Key income tax deductions not to miss

By Elliot Raphaelson
Posted on February 01, 2024

It is no secret that the federal income regulations are very complex. As a result, many deductions are missed by individuals when they file their tax returns. I’ll discuss some of these deductions below.

Because of the increase in standard deductions, according to the IRS, almost 88% of tax filers used the standard deduction on their 2020 tax return. For your 2023 tax return, the standard deduction was increased by 7% from last year. For individuals, the standard deduction is $13,850; for joint filers, the deduction is $27,700.

Medical premium deductions

Many individuals who are self-employed use the standard deduction. Even if you are self-employed and use the standard deduction, you are allowed to deduct Medicare premiums associated with Part B, Part D, Medigap and Medicare Advantage. You are considered self-employed if you are a sole proprietor using Schedule C, a partner filing Schedule E, a limited liability member or an S corporation shareholder with at least 2% of the company stock. This deduction is not subject to the 7.5% of adjusted income test associated with itemized deductions.

If you are self-employed and have been using an itemized deduction because of high medical premiums and other healthcare costs, you should make sure that you would not have lower taxes if you use the standard deduction and deduct the healthcare premiums and other healthcare expenses from your self-employed income on the appropriate schedule, such as Schedule C.

Additional retirement contributions after age 50

If you contribute to retirement accounts such as IRAs or a 401(k) and have reached age 50, you should take advantage of the extra contributions you can make.

On your 2023 or 2024 tax return, you are allowed to make the following additional contributions: For IRAs, you can contribute $1,000 in addition to the upper limits ($6,500 for 2023; $7,000 for 2024). For 401(k) plans in 2024, you can contribute an additional $7,500 above the $22,500 maximum for individuals under 50.

As long as you file a joint return, you are allowed to make IRA contributions to a spouse’s IRA even if the spouse does not work or if the spouse does not earn enough to make the maximum IRA contribution. The only requirement is that the working spouse has sufficient income to cover both IRA contributions.

For example, the maximum IRA contribution for 2024 is $7,000. So, if your earned income is at least $14,000, you can make an IRA contribution for yourself of $7,000 and a contribution of $7,000 for your spouse, even if your spouse has no earned income.

Qualified charitable distributions

As long as you are at least 70 1/2, you are allowed to make qualified charitable distributions (QCDs) of up to $100,000 a year directly from your IRA account to a qualified charity. If you are required to take required minimum distributions (RMDs) in 2024 and you intend to make QCDs, then you will be reducing your taxes by using the QCD option.

For example, suppose you are in the 22% tax bracket, which means that when you file your tax return, the last dollar of your taxable income is taxed at 22%. This is known as your marginal tax bracket.

In this example, if you make a $1,000 charitable contribution using the QCD option, you will have reduced your taxes by $220 (22% of the amount of your contribution).

Some IRA custodians establish a separate account for you to make the contribution directly from your IRA to the charity; some custodians will prepare a check for the charity and send it to you to submit; still, other custodians will send the check to the charity directly. If you want to use the QCD option, ask your IRA custodian which alternative the financial institution uses.

Bottom line: Use all the allowable deductions to reduce your taxes. Don’t hesitate to ask your tax preparer if you are taking all the deductions you are entitled to.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.