Tax Deductions

Getting the Most Out of Different Types of Tax Deductions

written by Drew O. Mark
reviewed by cinnamon
September 22, 2023

Getting the Most Out of Different Types of Tax Deductions

Understanding the different types of tax deductions can help ensure that you save the most during tax season. Discover some of the different types and save.

In the United States, low-income citizens pay higher payroll taxes than the rich. Those with incomes below five figures pay a 14.1% tax rate. Those making seven-figure incomes or more pay only a 1.9% rate.

Adding insult to injury, for every $1 in deductions the lowest-income American claims, the average millionaire deducts $317.

What does this mean to you? Unless you are a millionaire, you benefit by taking all available types of tax deductions.

Tax deductions allow businesses and individuals to reduce their tax liability.  Learn about tax deductions and tax credits you may qualify for in this guide.

Tax Credits vs. Types of Tax Deductions

A tax credit reduces dollar-for-dollar your tax liability. This differs from a tax deduction, a write-off you take when filing taxes.

Deductions lower the tax due by reducing a portion of your taxable income. You must itemize to benefit from deductions.

To receive as many tax deductions as possible, maintain detailed records of all transactions. When preparing your annual tax return, your tax professional will determine which deductions you qualify for.

Standard vs. Itemized

It pays to consult a tax professional when deciding whether to itemize. The Tax Cut and Jobs Act (TCJA) of 2017 almost doubles standard deduction amounts while eliminating or capping many deductions.

With a standard deduction, you don’t need to keep all eligible receipts. The determining factor is whether deductions exceed your standard allowance.

State Tax Deductions

Each state has its own tax return. State rules vary, including the tax rate. There is no state income tax in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Those same states don’t charge taxes on retirement income.

When you reach retirement age, eleven states—Vermont, Utah, Rhode Island, New Mexico, Nebraska, Montana, Missouri, Minnesota, Kansas, Connecticut, and Colorado—don’t tax Social Security benefits.

Check your state tax return forms for rules allowing itemized deductions. Twelve states—Virginia, Utah, South Carolina, Oklahoma, North Dakota, Nebraska, Missouri, Maryland, Maine, Kansas, Georgia, and Colorado—only allow itemizing if you itemize on your federal tax return.

Small Business Tax Deductions

Understanding tax benefits for businesses, your obligations to submit timely payroll tax payments, and more is time-consuming. Here is a list of deductions your business may qualify for:

  • Startup costs—advertising, employee training, fees for consultants, attorneys, and accountants, expenses for establishing relationships with suppliers and distributors
  • Insurance—business auto, health, property, liability, malpractice, workers’ compensation
  • Utilities—electricity, gas, cable, telephone, trash, etc.
  • Inventory—factory overhead, freight, labor, raw materials, storage
  • Rent—rent for business space and common area maintenance
  • Vehicle expenses—purchase and upkeeps of company vehicles
  • Charitable deductions
  • Office supplies and furniture
  • Software
  • Business meals
  • Travel expenses
  • Bank fees and interest
  • Professional services
  • Contractors
  • Salaries and employee benefits
  • Employee education
  • Advertising and marketing

Using a tax professional is the best way to ensure you file taxes with all allowable deductions. Penalties for incorrect deductions, getting behind,  owing back taxes, and other IRS issues will be costly. 

Middle-Income Earners

Those in the middle to high-income range can benefit from several tax-deductible expenses to reduce their income tax obligation.

  • American Opportunity tax credit—up to $2,000 on tuition, books, equipment, and school fees
  • Adoption credit—up to $14,890 in costs to adopt a child
  • Charitable donations
  • Child and dependent care credit—covers a percentage of daycare expenses for children under 13 years of age or an adult unable to care for themselves
  • Child tax credit
  • Earned income tax credit
  • Electric vehicle tax credit
  • Gambling loss and expenses—you can’t write off an amount higher than the winnings you report
  • Health savings account contributions
  • IRA and 401(k) contributions
  • Lifetime learning credit—up to 20% of the first $10,000 paid for tuition and fees
  • Medical expenses—must exceed 7.5% of adjusted gross income
  • Mortgage interest
  • Savers Credit—for deductions to IRA, 401(k), 403(b) or other retirement plans
  • Solar tax credit
  • State and local taxes
  • Student loan interest deduction

There are additional deductions for those who work at home as self-employed freelancers.

High-Income Earners

The SECURE Act reduces the tax obligation of those earning a high wage.  The IRS defines a high-income earner as anyone with income in the top three tax brackets—over $170,050 for a single person or married filing separately; over $340,101 when married filing jointly.

  • Minimum age for the required minimum draw (RMD) to 72
  • Eliminates age limit for contributing to traditional IRA accounts
  • Increases annual contribution limits for 401(k) and 403(b) accounts
  • Increases the wage base for Social Security to $142,800
  • Increases income ceiling for Roth IRAs
  • Increases limits for long-term care premium deductions

By allowing high-wage earners to make additional contributions, there is a reduction in current tax liability while increasing your retirement funds.

Work Expenses for W-2 Employees

The Tax Cut and Jobs Act (TCJA) of 2017 eliminates most tax deductions for non-reimbursed employee expenses. The exception is reservists in the military, qualifying performing artists, work expenses relating to impairment, and fee-basis government officials.

Eligible employees can claim travel costs, vehicle costs, work clothes, and meals. The taxpayer must prove the business purpose, relationship, expense amount, and time and place. 

Those in the K-12 education field can deduct up to $300 for some classroom and professional development expenses.

You can only take eligible W-2 employee deductions if you itemize. A simple tax return with the standard deduction is easier, but itemizing can provide substantial savings.

Business Owners, Self-Employed, and Freelance Workers

Business owners, freelancers, and self-employed can deduct business expenses, whether taking the standard deduction or itemizing. “Above the line” tax-deductible expenses are deductions you can claim regardless of whether you itemize.

You may deduct necessary and ordinary business expenses—not personal expenses.

Home Office Deduction

The home office deduction is available when using an area of the home exclusively for work. If you are an employee using the space to work remotely, you do not qualify. You must be self-employed, receiving a 1099, not a W-2.

To take a home office deduction, you must answer yes to all of the following questions:

  • Is part of your home used in connection with business or trade?
  • Is the use exclusive and regular?
  • Is this your principal place of business?

If you answer yes to the above, you qualify for the deduction. Other qualifying factors include meeting customers, clients, or patients in your home or using a separate structure on your property for business.

Self-Employment Tax

When self-employed or freelancing, you pay a federal tax of 15.3% on your income. This is the equivalent of the Medicare and Social Security taxes businesses pay for employees. You must pay the tax if earning over $400 in freelance income, even if you also receive a W-2 as an employee.

Self-employment tax applies to about 92.35% of your net income, but half is deductible. Calculate the tax on Schedule SE, then subtract 50% and enter that amount on line 15 of Form 1040.

You may also deduct the cost of healthcare premiums, including medical, dental, and long-term care insurance for yourself, your spouse, and your dependents if no employer plan is available.

If you underpay your self-employment estimated taxes, the IRS charges a penalty and interest on penalties. 

Get Tax Relief

If you are behind on your taxes, being audited by the IRS, incurring penalties for inappropriately taking the various types of tax deductions, and more, Tax Relief Professional can help.

We assist you by negotiating an agreement with the IRS, can help with audits, reduce your tax debt, stop wage garnishments, bank levies, and more. Contact us to begin the process of negotiating an agreement with the IRS

Drew O. Mark

Drew O. Mark, a tax attorney, draws on a lifetime of financial insight to guide individuals through the labyrinth of taxation. Raised by a financial attorney and a tax consultant, Drew's destiny was woven with fiscal expertise. As he stepped into adulthood, his path inevitably led him to follow in his mother’s footsteps. He became a tax attorney himself. With a profound understanding of the nuances within the tax landscape, Drew's true passion emerges in empowering people to navigate their intricate finances with assurance. Through his writing, he transforms convoluted tax jargon into comprehensible advice, enabling others to confidently maneuver their economic positions within the bounds of the tax system.
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