For some types of expenses, such as medical expenses, only the amount that exceeds a certain percentage of the taxpayer's adjusted gross income (AGI) can be deducted. Currently, taxpayers cannot deduct more than $10,000 in state and local taxes, nor can they deduct home mortgage interest on loan amounts over $750,000. The tax code imposes several limits on the amount of itemized deductions that taxpayers can claim. (Tax expenditures are exclusions, deductions, preferential rates, deferrals, and credits in the tax system that resemble federal spending in that they provide financial assistance for specific activities, entities, or groups of people.) Most of the tax savings from itemized deductions constitute a tax expenditure for the federal government. For instance, $10,000 in deductions reduces tax liability by $1,200 for someone in the 12 percent tax bracket and by $2,400 for someone in the 24 percent tax bracket.īecause deductions reduce the cost of incurring certain expenses, they serve as subsidies for undertaking deductible activities. The change in taxes from deductions depends on the taxpayer's marginal tax rate (the percentage of an additional dollar of income that is paid in taxes). For calendar year 2022, the basic standard deduction amount ranges from $12,950 for a single filer to $25,900 for a married couple filing jointly, with additional amounts allowed for taxpayers who are age 65 or older or blind. Taxpayers benefit from itemizing when the value of their deductions exceeds the amount of the standard deduction. Deductions reduce the amount of income subject to taxation (taxable income). When preparing their income tax returns, taxpayers may choose to take the standard deduction-a flat dollar amount-or to itemize and deduct certain expenses, such as state and local taxes, mortgage interest, charitable contributions, and some medical expenses.
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