes owed. Some deductions are applied as Adjustments creating your Adjusted Gross Income (AGI). Some are applied as income related expenses directly against a source of income, such as self-employment expenses. Some are applied as part of itemized deductions. Some are in a category of their own.
Income Related Expenses
Many income related expenses may be deducted directly against the source of income. These are typically reported on a supporting form or schedule before ‘flowing’ to your tax return. There are a variety of forms and schedules to report these sources of income and expenses, so I cannot list them all here. One of the most common situations is self-employment related expenses that get reported on a Schedule C before the net income is listed on your tax return. A couple big exceptions to reporting the expenses directly against income are hobby and gambling income. Gambling losses get reported as an itemized deduction if you choose to itemize. (Professional gamblers may report their income and losses differently, see a tax professional.) Expenses related to hobby income used to be an itemized expense like gambling losses, but after the Tax Cuts and Jobs Act of 2017, hobby expenses are no longer deductible. If you have expenses related to a specific source of income, consult with a tax professional to determine how to properly report it.
Itemized or Standard?
Nearly everyone has the choice to itemize deductions or to take a standard deduction. The standard deduction doesn’t require you to prove any expenses to claim. It is based on your age, filing status, and if someone claims you as a dependent. For tax year 2022, the standard deduction is: Single may deduct $12,950; Married Filing Jointly may deduct $25,900; Head of Household may deduct $19,400. These amounts are adjusted for inflation each year and taxpayers who are 65 or older get an increased standard deduction ($1,400 per taxpayer 65+ or $1,750 if single/HOH).
Taxpayers can generally elect to itemize deductions instead of taking the standard deduction if they have more expenses than the standard deduction would allow. Allowable itemizable deductions for tax year 2022:
- Charitable contributions
- Up to $10,000 of state/local taxes (income, sales, or property taxes)
- Mortgage interest and insurance (limited on mortgages over $500,000)
- Medical expenses greater than 7.5% of your income (insurance, Rx, visits, etc…)
- Gambling losses (limited to value of your winnings)
- Work expenses related to a disability
- Foreign income taxes
- Generation skipping taxes
- Certain other miscellaneous deductions in IRS Pub 529
If the value of all your itemizable expenses is less than the standard deduction, then you should take the standard deduction instead.
Adjustments
Not all claimable deductions are itemizable. Some of your deductions are claimed as adjustments to income and create your AGI. Your itemized or standard deductions are then subtracted from your AGI to make your taxable income.
Some common adjustments include: the IRA deduction where taxpayers may deduct contributions to a traditional individual retirement account; self-employed taxpayers can deduct a portion of the self-employment tax they owe and can qualify to deduct a portion of their health insurance premiums; taxpayers can deduct some of the student loan interest they pay; taxpayers can deduct alimony paid if the agreement was entered before 2019. There are many adjustments, too many to list in a reasonable amount of space, so please talk to a tax professional if you have questions on if something is deductible.
Categories of their own
Periodically, some deductions are created that don’t fall neatly into the other deduction categories. These may be time limited and or one-off deductions. Currently, there is a Qualified Business Income Deduction that is deducted from your taxable income after your AGI has been determined. This deduction is based on a percentage of certain kinds of net business profit reported on an individual’s tax return. It is currently set to expire after tax year 2025.
If you have questions on your tax situation, please send an email to taxes@evanslegalservices.com and an appointment can be scheduled to discuss the details. As always with any post like this, this is not intended to serve as legal advice and everyone’s situation is different. Please consult an attorney about your situation.
Updated December 2022