Understanding Tax Deductions

Tax deductions reduce the amount of income you pay taxes on. When you take a deduction, you lower your taxable income. This means you end up paying less in taxes. This guide explains the most common tax deductions you can claim in the United States.

Standard Deduction

The standard deduction is the most basic tax deduction. You don’t need to keep receipts or records to claim it. The IRS sets the amount each year. For 2024, single filers can deduct $14,600. Married couples filing jointly can deduct $29,200. Heads of household can deduct $21,900.

Most taxpayers take the standard deduction because it’s simple. You claim it on your tax return. You don’t need to do any calculations. The standard deduction makes tax filing easier.

Itemized Deductions

Some people choose to itemize deductions instead of taking the standard deduction. Itemizing means listing each deduction separately. You need records to prove these expenses. It would be best to itemize when your total itemized deductions are more than your standard deduction.

Mortgage Interest

Homeowners can deduct the interest they pay on their mortgage. This applies to loans to buy, build, or improve your main home. The deduction has limits. You can only deduct interest on up to $750,000 of mortgage debt. This limit applies to mortgages taken out after December 15, 2017.

The mortgage interest deduction helps make owning a home more affordable. Your lender sends you Form 1098 each year, which shows how much interest you paid. You use this form when filing your taxes.

State and Local Taxes (SALT)

You can deduct state and local taxes you pay. This includes property taxes and either state income taxes or state sales taxes. The total SALT deduction is limited to $10,000 per year. This limit applies to both single filers and married couples filing jointly.

The SALT deduction helps offset the cost of state and local taxes. Many people who live in high-tax states use this deduction. You need records of the taxes you paid to claim this deduction.

Charitable Contributions

Money or property you donate to qualified charities can be deducted. You must have records of your donations. This includes receipts, bank records, or written statements from the charity. Cash donations are usually limited to 60% of your adjusted gross income.

The charitable deduction encourages giving to good causes. The IRS must recognize the charity as tax-exempt. Religious organizations, educational institutions, and many nonprofits qualify. You can check if an organization qualifies on the IRS website.

Business Deductions

People who run businesses or are self-employed can take many deductions. These deductions reduce their business income. Business deductions must be ordinary and necessary for your business.

Home Office Deduction

If you use part of your home regularly and exclusively for business, you can claim the home office deduction. You can deduct a portion of your home expenses. This includes rent, utilities, insurance, and repairs. The amount is based on the percentage of your home used for business.

The home office must be your principal place of business. It would be best if you used it exclusively for work. This means you can’t use the space for personal activities. You can choose between simplified or regular methods to calculate this deduction.

Business Equipment and Supplies

Businesses can deduct the cost of equipment, supplies, and materials. This includes computers, software, office supplies, and tools. You can either deduct the total cost in the year you buy them or spread it out over several years through depreciation.

These deductions help businesses offset their costs. It would be best to have receipts and records to prove these expenses. The items must be necessary for your business operations.

Travel and Transportation

Business travel expenses are deductible. This includes airfare, hotels, car rentals, and meals. Local transportation for business purposes is also deductible. You can deduct actual car expenses or use the standard mileage rate.

You must keep detailed records of business travel, including the purpose of each trip, dates, and costs. Personal travel expenses are not deductible. Only the business portion of mixed personal and business trips can be deducted.

Medical Expense Deductions

Medical expenses that exceed 7.5% of your adjusted gross income are deductible. This includes payments for diagnosis, treatment, prevention, and prescription medications. Insurance premiums you pay with after-tax dollars also qualify.

Many people don’t get to deduct medical expenses because of the 7.5% threshold. However, those with high medical costs or lower incomes often benefit from this deduction. Keep all medical receipts and records.

Education Deductions

Education expenses can lead to tax savings. The student loan interest deduction lets you deduct up to $2,500 of interest paid on student loans. You don’t need to itemize to claim this deduction. There are income limits that determine if you qualify.

Teachers can deduct up to $300 spent on classroom supplies. This is called the educator expense deduction. You don’t need to itemize to claim it. You must be a K-12 teacher, instructor, counselor, principal, or aide who worked at least 900 hours during the school year.

Retirement Account Contributions

Traditional IRA contributions might be deductible. The deduction amount depends on your income and whether you have a retirement plan. For 2024, you can contribute up to $7,000 to an IRA. If you’re 50 or older, you can add $1,000 more.

Self-employed people can deduct contributions to SEP IRAs, SIMPLE IRAs, or solo 401(k)s. These retirement plans have higher contribution limits than traditional IRAs. The deduction helps reduce both income tax and self-employment tax.

Special Circumstances Deductions

Casualty and Theft Losses

Losses from disasters declared by the president can be deducted. This includes damage from hurricanes, floods, and wildfires. The loss must not be covered by insurance. You must reduce each loss by $100 and reduce your total losses by 10% of your adjusted gross income.

Moving Expenses

Only active-duty military members can deduct moving expenses. The move must be due to a military order. You can deduct reasonable expenses for moving your household goods and personal effects. You can also deduct travel costs, including lodging but not meals.

Keeping Records for Tax Deductions

Good record-keeping is essential for tax deductions. Save receipts, bills, canceled checks, and other documents that prove your expenses. Create a filing system to organize these records. Keep tax records for at least three years from the date you filed your return.

Digital records are acceptable to the IRS. You can scan receipts and keep electronic copies. Many apps and software programs help track deductible expenses. Back up electronic records regularly.

Getting Help with Tax Deductions

Tax deductions can be complex. Consider working with a tax professional if you’re unsure about deductions. CPAs and enrolled agents can help identify deductions for which you qualify. They can also ensure you follow IRS rules and maintain proper documentation.

The IRS website provides detailed information about tax deductions. IRS Publication 17 covers most personal deductions. The IRS also offers free tax help through volunteer programs for eligible taxpayers.

Planning for Tax Deductions

Think about tax deductions throughout the year. Keep good records as you go. This makes tax time easier. Consider bunching deductible expenses into a single year when possible. This strategy helps you exceed the standard deduction threshold.

Look for new tax deductions each year. Tax laws change regularly. New deductions become available while others expire. Stay informed about tax law changes that affect your situation.

Understanding Tax Deduction Limits

Many deductions have limits based on your income. These limits can reduce or eliminate your ability to claim certain deductions. Phase-outs gradually reduce deductions as your income increases. Know the limits that apply to your situation.

The alternative minimum tax (AMT) can affect your deductions. The AMT is a separate tax system with its own rules. Some regular tax deductions aren’t allowed under the AMT. High-income taxpayers should consider the AMT when tax planning.