How to Lower Your Tax Bill: Essential Deductions You Need to Know

Amelia Ross
5 Min Read

Paying taxes can be tough, but did you know you can reduce your tax bill by deducting certain expenses? By understanding how deductions work, you can save money and maybe even get a bigger refund. Let’s break down the basics of tax deductions and how they can benefit you.

What Are Tax Deductions?

Tax deductions are specific expenses that you can subtract from your total income, which lowers the amount of income that is subject to tax. The IRS offers two types of deductions: the standard deduction and the itemized deduction.

Standard Deduction

The standard deduction is a set amount that you can subtract from your income. For the tax year 2024, the standard deduction amounts are:

  • $13,850 for single taxpayers or couples filing separately, under age 65
  • $20,800 for heads of household
  • $27,700 for couples filing jointly, under age 65

Itemized Deductions

If you have a lot of specific expenses, you might benefit from itemizing your deductions. This means listing each expense separately instead of taking the standard deduction. If your itemized deductions add up to more than the standard deduction, you will save more money by itemizing.

Common Tax Deductions

Here are some common deductions that can help reduce your tax bill:

Charitable Donations

Donating to charity can be a great way to lower your taxes. When you give money or property to a tax-exempt organization, you can deduct the value of your donation from your taxable income. However, there are limits to how much you can deduct. Generally, you can deduct up to 60% of your adjusted gross income, but this can vary based on the type of donation and the organization you donate to.

Other Common Deductions

  • Medical Expenses: If your medical expenses are more than 7.5% of your adjusted gross income, you can deduct the amount that exceeds this threshold.
  • Mortgage Interest: Homeowners can deduct the interest paid on their mortgage.
  • State and Local Taxes: You can deduct up to $10,000 of state and local taxes, including property taxes.

Understanding Tax Rates

Each year, the IRS sets tax rates, which are the percentages of tax you pay based on your taxable income. These rates depend on your marital status. For the tax year 2024, here are the tax rates:

  • 37% for income over $578,125 ($693,750 for married couples filing jointly)
  • 35% for income over $231,250 ($462,500 for married filing jointly)
  • 32% for income over $182,100 ($364,200 for married couples filing a joint return)
  • 24% for income over $95,375 ($190,750 for married couples filing a joint return)
  • 22% for income over $44,725 ($89,450 for married couples filing jointly)
  • 12% for income over $11,000 ($22,000 for married couples filing jointly)

Understanding tax deductions can help you save money and reduce your tax bill. Whether you choose the standard deduction or itemize your expenses, it’s important to know what you can deduct and how it affects your taxes. By making the most of these deductions, you can lower your taxable income and keep more of your hard-earned money.

FAQs

1. What is the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable income, which can lower the amount of tax you owe. A tax credit, on the other hand, directly reduces the amount of tax you owe, dollar for dollar.

2. Can I deduct donations to any charity?

No, you can only deduct donations made to IRS-recognized tax-exempt organizations. Make sure to keep records of your donations.

3. Are gifts to family or friends tax-deductible?

No, gifts to family or friends are not tax-deductible. In fact, if the gift exceeds a certain amount, you may have to pay a gift tax.

4. How do I know if I should itemize my deductions?

You should itemize your deductions if the total of your itemized expenses is greater than the standard deduction amount for your filing status.

5. What happens if my donations exceed the deduction limit?

If your donations exceed the limit, you can carry forward the excess amount and deduct it on your tax returns for the next five years.

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