Filers Will Get a Bigger Tax Break in 2023

Talk about good news.

When it comes to filing a tax return, you have options. You can claim the standard deduction, or you can itemize deductions in the hopes of snagging a higher tax break.

Itemizing deductions can sometimes make sense, but not always. If you own a home, for example, you may find that between your mortgage interest and property taxes, you have a high enough deduction for itemizing to make sense. The same might hold true if you're eligible to claim a large medical expense deduction.

But if you don't have a whole lot of individual expenses to write off, you can fall back on the standard deduction instead. In fact, that's what the bulk of filers do, and have done for years.

Meanwhile, the standard deduction is increasing for the 2023 tax year. That means many filers will get an opportunity to reap even more savings.

How tax deductions work

Many people confuse tax deductions with tax credits, even though they work differently. A tax credit is a dollar-for-dollar reduction of your tax liability. If you owe the IRS $1,000 and qualify for a $1,000 tax credit, your tax liability will be whittled down to $0.

A tax deduction, on the other hand, exempts a portion of your income from taxes. And the amount of savings that amounts to will hinge on the tax rate that applies to you.

So, let's say you qualify for a $1,000 tax deduction. That means you won't be taxed on $1,000 of your earnings. If your tax rate is 22% (keeping in mind that the U.S. tax system is a marginal one that taxes you more on your highest dollars of earnings), that $1,000 tax deduction results in $220 of savings.

This also means that the higher the standard deduction is, the more income you can exempt from taxes -- and the more savings you can enjoy.

The standard deduction is rising

The standard deduction you're eligible for will depend on your tax-filing status. But here's a summary of what next year's standard deduction will look like and how it compares to the current standard deduction:

Should you claim the standard deduction in 2023?

That depends on the deductions you're eligible for. If you're buying a home, for example, you may have more of a reason to itemize deductions on your 2023 tax return than you had in the past.

Ultimately, deciding between the standard deduction versus itemized deductions is pretty easy. All you really need to do is run the numbers and see which one is higher.

If you're single and your itemized deductions total $11,000 in tax year 2023, then claiming the standard deduction is really your best move. But if you're looking at $14,000 in eligible deductions, then it pays to itemize, even if that involves a bit more work.