What Is a Tax Deduction?

What Is a Tax Deduction?

Let me explain what a tax deduction really is. It's an amount you subtract from your taxable income, which directly lowers the taxes you owe. You have a choice: take the standard deduction, which is a fixed amount, or itemize your deductions on Schedule A of your tax return.

If your itemized expenses add up to more than the standard deduction for your filing status, you should itemize. Common itemized deductions include mortgage interest, charitable donations, unreimbursed medical expenses, and state and local taxes.

Key Takeaways

Remember, tax deductions come off your taxable income, cutting your tax bill. You pick either the standard deduction or itemize on Schedule A of Form 1040 or 1040-SR. The Tax Cuts and Jobs Act nearly doubled the standard deduction and enhanced some deductions, but it also cut or limited many itemized ones, like mortgage interest. If you itemize, keep those receipts to back up your claims.

Understanding Tax Deductions

As an individual, you can go with the standard deduction, which got a big boost from the Tax Cuts and Jobs Act, or itemize. For 2024, singles get $14,600, married filing jointly $29,200, and so on—check the amounts for 2025 too, as they increase slightly. If you're 65 or older or blind, you get an extra deduction on top.

You can't do both standard and itemized in the same year—that's a hard rule.

Common Tax Deductions

Here are some deductions you can claim: up to $2,500 in student loan interest, mortgage interest on up to $750,000 of debt (or $1 million if bought before late 2017), retirement contributions to IRAs or 401(k)s, up to $10,000 in state and local taxes, HSA contributions, medical expenses over 7.5% of AGI, self-employment costs like home office and health insurance, charitable gifts, investment losses, and gambling losses.

Most go on Schedule A, but some need other forms, like Schedule D for investments. Your 401(k) contributions show up automatically on your paycheck.

Deductions Impacted by TCJA

The 2017 Tax Cuts and Jobs Act changed things—it eliminated or capped deductions like home equity loan interest unless for home improvements, mortgage interest over $750,000, unreimbursed work expenses, state taxes over $10,000 for couples, professional dues, moving costs except for military, casualty losses outside disasters, personal exemptions, tax prep fees, alimony, and miscellaneous items. These changes last until 2025.

Tax Deductions for the Self-Employed

If you're self-employed—and more than 16 million Americans are—you keep some deductions that others lost. Figure out what's business versus personal. Key ones include half your Medicare and Social Security taxes, home office, health insurance premiums, and retirement contributions to SEP IRAs, SIMPLE IRAs, or solo 401(k)s. These retirement deductions are above-the-line, so they work even with the standard deduction.

Small Business Tax Deductions

Businesses deduct expenses from profits to lower taxes. Track everything: advertising, bad debts, books, travel, charitable gifts, education, equipment, insurance, legal fees, licenses, loan interest, pass-through deduction, repairs, startup costs, taxes, and vehicle expenses. Rules are tricky, especially separating business from personal use.

Tax Deductions vs. Tax Credits

Deductions cut your taxable income, while credits subtract directly from your tax bill—some are even refundable. Credits are usually worth more than deductions since they reduce taxes dollar for dollar.

Example of a Tax Deduction

Take Sarah, a single filer with $50,000 income. Her itemized expenses: $8,000 mortgage interest, $3,000 state taxes, $1,200 charity, $2,500 medical over threshold, $800 business expenses—total $15,500. For 2024, standard is $14,600, so she itemizes to save more.

Standard Deductions vs. Itemized Deductions

Choose whichever lowers your income more. The TCJA made standard deductions bigger, so many skip itemizing. If you itemize, keep receipts and use Schedule A; standard is just plugging in the number on your 1040.

State Tax Deductions

Most states mirror federal forms but have their own rates and deductions. Some don't allow itemizing if you take federal standard. Check your state's rules for extras, like age-based exemptions.

Limits on Tax Deductions

Deductions have caps, like mortgage interest up to $750,000 debt, medical over 7.5% AGI. Capital losses can be deducted up to $3,000 yearly, with carryforward for more.

The Bottom Line

Tax deductions let you subtract from income to owe less tax. Pick standard or itemize based on what cuts your bill most.