What is a deduction?
A deduction is an expense that you can subtract from your gross income to lower the total amount you pay taxes on. The more deductions you report, the less in taxes you pay.
Standard deduction vs itemized deduction
You can choose whether to report your deductions in one of two ways: standard or itemized. If you claim the standard deduction, that means you claim the fixed amount available for your filing status:
- If you are single or married filing separately, the standard deduction in 2023 will be $13,850, up $900 from 2022
- For people married filing jointly, the standard deduction will be $20,800 in 2023, up $1,400 from 2022
On the other hand, if you claim itemized deductions, then you report a list of expenses that are eligible to be deductions. Examples of eligible expenses are below.
**Which deduction should I claim? **
Whichever is bigger. If your itemized expenses are greater than the fixed amount allowed for your filing status, then you should choose itemized. If your itemized expenses are below that fixed threshold, then you’d save more money to claim the standard deduction.
Examples of tax deductions
There are a lot of options to deduct the total amount of expenses if you’re a freelancer, a contractor, or self-employed. Not all expenses are deductible. Here’s a list of common business expenses that are tax deductible:
- Qualified Business Income (QBI) deduction: if you’re self-employed or a small-business owner, the QBI deduction allows you to deduct 20% of business income up to certain thresholds (in 2022 the limits are $170,050 for single filers and $340,100 for joint filers. In 2023, the limits are to $182,100 for single filers and $364,200 for joint filers).
- Home office deduction: if you work from home or your home is part of your business, then you can deduct expenses like home mortgage interest or rent, utilities, property taxes, repairs, and maintenance. You can calculate your home office deduction either by multiplying the number of square feet you use for business by $5 (up to $1500) or by calculating the percentage of your home you use exclusively for business.
- Health insurance: your medical and dental premiums might be deductible under certain circumstances. You can’t claim them if you’re eligible for your spouse’s insurance, or if you don’t pay your premiums out of pocket, or if medical expenses were less than 7.5% of your adjusted gross income.
- Continuing education: expenses like books, tuition, travel, and supplies from education that’s related to your profession can qualify as deductions.
- Business travel/driving: you can deduct a little more than $1 for every two miles you drive for business purposes. You can also deduct other car expenses like gas, auto insurance, tolls, and repairs. Flights and meals if traveling and eating specifically for work are also deductible.
- Retirement contributions: Contributions to certain retirement accounts are tax deductible. If you contribute to a traditional 401(k) or a SEP IRA, then these contributions are deductible up to certain limits that are determined by your income and filing status. Roth IRA contributions are not tax deductible, but the advantage of a Roth IRA is that withdrawals are tax-free.
- Office supplies: Pens, paper, postage, and other supplies you used throughout the year to run your business are deductible.
- Start-up costs: you can deduct the costs of getting your business established by up to $5000 for organizational expenses (like the cost of setting up an LLC) and another $5000 in start-up costs. Examples of these expenses are advertising at a grand opening, paying employees in training, and consulting expenses.
- Self-employment tax: self-employment tax is different than income tax. The self-employment tax rate is 15.3%. Half of the self-employment tax you owe is deductible. So if you owed $3000, you could deduct $1500.
- Interest from student loans (up to $2500), home mortgage (on up to $750,000 of debt), and credit card debt can all potentially be tax deductible.
- Phone and internet bills: if you have exclusive business lines, the total cost is deductible. If not, the percentage you use for business is the percentage of the bill that’s deductible.
- Business insurance premiums.
- Advertising expenses (so long as they aren’t political or lobbying).