End-of-Year Tax Tips – Deductions

By Mitchell J. Smilowitz, CPA

As the end of the 2023 tax year approaches, it’s a good time to begin preparing for tax filing season. The JRB has prepared a two-part series of articles to get you started. This article describes federal tax deductions for which you may be eligible. Part Two discusses tax credits.

Not sure what the difference is between tax deductions and tax credits? Find the answers here.

Maximize Your JRB Retirement Plan Contribution

Increasing your JRB retirement plan contribution is one of the most effective tax reduction strategies available. Contributions to your JRB account reduce your taxable income dollar-for-dollar up to federal limits. For example, $1,000 invested in your retirement account reduces your taxable income by $1,000. Retirement savings also build long-term financial security. This tax benefit is available regardless of whether you itemize or take the standard deduction.

For 2023, the salary reduction contribution limit for your JRB account is $22,500. Those age 50+ can contribute an additional $7,500 for a total of $30,000. The limit for all contributions to your JRB account (including employer contributions) is $66,000, $73,500 for those age 50 and over.

Does Itemizing Your Tax Deductions Make Sense for You?

The standard deduction is $13,850 for those who are single or married and filing separately; $27,700 for married couples filing jointly; and $20,800 for a single head-of-household.  If your itemized deductions do not exceed this amount, it makes more sense to claim the standard deduction.

Itemized Tax Deductions

Itemized tax deductions can reduce the amount of your income before you calculate the taxes you owe. Here are some of the itemized tax deductions for which you may be eligible.

• State and Local Taxes.  Property taxes and state and local income taxes can be deducted up to a maximum of $10,000 if single or married filing jointly; $5,000 if married and filing separately.
• Interest Paid on Your Home Mortgage and home-equity loan (or line of credit) can be deducted on the first $1 million in mortgage debt ($750,000 on houses purchased after December 15, 2017). If you pay “points” when you first originate your mortgage, you can choose to deduct them gradually over the life of the loan or all at once. You can deduct the interest paid on a home equity loan only if the funds are used to buy, build or “substantially improve” your home.
• Student Loan Interest. Interest paid on student loans can be deducted up to a maximum of $2,500 for 2023, but there are income limits. You can deduct student loan interest even if you do not itemize.
• Teachers' Educational Expenses. An eligible educator can deduct up to $300 of any unreimbursed expenses for classroom materials, such as books, supplies, computers (including related software and services) or other equipment that are used in the classroom. Educators can take this deduction even if they do not itemize.
• Unreimbursed Medical and Dental Expenses that exceed 7.5% of your Adjusted Gross Income (AGI) can be deducted to reduce your taxes. This includes health insurance premiums and qualified long-term care premiums. For example, if your AGI is $50,000, you can deduct unreimbursed medical expenses that exceed $3,750 (7.5% of $50,000).
• Charitable Contributions. Donations to public charities, including donor-advised funds, are generally deductible, but limits may apply to high earners.

• Business or Charitable Use of Car.  If your car is only used for business purposes, you can deduct its entire cost of ownership and operation (subject to certain limits). If your car is used for both business and personal purposes, you can only deduct the cost of its business use. Calculate the deduction by multiplying the miles driven for business or charity by the standard mileage rate (65.5 cents/mile for business and 14 cents/mile for charity).

Summary

Tax deductions allow you to reduce your taxable income. This means that you pay taxes on less income than you actually earn. Increasing your contribution to the JRB retirement plan is your best tax reduction strategy for three reasons:

• You reduce your taxable income by $1 for each $1 you contribute.
• You build long-term financial security without paying taxes until you withdraw the funds in retirement – when you’ll probably be in a lower tax bracket.
• You receive this tax reduction regardless of whether you take the standard deduction or itemize.

Itemizing your tax deductions only makes sense if your total itemized deductions exceed the standard deduction of $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for single heads of household. Remember, contributions to your JRB retirement account are available regardless of whether you itemize other deductions.

Please contact the JRB via email or by calling 888-JRB FREE (572-3733) if you have questions about reducing your taxes.

This article is intended for informational purposes only. Please consult a tax professional for specific tax advice.

November 2023