The 2023 tax season is now in full swing, with the April 15 deadline for filing your federal tax return fast approaching. As you gather your tax documents and prepare to file, one of the best ways to reduce your tax liability and maximize your refund is to claim all eligible tax deductions.
Tax deductions directly lower your taxable income, resulting in a reduced tax bill or a larger refund. With major tax law changes taking effect in 2024, this year presents a final opportunity to utilize deductions before some are scaled back. Read on for tips to make the most of your 2023 tax deductions.
Overview of 2023 Tax Changes
Before diving into deductions for 2023, it helps to understand coming tax changes in 2024 stemming from the Tax Cuts and Jobs Act. While several provisions will remain in effect, such as reduced individual tax rates, some key changes include:
- Elimination of the $10,000 cap on state and local tax (SALT) deductions
- Reduction of the mortgage interest deduction limit
- Changes to the 2023 Child Tax Credit
With higher SALT deductions and a final year of the expanded Child Tax Credit, the 2023 tax year offers a last chance to maximize many deductions before new limits take effect.
Tax Deductions vs. Tax Credits
Before claiming deductions, it helps to understand the difference between deductions and credits:
- Tax deductions reduce your taxable income, resulting in a lower tax bill. Common deductions include mortgage interest, charitable donations, and business expenses.
- Tax credits directly reduce how much tax you owe, dollar for dollar. Examples include the Child Tax Credit, education tax credits, and energy efficiency home improvements credit.
In most cases, a $1 tax credit will save you more than a $1 tax deduction. However, income limits and eligibility rules apply to many credits. When possible, claim all deductions and any credits you qualify for.
Claiming the Standard Deduction vs. Itemized Deductions
You have two options when filing your federal return – claim the standard deduction or itemize your deductions.
- The standard deduction reduces your taxable income by a fixed amount. For 2023, it is:
- $13,850 for single filers
- $27,700 for married joint filers
- Itemizing deductions involves adding up specific categories of deductible expenses and claiming the total amount. Common itemizable deductions include:
- Mortgage interest
- Charitable donations
- Medical and dental expenses
- State and local taxes (SALT)
If your total itemized deductions exceed the standard deduction amount you qualify for, itemizing will lead to greater tax savings. Use the IRS Itemized Deduction Estimator tool to determine which method results in higher deductions for your situation.
Major Tax Deductions You Can Claim
To maximize savings, be sure to claim all tax deductions you qualify for. Here are some of the most common and valuable options:
1. Mortgage Interest Deduction
One of the most valuable deductions homeowners can claim is the mortgage interest deduction. For 2023, you can deduct mortgage interest on up to $750,000 of qualified home loans. This includes interest paid toward:
- Your first home
- A second home like a vacation property
- Home equity loans or lines of credit (total combined debt up to $750,000)
Points paid toward home purchases are also deductible, spread over the loan term. The IRS Deductibility of Points tool helps determine your deduction amount.
Tip: Make January mortgage payments early to deduct 12 months of interest on your 2023 return.
2. Charitable Donations
Donations to qualified charitable organizations, including nonprofits and religious groups, are tax-deductible up to 60% of your adjusted gross income (AGI). This includes:
- Monetary donations
- Values of donated property
- Out-of-pocket expenses for volunteer work
Be sure to retain all donation receipts from the organizations. If your total donations exceed the 60% AGI limit, you can carry forward the excess deduction for up to 5 additional years.
3. Medical and Dental Expenses
Unreimbursed medical and dental fees in excess of 7.5% of your AGI are deductible. This includes expenses like:
- Health insurance premiums
- Doctor/hospital bills
- Prescription medications
- Medical devices
Mileage for medical-related travel over 2022’s rate of 18 cents per mile can also be deducted. Common eligible costs many miss are dental work, vision care, hearing aids, and long-term care premiums.
4. State and Local Taxes (SALT)
In previous years, the SALT deduction was capped at $10,000, but this limit expires at the end of 2023. For your 2023 return, you can fully deduct:
- State income taxes
- Local income and sales taxes
- Real estate and personal property taxes
Claim these on Schedule A when itemizing. The uncapped SALT deduction expires after 2023, so this is the last year to maximize the write-off before the $10,000 limit returns in 2024.
5. Child and Dependent Care Credit
While not a deduction, the Child and Dependent Care Credit offers eligible filers a dollar for dollar reduction in taxes owed. It covers up to 50% of $8,000 in care costs for:
- Children under age 13
- Spouses or other dependents unable to care for themselves
This includes expenses like daycare, babysitters, preschool, and summer day camps. The percentage of costs covered is reduced for higher income filers.
Other Potential Deductions and Credits
Beyond the major options above, there are a variety of other tax deductions and credits available that can help reduce your tax bill, including:
- Self-employment expenses – Deductible costs include home office use, mileage, supplies, health insurance and more
- Student loan interest – Up to $2,500 is deductible subject to income limits
- Energy efficient home improvements – Tax credits up to $500
- Electric vehicle tax credit – Up to $7,500 credit for qualifying EV purchases
- Child Tax Credit – Up to $3,600 per child under age 6 and $3,000 for ages 6-17
The key is staying organized with your tax paperwork so you can claim all deductions and credits you are eligible for.
Common Mistakes to Avoid
To ensure you maximize savings, steer clear of these common errors:
Not claiming deductions you qualify for – Leaving money on the table by missing eligible deductions
Forgetting required documentation – Failing to retain receipts, bank records and other proof need to back up deductions
Entering information inaccurately – Double check figures match documentation to avoid processing delays or audit risk
Illegible handwritten logs – If documenting expenses or mileage, ensure the records are legible
Filing beyond the deadline – Missing the April 15 deadline leads to late filing penalties
Submitting an incomplete return – Omitting required forms or missing signatures can negate deductions
Rounding numbers – Deduct every dollar and cent – rounding leads to lost deductions
Best Practices for Maximizing Deductions
Follow these tips throughout the year to ensure you maximize tax deductions:
Track and retain records – Maintain thorough records like donation receipts and mileage logs to support all deductions
Contribute early to retirement plans – Take full advantage of 401(k) employer matches and IRA limits to reduce taxable income
Bunch medical expenses – Consider scheduling elective exams and procedures in one year if close to the 7.5% AGI threshold
Pay estimated taxes – Making quarterly estimated payments helps avoid underpayment penalties
Consult a tax professional – Tax pros help uncover overlooked deductions and ensure accurate filing
Use the IRS Withholding Calculator – Properly claim allowances on Form W-4 to get tax savings all year instead of just a refund
The Bottom Line
Claiming every eligible tax deduction is one of the smartest ways to reduce your taxable income and maximize refunds. Just be sure to maintain proper documentation and comply with IRS rules to avoid issues. With major tax law changes taking effect in 2024, be sure to utilize this 2023 tax year to make the most of deductions before new limits kick in.
Consulting a trusted tax professional can also help uncover deductions you may be missing. Through proper planning and foresight, you can put the tax code to work for you.