Tax Deductions Guide 20 Popular Breaks in 2022

Tax deductions & tax breaks

In this article, you will get to know how to avail of tax deductions and lower your taxes in the year 2022. We would also provide comparative insights of the deductions in tax years 2021 and 2022 and other associated information you should know.

Do you want to lower your taxes and save money? Well, all of us do. Tax deductions and tax credits can be two very important means to help you save a lot on your taxes, provided, you know what they are, how they are calculated, how they work and how to make the best use of them. 

Here, we will discuss everything you should know in this regard.

What is a Tax Deduction?

As the name suggests, a tax deduction reduces your taxable income and hence reduces your tax liability. When you subtract the amount of the total tax deduction from your total income, you get your taxable income. The more your deduction is, the lower is your taxable income. The lower your taxable income is, the lower your tax bill.

What do we mean by a Tax Credit?

A tax credit is a monetary reduction in your original tax bill. Most of these credits are not refundable. However, you can claim refunds on some tax credits. For example, if you owe $500 in taxes but qualify for a tax credit of $1,000, you will receive a check for the differential amount of $500. Typically, a tax credit can further lower your tax bill, as compared to a tax deduction. The following table will make it clear-

 

A Tax Deduction of $10,000

 A Tax Credit Of $10,000

Adjusted Gross Income

$100,000

$100,000

Minus tax deduction

($10,000)

 

Taxable income

$90,000

$100,000

Tax rate applicable

25%

25%

Calculated tax

$22,500

$25,000

Minus tax credit

 

($10,000)

Total Tax Bill

$22,500

$15,000

How to Claim Tax Deductions?

In general, you can claim tax deductions through any of the two ways: the standard deduction or itemized deductions. You are not allowed to do both

A. The Standard Deduction for Tax Years 2021 and 2022

The standard deduction is mainly a blanket reduction in your AGI (Adjusted Gross Income). The amount of deduction you qualify for depends on your tax filing status. Here is a break-down-

Filing Status

Tax Year 2021

Tax Year 2022

Single filer

$12,550

$12,950

Head of household

$18,800

$19,400

Married, filing jointly

$25,100

$25,900

Married, filing separately

$12,550

$12,950

Please note that a bigger standard deduction is earmarked for people over 65 years of age or those who are blind.

B. Itemized Deductions

When you opt for itemizing, it allows you to reduce the taxable income by choosing from the plethora of tax deductions you qualify for. The more you are able to deduct, the less will be your tax bill.

Which one should you opt for: itemized or standard Tax Deduction?

The following points will help you choose the best one for yourself-

  • If your standard deduction is lower than the total of your itemized deductions, you will probably opt to itemize. However, please note that itemizing normally takes more time, involves more forms and you will need to have enough proof that you are entitled to avail of the deductions.
  • If the total of your standard deduction is more than that of your itemized deductions, you may be tempted to opt for the standard deduction. the process is faster as compared to itemizes deduction.
  • Most people opt for the standard deduction these days and this may seem to be the better option for you. If you are confused, you may take the help of tax software or tax advisor. Both these will have a ‘rundown’ of your return both ways to figure out which method lowers your tax bill more

Some Popular Tax Deductions and Tax Credits for individual Taxpayers

As we have mentioned, hundreds of deductions and credits are available to help you reduce your tax bill. Here we will discuss a handful of some popular ones –

🔹 American Opportunity Tax Credit

This tax credit allows you to claim the expenditure you made on books, tuition, school fees and equipment. You can claim the entire amount of the first $2,000 of such expenses plus 25% of the next $2,000. The total should not exceed $2,500. Please note that such expenses should not include expenses made on living or transportation.

🔹 Child Tax Credit

For the 2021 tax year, you can claim up to $3,600 per child in this category. Some families have already received 50 % of this credit as advance payments during the pandemic period.

🔹 Child and Dependent care Tax Credit

In general, this credit is provided to cover a certain percentage of daycare and similar expenses made for a child under the age of 13, parents unable to care for themselves, a spouse or another dependent. For the tax year 2021, the maximum limit you can claim is 50% of $8,000 for one dependent or $16,000 for two or more dependents.

🔹 Student Loan Interest Deduction

Here, you can deduct a maximum of $2,500 from the taxable income if you have availed of a student loan. The deduction can be availed against the interest paid on student loans.

🔹 Lifetime Learning Credit

You can claim a deduction of 20% against the first $10,000 you paid against tuition fees. The maximum amount you can claim is $2,000. You can also claim against expenses incurred for books or supplies required for your coursework. Please note that you can’t claim for expenses made on living or transportation.

🔹 Adoption Credit

You can claim for the cost of adopting a child. For the tax year 2021, you can claim up to $14,440 per child.

🔹 Earned Income Tax Credit

The amount of credit you can claim here depends on factors such as your marital status, income and the number of dependent children you have. For the 2021 tax year, you can receive credits between $1,502 and $6,728. You can explore this option to lower your tax bill if your AGI is below $57,000.

🔹 Deduction against Charitable Donations

If you opt for itemizing, you may deduct the value of your charitable gifts from your taxable income. Such gifts may include cash or property, like clothes or a car. For the tax year 2021, you can deduct $300 per person on your tax return, without itemizing. The married people filing jointly can deduct up to a maximum of $600.

🔹 Deduction against Medical Expenses

In this category, you can claim for deduction against qualified, unreimbursed medical expenses. Please note that in a particular tax year, you can claim such expenses that are over 7.5% of your AGI.

🔹 Deduction for State and Local Taxes

You may claim for deduction against property taxes, state/ local income taxes or sales taxes paid. The maximum deduction allowed is $10,000 for single filers and $5,000 if married filing separately.

🔹 Gambling Loss Deduction

You can claim a deduction against losses and expenses made in gambling, only if they are related to a win. This means the expense of $100 you made to buy lottery tickets is not deductible from taxes unless you win and report, at least an amount equal to $100. in any case, you can’t claim for deducting more than the winning amount.

🔹 Deduction for Mortgage Interest

This tax deduction is devised to make homeownership more affordable. It has made provisions to deduct the federal income tax paid by qualifying homeowners. Here, the amount of mortgage interest they pay is deducted from their taxable income.

🔹 Deduction for IRA Contributions

You may be able to deduct if you have made contributions to a traditional IRA, you can claim for deduction from your taxable income. However, the amount to deduct will depend on your income and if you or your spouse is benefitted from a retirement plan at the workplace.

🔹 Deduction for 401(k) Contributions

The IRS deducts the contribution from your salary into a 401(k). For the tax year 2021, the contribution limit was fixed at $19,500. For people aged 50 or above, this limit was $26,000. However, for the year 2022, the contribution limit has been increased to $20,500 per year. For people aged 50 or above, this limit was increased to $27,000. For employees, these retirement accounts are normally sponsored by employers. Self-employed people can also open their own 401(k)s and claim for tax deductions.

🔹 Deduction for Health Savings Account (HSA) Contributions

Contributions made towards HSAs are tax-deductible. The withdrawals are tax-free as well, provided you use them towards qualified medical expenses. For the tax year 2021, the coverage contribution limit was fixed as $3,600 if you had high-deductible health coverage for yourself only. For family high-deductible coverage, the contribution limit was fixed as $7,200. People aged 55 or above can contribute an additional $1,000. In the tax year 2022, the individual coverage contribution and family coverage limit are fixed at $3,650 and $7,300 respectively.

🔹 Deduction for Self-employment Expenses

Self-employed people such as freelancers, contractors etc. can claim tax deductions in this category.

🔹 Saver’s Credit

If you have made contributions to an IRA, 403(b), 401(k), or certain other retirement plans, you may claim between 10% and 50% of the contribution. The maximum limit for single filers is $2,000 and $4,000 if filing jointly. The percentage of the deduction depends on your income and filing status.

🔹 Deduction for Educator Expenses

If you are a school teacher or an eligible educator, you can claim a deduction of up to $250 against the expenditure made on classroom supplies.

🔹 Home Office Deduction

If you are using a part of your home exclusively for business-related activities, you can claim for deducting the expenses made towards rent, real estate taxes, utilities, maintenance, repairs and other related expenses.

🔹 Residential Energy Credit

You can claim a tax deduction against the installation cost of solar energy systems, including solar panels and solar water heaters. The limit is fixed at 26% of such costs.

🔹 Bonus: Recovery Rebate Credit

As per the IRS figures, most people have received the stimulus checks (called the third economic impact payment) disbursed between March and December of 2021. But if you think you qualified for this payment and have not received it yet, or if you think you received less than your eligibility, you may claim the funds. You may do so through the recovery rebate credit while filing your tax return for the year 2021.

Accounting Professionals & Specialized Experts

Want quick help from accounting software experts? Get in touch with our team members who can install, configure and configure your software for you. Proficient in fixing technical issues, they can help you quickly get back to work whenever you encounter an error in Sage software. Our team is available 24/7 365 days to assist you. To get in touch.


Sage Chat help desk
Sage Chat help desk

Customer Service

AVAILABLE 24/7

Chat with us

HOURS OF AVAILABILITY VARY
Related Posts:

Report Your Issue

(Didn't find what you were looking for! Report your issue and get customized help from our Sage experts.)



    Sage Version

    Edition Year

    No of User: Licence

    Operating System:

    Help Needed:

    Write your Issue

    Further Reading