Last Updated: February 2, 2023
Just when you thought you understood the process of filing taxes, another intimidating term is thrown your way – tax deductibles! Believe it or not, tax deductibles actually work in your favor. To help clear all your doubts about tax deductibles, in this article we’ll explain everything you need to know, including what does tax-deductible means, itemized deductions, as well as overlooked tax deductions in 2022.
What Does Tax-Deductible Mean?
Tax-deductible is an expense that can be subtracted from the taxpayer’s gross income to get adjustable gross income, reducing the tax liability. When taxable income is reduced, you pay less tax! In the world of taxes, tax deductibles are one of the few things that work in the favor of the taxpayer and reduce taxes for both individuals and businesses, applicable to both federal and state tax in the US.
|Did You Know: Although every citizen pays taxes and tries to reduce their taxable income, not many are aware of what income taxes actually pay for. Based on a study, people who are more aware of where their taxes are being used are more satisfied with paying taxes.|
What Is an Itemized Deduction?
There are mainly two types of tax deductions that a taxpayer is free to choose from itemized or standard deductions. The majority of people choose standard deductions to avoid a lot of calculations and pay a fixed amount set by the Internal Revenue Service (IRS).
Itemized deductions, on the other hand, can significantly reduce your taxable income. They are personalized, varying from person to person and year to year, and include all your expenses which can be subtracted from the income.
Before you get confused about which one to choose, here are a few pros and cons of both.
Pros of Itemized Deductions
- Reduce taxable income
- Can claim more deduction than standard.
Cons of Itemized Deductions
- The tax-deductible expenses list keeps changing
- Not suitable for someone with lower income
- The calculation can be complicated, especially for a business, but you can always take the help of business tax software.
Pros of Standard Deductions
- Does not require much calculation
- Suitable for anyone with fewer expenses
- Can be claimed by anyone.
Cons of Standard Deductions
- This can lead to smaller deduction
- Limitations between single and joint filing.
|Did You Know: Standard tax deductions have increased in the year 2022. For singles, it’s now $12,950, for those who are married it’s $25,900, and for the head of household, it’s $19,400.|
Tax Deductions List
We hate to break it to you, but not all your expenses may be included in tax deductibles—the Internal Revenue Service (IRS) provides guidelines as to what is included. However, many people are left confused even after reading through these long lists.
Below, we’ve discussed some of the most commonly asked questions explaining what situations are tax-deductible and when. Hopefully, you’ll get a clear understanding of all the things included and things exempted from itemized deductibles by the end.
Sales Tax Deduction
Sales tax can be deducted from gross income, but since taxes wouldn’t be taxes if they weren’t complicated, it’s not as simple as that.
Here’s where it gets a bit confusing: you can either choose to deduct state and local sales tax or to deduct state or local income tax from your gross income.
People living in states that don’t charge income tax go for a deduction of sales tax, as its amount is much higher compared to states which do charge income tax.
Moreover, if you opt for sales tax, you need to provide proof of purchase. Sales tax is also advisable if you’ve recently had a big purchase like a car or furniture.
Are Political Donations Tax-Deductible?
To keep it short, donations to a political candidate or party, newsletter fund, campaign committee, etc. are not tax-deductible, and the Internal Revenue Service (IRS) has made this very clear.
However, not all donations follow this rule. Donations made to a charity or charitable gifts are tax-deductible. Religious organizations, qualified nonprofit educational institutes, as well as nonprofit hospitals are a few of the organizations that you can donate to which also offer tax deductions.
Is Child Support Tax-Deductible?
Child support is also not tax-deductible, as the IRS regards it as a personal expense that is neither deductible on the part of the payer nor counted as taxable income for the payee.
To make it more simple, buying the newest edition of the video game for your child is regarded as a personal expense that can’t be tax-deductible as such. The IRS considers child support the same way—the money you spend on your children, whether they live with you or not, is counted as a personal expense.
However, the IRS is not heartless and understands that bringing up children can be expensive, so it provides a child tax credit that reduces the tax liability of the taxpayer.
Are Home Improvements Tax Deductible?
Again, home improvements come under personal expenses and are not tax-deductible. However, before you cancel your plans for home renovations, note that these expenses do come with tax benefits.
Suppose you bought your home for $300,000 and sold it later for $800,000. During the time you had the house, you made home improvements worth $50,000. Therefore, your total home’s value is $350,000. Now, your profit after the sale is $800,000 minus $350,000, which is $450,000—only this amount is subject to tax.
Home improvements reduce your taxable capital gain. If you do not have funds to renovate your home, you can take the help of home improvement loans.
Are Union Dues Tax-Deductible?
Till now, all the ambiguities have been answered by either yes or no, but union dues are a bit more complicated, and so in determining if they are tax-deductible.
Let’s first understand union dues. These are the expenses incurred by an employee to carry out a job or business. The majority of the time, they’re not tax-deductible for the year 2018 through 2025.
However, there are a few exceptions to this—if the expenses were incurred before 2018, they are tax-deductible, and if you’re self-employed, your expenses are tax-deductible too.
As the guidelines provided by the Internal Revenue Service (IRS) are quite complex, you should contact a professional if you’re facing any issues, or use affordable tax software.
Is Private School Tuition Tax-Deductible?
Private school tuition is not tax-deductible directly, as it’s also considered a personal expense.
However, if your child is in a school for special needs, the IRS certainly helps reduce your tax liability, but you’ll need an official medical certificate from a doctor stating that your child needs to go to a private school.
Opening a Coverdell Education Savings Account can help reduce your tax liability and provide a tax credit in some cases. But, as mentioned, these are all indirect ways to reduce tax.
Are Funeral Expenses Tax Deductible?
For an individual taxpayer, funeral expenses are not tax-deductible.
However, if you’re settling an estate and you’ve used its funds to pay for the funeral expenses, it can be tax-deductible. However, to make this tax deduction, there are several forms and legalities you need to look into, like Form 706. You can also take the help of some of the best Robo advisors for your taxes.
Is GoFundMe Tax Deductible?
Although GoFundMe is one of the best crowdfunding platforms, and charity donations are usually considered tax-deductible, that’s not always the case.
The official website of GoFundMe states that only if you contribute to GoFundMe charity fundraisers, it will be tax-deductible. Otherwise, all personal donations are considered gifts, and donors are not provided with any receipt.
So, if you wish to donate and want to receive tax-deductible for this, donate to one of the certified GoFundMe charity fundraisers.
Are Medicare Premiums Tax Deductibles?
Finally, Medicare premiums are one of the many healthcare deductions that the IRS allows to be tax deductible, enabling you to deduct all your medical expenses that are more than 7.5 percent of gross income. Moreover, it’s not taken out pretax, meaning that you file for these tax deductions at the end of the financial year.
We advise you to keep all the records of your medical visits and payments to avoid any discrepancies.
|Did You Know: The IRS recognizes that many school teachers spend their own money for classroom expenses, so they’re allowed to file such expenses as tax deductibles. If you’re a school teacher, you can deduct up to $250 from your taxes!|
Overlooked Tax Deductions in 2022
Now that we’ve discussed some of the most common ambiguities related to tax deductibles, here are a few tax deductibles that you might not be aware of as a taxpayer, especially if you’re choosing itemized deductions:
Captial loss on investments in stocks is tax-deductible, especially if you haven’t received any profits from your investment. To deduct your capital loss, fill out Form 8949 and Schedule D of your tax return.
Charitable donations for humanitarian or community service programs are only tax-deductible if you donate to specified organizations that the IRS has approved.
Among the commonly overlooked tax deductions in 2022, you can also find gambling losses, but the catch is that the amount of the loss can’t be higher than the gambling income.
Whereas tax deductibles reduce the amount of taxable income, tax credits reduce the amount of tax, so it’s important to differentiate between pre and post-tax deductions. Examples of tax credit include credits for adoption, mortgage interest credit, earned income tax credit, etc.
Before you start planning your trip thinking it’s tax-deductible, remember that only the travel expenses incurred for business purposes are tax-deductible.
|Did You Know: The money spent on traveling while volunteering is also tax-deductible, but you need the receipts that prove you were genuinely traveling for charitable purposes.|
Now that you have all the information on what is included in tax deductibles, let’s take a look at some non-deductible expenses:
- Credit card fees (personal)
- Tax penalties
- Lobbying expenses
- Legal fees
- Homeowner’s insurance
- Personal lunches with co-workers
- Rent payments, etc.
|Did You Know: You have to pay income tax on profits gained by trading in cryptocurrencies. To calculate the exact amount, you can take the help of crypto tax software.|
The tax-deductible definition indicates that they’re subtracted from your income to reduce the actual taxable income, working in favor of the taxpayer. Hopefully, this article has helped you figure out what’s included in tax deductibles as per the tax codes, like gambling losses, travel expenses incurred on business trips, Medicare premiums, and charitable donations, as a good understanding of deductibles will help you reduce your taxable income.
Yes, tax deduction works in favor of taxpayers. It reduces the taxable income, thereby reducing the amount of tax. Any taxpayer can have a look at their expenses and determine the deductibles.
Although they reduce your taxable income, tax deductibles don’t give you your money back, but only subtract it from your current income. Nonetheless, they work in favor of the taxpayer.
To know when something is tax-deductible, it’s important to understand what does tax-deductible means. These are deductibles that are subtracted from your income to reduce the overall taxable income.