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Personal Finance & savings
7 Most Common Tax Deductions and Credits
Every time you leave the house, you may feel like you’re spending money on something—a medical visit, a trip to the store to get supplies for your small business, a dentist appointment for your child. These are all a part of the fabric of our lives—and they may be something we can deduct when tax time rolls around, so you pay less in tax. Continue reading to learn about the 7 most common tax credits and deductions, and how you may claim these important credits and deductions when doing your 2023 taxes next year.
7 tax credits and deductions that can save you money during tax season
A good place to start thinking about tax savings is deciding if standard or itemized deductions are right for you. A deduction is a specific dollar amount that reduces the amount of income on which you’re taxed.
Standard versus itemized deductions
The standard deduction amount depends on your filing status, whether you’re 65 or older, are blind, and whether another taxpayer can claim you as a dependent.
On the other hand, itemized deductions are certain expenses the IRS allows you to deduct from your income to determine your taxable income. The more deductions you claim, the lower your taxes for the year will be. You could even get a bigger refund.
There are specific circumstances and limits when itemizing deductions. Possible itemized deductions include medical expenses, certain taxes, mortgage interest, charitable contributions, casualty loss in a federally declared disaster area, as well as other miscellaneous deductions. That’s why it’s good to keep your receipts--you just never know what might turn out to be a deduction.
Since every taxpayer’s situation is different, a Tax Pro can help you with deciding whether to itemize or take the standard deduction. But the general rule is easy—you get to pick the bigger of the two: Either the standard deduction that all taxpayers are entitled to, or itemized deductions, if larger.
1. Medical and dental expenses for itemized deductions
As you probably know all too well, health and medical expenses for you and your family can add up quickly. It can be hard to plan for, especially when unexpected emergencies occur that might not be covered by your insurance.
However, the IRS allows for some relief. You can deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). For example, if you have an AGI of $50,000 and $10,000 in total deductible medical expenses, 7.5% of $50,000 is $3,750. You can deduct $6,250 of medical expenses as part of your itemized deductions.
The total itemized deductions need to exceed the standard deduction for your filing status.
To qualify as deductions, your medical or dental expenses must be legal in the U.S. and be for yourself, your spouse, or a dependent. Below is a brief list of medical and dental expenses that may be considered deductible:
- Medical copays – Payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other medical practitioners for preventative care, surgery, dental or vision care, x-rays, lab fees, and more
- Prescriptions - Including insulin and medical devices such as hearing aids, dentures, wheelchairs, crutches, etc.
- Treatment facility payments including addiction services
- In-hospital payments including lodging and meals
- In-home health care and visiting nurse payments
- Dental expenses including braces and dentures
- Eye exams, prescription glasses, and contact lenses and associated cleaning supplies
As always, work with your Tax Pro on your specific situation to decide if itemizing your deductions may be right for you and your family. Keep your receipts in a safe place and make sure to have them when filing your taxes.
2. Homeownership-related itemized deductions
Your home is often the largest investment you make over your lifetime. Due to the high cost of owning a home, the tax code allows you to deduct certain expenses associated with your home each year. These types of deductions are referred to as itemized deductions.
Of course, as mentioned above, you should have more in itemized deductions than your standard deduction to make itemizing worth your while.
Mortgage interest—you can deduct the mortgage interest on your home when you itemize deductions. The mortgage interest deduction is capped at interest paid on no more than $750,000 of the principal. So, if your principal is $1,000,000, you can’t deduct interest on $250,000 of it. If you have a mortgage that went into effect before Dec. 15, 2017, you can continue to deduct interest on loans up to $1 million.
Home equity line of credit interest—You can still deduct interest on the proceeds from an equity line that you used to improve your home, if the total remaining principal from the first mortgage and the equity line don’t exceed the original mortgage or the $750,000 cap.
Additional home deductions—There are other possible deductions that you may be able to get. Work with your Tax Pro about the latest changes with the IRS and what may or may not be eligible for an itemized deduction.
3. State and local taxes (SALT) itemized deductions
State and local tax (SALT) deductions are specific types of deductions for people who choose to itemize.
Prior to the 2018 Tax Cuts and Jobs Act (TCJA), you could fully deduct your SALT from your income taxes. Since the passage of the TCJA, you can only deduct up to $10,000 per year for combined total taxes, or $5,000 for married couples who file separately.
Due to the changes to the standard and itemized deductions following the TCJA, fewer taxpayers are itemizing deductions.
Regardless of filing status, you may live in a state that uses a matching principle when it comes to itemized deductions. This means you must claim itemized deductions at the federal level to also claim itemized deductions on your state income tax return.
4. Gambling loss deduction for itemized deductions
Gambling losses are tax deductible and will require you to report all the money you win as taxable income on your return. As with all of these, the deduction is only available if you itemize your deductions.
You may deduct gambling losses only if you itemize your deductions on Schedule A of Form 1040. You must keep a record of your winnings and losses. The amount of losses you deduct can't be more than the amount of gambling income you reported on your return. Work with your Tax Pro on any questions you may have about gambling winnings and losses.
5. Job-related deductions
Finally, tax reform in 2017 greatly affected your ability to claim business expense deductions. How do these new rules affect you?
Under the TCJA, as an employee, you may no longer deduct unreimbursed expenses related to your employment. The IRS has suspended these expenses, ranging from out-of-pocket office expenses to miles driven on your own vehicle for your job, through 2025.
6. Retirement contributions deductions
The IRS offers a Retirement Savers’ Credit for making eligible contributions to your IRA or employer-sponsored retirement plan, like a 401(k). Also, you may be eligible for a credit for contributions to your Achieving a Better Life Experience (ABLE) account, if you’re the designated beneficiary.
You're eligible for the credit if you're:
- Age 18 or older,
- Not claimed as a dependent on another person’s return, and
- Not a student.
You would use Form 8880, Credit for Qualified Retirement Savings Contributions to calculate your credit. Depending on your AGI reported on your Form 1040 series return, the amount of the credit is 50%, 20%, or 10% of the first $2,000 contributed to your:
- Traditional or Roth IRA,
- Elective salary deferral plan such as a 401(k), 403(b), governmental 457(b), SARSEP, or SIMPLE plan,
- Voluntary after-tax employee qualified retirement plan (including the federal Thrift Savings Plan) or 403(b) plan,
- 501(c)(18)(D) plan, or
- ABLE account for which you are the designated beneficiary (beginning in 2018).
You can work with a Tax Pro on any questions you may have about eligibility and how to maximize this credit, if eligible.
7. Student loan interest deduction
There are various educational tax breaks. We’ll touch upon the student loan interest deduction below, but your Tax Pro will be able to help you find more credits and deductions that may fit your situation.
You may be able to get credit for student loan interest you paid. If you paid $600 or more in student loan interest during the year, the lender is required to send you a Form 1098-E. The interest you paid the lender or servicer is reported in Box 1. You’ll want to bring this to your appointment with your Tax Pro to make sure it’s captured when filing your taxes.
This article gave you a brief snapshot of the most common deductions available to you. There are many more that may help you save money and get a bigger refund at tax time. We are here for you year-round and can answer any questions you may have. Find an office near you today.
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