For 2024 tax returns, the student loan interest deduction starts to phase out when your modified adjusted gross income hits $80,000 (single filers) and $165,000 (joint filers). The decision to itemize deductions typically comes down to whether your eligible itemized deductions exceed the value of your applicable Standard Deduction. If you have minimal expenses, you’re generally better off claiming the Standard Deduction. For many people, the standard deduction is now so high that their mortgage interest and other items combined don’t exceed it – meaning itemizing would yield no extra tax benefit.
Itemized Deduction vs. Standard Deduction
An itemized deduction is an expense that can be subtracted from your adjusted gross income (AGI) to reduce your taxable income and lower the amount of taxes you owe. Taxpayers can itemize deductions like mortgage interest, charitable gifts, and unreimbursed medical expenses, or choose to take the standard deduction, a fixed dollar amount that varies by filing status. An itemized deduction is an expense that can be subtracted from your adjusted gross income (AGI) to reduce your tax bill. Taxpayers can itemize deductions or claim the standard deduction that applies to their filing status. Itemized deductions must be listed on Schedule A of Form 1040 and may include mortgage interest, charitable gifts, and unreimbursed medical expenses.
A tax credit is an amount that can be subtracted directly from your tax bill or, in some cases, added to your tax refund. For example, if you have a $1,000 bill and claim a $250 credit, you owe $750. Staying aware of these pitfalls can save you a headache, an IRS notice, or missing out on a deduction you deserve. When in doubt, consult IRS Publication 936 (Home Mortgage Interest Deduction), which offers detailed guidance and worksheets for things like the interest limitations, or seek advice from a tax professional. It’s worth noting that the current high standard deductions are a result of the Tax Cuts and Jobs Act (TCJA) of 2017, which roughly doubled the standard deduction starting in 2018.
You have the option to take the standard deduction or itemize your deductions. If the value of expenses you can itemize is greater how to reduce your tax bill with itemized deductions than the standard deduction, then it likely makes sense to itemize. If you qualify for the deduction, you can claim it either using the Direct Method or Simplified square footage method. The Simplified square footage method assigns a flat $5 per square foot rate to your home office up to 300 square feet, or $1,500 per year. In addition to itemized deductions, the Qualified Business Income deduction is also a below-the-line deduction.
Popular tax deductions to claim on your tax return
You can claim certain itemized deductions without receipts, such as rent and utilities for a home office, but not much else. It’s important to provide documentation for most expenses to have proof of the amount, purpose, and date. You should itemize your deductions if the total amount exceeds that of your standard deduction. For others, the standard deduction provides a bigger benefit, making the mortgage interest essentially moot for tax purposes. Next, we’ll dive deeper into how to decide between standard and itemizing, and the specific rules (and limits) that apply if you choose to deduct your mortgage interest.
The personal exemption disappeared with the TCJA, but the child tax credit doubled and applied to more families. Itemizing deductions allow taxpayers to subtract certain expenses from their Adjusted Gross Income (AGI), reducing their taxable income. Unlike the standard deduction, which is a flat amount based on filing status, itemizing lets you deduct specific expenses if they exceed the standard deduction amount. Uncovered or out-of-pocket medical expenses, especially surprise ones, can be painful. (Emergency savings, anyone?) Fortunately, if these add up to more than 7.5% of your adjusted gross income, you may be able to deduct them on your taxes. This is true for your spouse’s and dependents’ health care services too, including doctor or dentist fees, hospital care, prescriptions, and even addiction treatment.
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The interest deduction might not be the driving factor in which homes to keep or sell, but it’s part of the cost equation. Always ensure you’re within the allowed two-home limit and the debt cap. That’s a substantial savings because those dollars removed by the standard deduction are not taxed at all.
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For taxpayers who are married and filing jointly, the standard deduction is $29,200 in 2024 and $30,000 in 2025. You can generally deduct unreimbursed medical and dental expenses, long-term care premiums, home mortgage interest, charitable donations, certain taxes, casualty and theft losses, and some gambling losses. If supporting children and other relatives is a big part of your life, you’ll want to cash in at tax time. Even changing your filing status to head of household can have a big effect on your tax bill. If you made contributions to your HSA, you’ll likely receive a Form 5498-SA from your HSA provider.
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For 2024, the amount of your student loan interest deduction is gradually reduced (phased out) if your MAGI is between $80,000 and $95,000 ($165,000 and $195,000 if you file a joint return). You can’t claim the deduction if your MAGI is $95,000 or more ($195,000 or more if you file a joint return). However, this deduction is not automatic for everyone; you must itemize deductions on your tax return (Schedule A of Form 1040) to claim it.
Tax deductions should not be confused with tax credits, which directly reduce your tax bill. If you calculate your taxes due as $14,000 and are eligible for a $1,000 tax credit, your bill is cut by $1,000 to $13,000. “If you’re unmarried and supporting a dependent, you may qualify for head of household status. Some of the highlights include a preferential tax bracket and a higher standard deduction,” Burke says.
- Keep in mind, there are income limits on contributing to a Roth IRA.
- Roth IRA accounts function in the opposite manner as traditional IRAs, allowing you to make after-tax contributions (no current deduction).
- Tax deductions subtracted from your AGI are called below-the-line deductions.
- There’s no limit to how many years you can claim it, but it phases out if your modified AGI is above $80,000 (single) or $160,000 (joint).
- For many people, the standard deduction is now so high that their mortgage interest and other items combined don’t exceed it – meaning itemizing would yield no extra tax benefit.
Itemized Deduction vs. Standard Deduction: The Key Choice 💰
In summary, mortgage interest can absolutely reduce your taxable income, but only in the context of itemizing deductions. It’s a valuable tax break for those who can use it – typically higher-income homeowners with larger mortgages or multiple deductible expenses. If you itemize your deductions, “health-related expenses are deductible if they exceed 7.5% of your adjusted gross income,” says Gaymon.
- Like some other credits, this one phases out as your income increases.
- The QBI deduction (also known as the Section 199A deduction) was introduced by the TCJA in 2018.
- Taxpayers must save all receipts and documentation of expenses reported in case the Internal Revenue Service (IRS) requests them in an audit.
- Unlike the standard deduction, which is a flat amount based on filing status, itemizing lets you deduct specific expenses if they exceed the standard deduction amount.
Luckily, all of the tax deductions we note below are “above-the-line” deductions, which means you don’t have to go to the trouble of itemizing to claim them. Modified adjusted gross income (MAGI), on the other hand, is a bit more complex. It takes your AGI and makes further adjustments by adding back certain deductions that were subtracted from your AGI, such as student loan interest, IRA contributions and foreign earned income. Additionally, MAGI might include some income sources that aren’t part of your AGI, like tax-exempt interest from municipal bonds.