Tax Deductions – Valuable Things You Need to Know is Here
Taxes aren’t exactly most people’s cup of tea. Apart from the tedious task of filing your taxes, paying more taxes than what’s necessary makes it more frustrating, especially if you don’t know how to decrease your taxes. As such, you must know how to leverage your tax benefits, particularly your tax deductions.
Tax deductions are a great way to reduce your taxes, allowing you to enjoy more of your hard earned income. However, many people don’t know where to look or how to maximize them. If you don’t know how tax deductions work, here are a few things to help you understand how they can benefit you.
Tax Deduction vs. Tax Credit
A tax credit directly reduces the amount of tax you owe by a dollar-for-dollar reduction on your income tax. For example, qualifying for an American Opportunity Tax Credit entitles you to up to $2,500 in tax credit, reducing your tax bill by the same amount. You can refund the balance of your tax credit or opt for a non-refundable tax credit.
A tax deduction, on the other hand, reduces your taxable income. Tax deductions use your marginal tax bracket to compute how much tax liability is reduced. This means the amount of tax deductions you’ll receive highly depends on your tax rate.
For example, your taxable income can decrease by up to $4,000 if you opt for the tuition and fees deduction. Those in the 22% tax bracket can save up to $880 from the reduction in taxes owed. Note that your eligibility to claim corresponding deductions will depend on your filing status and household income.
Standard vs. Itemized Deductions
A standard deduction is fixed dollar amount that the IRS uses to lower your taxable income. The standard deduction amount you’re eligible for depends on your filing status.
Following the 2023 tax year, the fixed amounts for this type of tax deduction have increased to these current amounts:
- Single or married filing separately = $12,950
- Married filing jointly or qualifying widow or widower = $25,900
- Head of household = $19,400
Once you turn 65 or older, these amounts can still increase by $1,650 for singles or heads of households and $1,300 for married or qualifying widows or widowers.
Standard tax deductions can save you money and time from going through piles of records to check which expenses are qualified for a deduction. On top of this, anyone can claim these deductions without needing a lot of supporting papers since they constitute fixed amounts, making it easy and convenient for most to claim tax deductions.
Unlike standard deductions, itemized deductions can vary from taxpayer to taxpayer since the amount will depend on the eligible expenses to reduce your adjusted gross income (AGI). Here, you must keep track of your expenses for easier filing come tax season. Once you’ve prepared a list of all eligible expenses, you can subtract their sum from your taxable income.
Here are some of the qualified expenses for claiming itemized tax deductions:
- Medical and dental expenses
- Mortgage interest
- Charitable contributions
- Casualty and theft losses
You can opt for this type of tax deduction if you have more of the qualified expenses to claim, saving you more money in taxes. However, it may entail more time and paperwork as you keep track of applicable expenses and have an itemized record for each of them.
So, which one should you go for?
It depends on which type gives you a lower tax bill. Suppose you do not have enough eligible expenses to claim a huge amount for itemized deductions. In such a case, you could opt for the standard deduction. However, if you have deductible expenses that rack up a huge sum, it’s in your best interests to claim an itemized deduction.
If you’re still debating between the two, you can always get professional advice from a tax resolution specialist to ensure you pick the right one.
What Tax Deductions Can U.S. Expats Take?
Foreign Earned Income Exclusion (FEIE)
This tax deduction is one of the most common for American expats. It reduces your payable income tax from some or all of the income you’ve made outside the country. You’ll need to pass the physical presence test or bona fide residence test to verify that you are an expat before claiming this tax deduction.
Read more: Foreign Earned Income Exclusion 2023 – Latest To Know Exposed
Foreign Housing Exclusion and Deduction
The Foreign Housing Exclusion and Deduction goes hand-in-hand with the FEIE tax deduction, where you can deduct foreign housing expenses from your foreign earned income. These include rent, utilities, renter or homeowner insurance, property taxes, and furniture rental. This lets you save money from tax deductions by reducing the amount of your taxable foreign earned income.
Tax Deductions are Your Best Friends
Nobody wants to pay more taxes than what’s necessary, and you should not either! However, many still don’t know what can help them save money from their taxes.
Understanding how tax deductions work and what you can claim under specific categories is a must. With tax deduction, you can reduce your taxable income, thereby reducing your tax liabilities.
If you’re unsure which tax deductions you can take or which approach to use, Tax Samaritan is here to help. We’ve been providing professional quality tax resolution services to expats since 1997, so we can give you solid advice on how to save the most from your taxes.
Contact us to learn more and Get a Free Tax Quote →
All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.