What Is a Tax Deduction?
A tax deduction is an amount you can subtract from your taxable income to lower the taxes you owe. You may choose the standard deduction—a set amount—or opt to itemize deductions, detailed on Schedule A of your tax return. If your itemized expenses outweigh the standard deduction for your filing status, it makes sense to itemize. Common allowable itemized deductions include mortgage interest, charitable donations, medical expenses, and state and local taxes.
Key Takeaways
- Tax deductions reduce your taxable income, lowering the amount of tax owed.
- Choose between the standard deduction or itemized deductions on Schedule A of Form 1040 or 1040-SR.
- The Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction and modified several other deductions.
- The TCJA eliminated or capped many itemized deductions such as the mortgage interest deduction.
- Keep receipts if you itemize to substantiate your expenses.
Understanding Tax Deductions
Taxpayers can take the nearly doubled standard deduction introduced by the TCJA or itemize their deductions. Here are the standard deduction amounts for the 2023 and 2024 tax years:
| Filing Status | 2023 Standard Deduction | 2024 Standard Deduction |
|---|---|---|
| Single | $13,850 | $14,600 |
| Married Filing Separately | $13,850 | $14,600 |
| Heads of Household | $20,800 | $21,900 |
| Married Filing Jointly | $27,700 | $29,200 |
| Surviving Spouses | $27,700 | $29,200 |
Additional deductions are available for taxpayers at least 65 years old or blind. You can only opt for the standard deduction or itemize, but not both, in the same tax year.
Common Tax Deductions
Common federal income tax deductions include:
- Up to $2,500 of student loan interest
- Mortgage interest on up to $750,000 of secured home mortgage debt ($1 million if purchased before Dec. 16, 2017)
- Contributions to traditional retirement accounts such as IRAs and 401(k)s, up to annual limits
- Up to $10,000 of state and local taxes
- Contributions to Health Savings Accounts (HSAs), up to annual limits
- Medical and dental expenses exceeding 7.5% of your adjusted gross income
- Self-employment expenses, including home office deduction and health insurance premiums deduction
- Charitable contributions
- Investment losses
- Gambling losses
Most of these should be recorded on Schedule A, but there are exceptions, such as Forms 8949 and D for investment losses.
Deductions Impacted by TCJA
The TCJA affected many previously common deductions, eliminating or capping several, such as:
- Home equity loan interest (except if used to improve the home)
- Mortgage interest on more than $750,000 of secured mortgage debt
- Unreimbursed work expenses
- State and local tax deductions above $10,000 for a couple
- Professional society dues
- Moving expenses (except military personnel)
- Casualty and theft losses (excluding federally declared disaster areas)
- The personal exemption
- Tax preparation fees
- Alimony payments
- Various miscellaneous itemized deductions
Tax Deductions for the Self-Employed
Many self-employed individuals and gig workers still benefit from specific deductions despite TCJA changes. Important deductions include those for half of Medicare and Social Security taxes, the home office deduction, and health insurance premiums deduction. Retirement plans such as SEP-IRA, SIMPLE IRA, and solo 401(k) offer deferred taxes on contributions.
Small Business Tax Deductions
Small businesses can deduct various expenses to lower taxable income, including:
- Advertising and promotion
- Bad debts
- Books
- Business travel
- Charitable contributions
- Continuing education
- Equipment
- Insurance
- Legal and professional fees
- License and regulatory fees
- Loan interest
- Pass-through tax deduction
- Repair and maintenance
- Local, sales, and property taxes
- Vehicle expenses
- Startup costs
Tax Deductions vs. Tax Credits
Tax deductions reduce your taxable income, whereas tax credits lower the taxes you owe directly. Some tax credits are refundable, meaning they can lower your tax liability below zero, resulting in a refund. A tax credit is generally more beneficial than a tax deduction because it reduces taxes owed, dollar for dollar.
Example: Calculating Tax Deductions
Here’s an enhanced example: Sarah, a single taxpayer with a $50,000 gross annual income, must decide between itemizing or taking the standard deduction. Her deductible expenses include $8,000 mortgage interest, $3,000 state and local taxes, $1,200 charitable contributions, $2,500 medical expenses (exceeding 7.5% AGI), and $800 unreimbursed business expenses.
Sarah’s Calculations
- Mortgage interest: $8,000
- State and local taxes (SALT): $3,000
- Charitable contributions: $1,200
- Medical expenses (above 7.5% of AGI): $2,500
- Unreimbursed business expenses: $800
- Total Itemized Deductions: $15,500
- Standard Deduction for Single (2024): $14,600
Since Sarah’s potential itemized deductions exceed the standard deduction, she should claim the standard deduction.
Standard Deductions vs. Itemized Deductions
Generally, U.S. taxpayers must decide whether to itemize deductions or take the standard deduction based on which minimizes their taxable income most effectively. Itemizing requires detailed records of eligible expenses, while claiming the standard deduction is simpler: it only requires entering the standard figure.
State Tax Deductions
Most states align closely with federal forms but may have additional or different restrictions on deductions. For instance, taxpayers usually can’t itemize state taxes if using the federal tax deduction. Reviewing your state’s forms ensures you’re aware of extra deductions.
Limits on Tax Deductions
Certain deductions have limitations. For example, mortgage interest deductions cap at $750,000 of secured mortgage debt (or $1 million for homes bought before Dec. 16, 2017). In 2023 and 2024, medical expenses must surpass 7.5% of your AGI to be deductible.
Capital Loss Carryforward
Not all deductions appear on Schedule A. For losses noted on Schedule D, taxpayers can deduct up to $3,000 ($1,500 if married filing separately) in capital losses each year. Excess losses can be carried forward.
What are Tax Deductions?
Tax deductions reduce your taxable income. These can include mortgage interest, medical expenses, charitable donations, and other eligible expenses.
What Can I Write Off on My Taxes?
There are many deductible expenses and credits, including mortgage interest, retirement plan contributions, student loan interest, HSA contributions, and more.
How Can I Maximize My Tax Deductions?
You can bolster your deductions whether you choose to itemize or claim the standard deduction through contributions to traditional retirement accounts, charitable donations, and carefully documenting deductible expenses.
Should I Itemize, or Should I Claim the Standard Deduction?
The choice between itemizing and claiming the standard deduction hinges on your specific financial situation. Compare your itemized deductions against the standard deduction to determine which option better minimizes your taxable income.
The Bottom Line
A tax deduction reduces taxable income, lowering your tax bill. Taxpayers should aim to choose between itemizing or standard deduction based on which yields a lower tax liability.
Related Terms: tax credits, adjusted gross income, capital losses, IRS forms, taxable income.
References
- Tax Policy Center. “How Did the TCJA Change the Standard Deduction and Itemized Deductions?”
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2023”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2024.”
- Internal Revenue Service. “Rev. Proc. 2022-38”, Page 14.
- Internal Revenue Service. “Internal Revenue Bulletin: 2023-48.”
- Internal Revenue Service. “Topic No. 551 Standard Deduction”.
- Internal Revenue Service. “Topic No. 456 Student Loan Interest Deduction”.
- Internal Revenue Service. “Publication 936 (2022), Home Mortgage Interest Deduction”.
- Internal Revenue Service. “Retirement Topics - IRA Contribution Limits”.
- Internal Revenue Service. “Topic No. 503 Deductible Taxes”.
- Internal Revenue Service. “Publication 969 (2021), Health Savings Accounts and Other Tax-Favored Health Plans”.
- Internal Revenue Service. “Publication 502 (2022), Medical and Dental Expenses”.
- Internal Revenue Service. “Self-Employed Individuals Tax Center”.
- Internal Revenue Service. “Charitable Contribution Deductions”.
- Internal Revenue Service. “Topic No. 409 Capital Gains and Losses”.
- Internal Revenue Service. “Topic No. 419 Gambling Income and Losses”.
- Internal Revenue Service. “About Schedule A (Form 1040), Itemized Deductions”.
- Internal Revenue Service. “About Schedule D (Form 1040), Capital Gains and Losses”.
- Internal Revenue Service. “Reporting IRA and Retirement Plan Transactions”.
- Congress.gov. “H.R.1 - An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”.
- Pew Research Center. “The Self-employed are Back at Work in Pre-COVID-19 numbers, But Their Businesses Have Smaller Payrolls”.
- Internal Revenue Service. “Retirement Plans for Self-Employed People”.
- Internal Revenue Service. “Publication 535 (2021), Business Expenses”.
- Tax Policy Center. “State Individual Income Tax Rates and Brackets for 2022”.
- Turbo Tax. “11 Strange State Tax Laws”.
- Internal Revenue Service. “About Schedule D (Form 1040), Capital Gains and Losses”.
- Internal Revenue Service. “Topic No. 409 Capital Gains and Losses”.
- Internal Revenue Service. “Credits and Deductions for Individuals”.
