As the 2023 tax season starts, Consumers are looking for strategies to file their taxes accurately to pay fewer taxes or obtain a higher refund.
While many taxpayers opt out of standard deductions on their annual tax return, which reduces their taxable income, the IRS requires taxpayers to itemize these deductions during the tax season if they wish to reduce their taxable income.
Standard Vs. Itemized Deduction
For this, we must first understand the difference between standard and itemized deductions. Generally, you have two alternatives when filing your tax return:
- Make use of the standard deduction. The IRS determines the standard deduction based on your filing status. If you claim the standard deduction, enter the standard deduction amount on Form 1040.
- Detail your tax deductions. The amount you actually spent on certain tax-deductible items, such as medical bills, state and local taxes, mortgage interest, and charitable contributions. If you itemize, each of these expenses must be listed on Schedule A and attached to your tax return.
It is simpler to claim the standard deduction because you do not need to keep track of your expenditures or save supporting documentation such as receipts, bank statements, and tax forms.
But, itemizing might reduce your tax liability if your total itemized deductions exceed your standard deduction for your filing status.
For tax returns for 2022 (filed in 2023), the standard deduction amounts to surpass are:
- $12,950 for single taxpayers and married individuals filing separate returns
- $19,400 for heads of household
- $25,900 for married couples filing jointly or qualifying widower
Those aged 65 or older or those who are blind are eligible for higher standard deductions. A worksheet in the IRS Form 1040 Instructions can assist you in calculating this amount.
Are Itemizing Deductions Right For You?
Few filers have sufficient itemized deductions to justify itemizing. Therefore, it is worthwhile to examine your deductions to determine whether itemizing can reduce the tax you owe or result in a larger tax refund.
Here are several itemized deductions that you may be able to claim on your tax return for 2022.
Medical Expenses
You may deduct medical, dental, and vision expenditures paid out of pocket. These may include insurance premiums, co-payments, lab fees, and the cost of prescription prescriptions, eyeglasses, contact lenses, hospital stays, surgeries, and ambulance services.
Nevertheless, there is a catch: only medical expenses that exceed 7.5% of your adjusted gross income qualify for a tax deduction (AGI).
For example, if your AGI for 2022 is $100,000, you can deduct medical expenses only if they exceed $7,500 (7.5% of $100,000).
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State And Local Taxes
You may deduct the following state and local taxes paid during the year:
- Property taxes
- State and local income taxes OR state and local sales taxes
- Personal property taxes like those paid when you register a car, boat, or motorcycle
Presently, the IRS caps your total deduction for state and local taxes at $10,000 ($5,000 if you file separately). Suppose you are married in 2022 and file a joint return with your spouse.
If you paid $7,000 in state income taxes and $5,000 in property taxes in 2022, you can deduct a maximum of $10,000. Hence, the remaining $2,000 deduction is forfeited.
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