The Complete Guide To Tax Deductions

Tax deductions reduce your taxable income, which can lower the amount of federal income tax you owe. Understanding how tax deductions work can help you claim the deductions you’re eligible for and potentially reduce your tax bill.

What Is A Tax Deduction?

A tax deduction is an eligible expense that reduces your taxable income.

By reducing your taxable income, deductions can lower the amount of federal income tax you owe. (Tax credits work differently by reducing your tax bill directly — we’ll cover those later.)

For example, say John earned $50,000 and claimed $10,000 in eligible tax deductions. His taxable income would drop to $40,000. Because deductions reduce taxable income, John would owe less federal income tax than he would have without those deductions.

Even if your deductions don’t lower you into a different tax bracket, they can still reduce the amount of tax you owe by lowering your taxable income.

How Tax Deductions Work

Tax deductions reduce your taxable income, which can lower the amount of federal income tax you owe. After determining your adjusted gross income (AGI), you’ll either claim the standard deduction or itemize your deductions. The amount you deduct is then subtracted from your AGI to determine your taxable income.

Here’s a simplified look at how the process works:

1. Calculate your gross income.
2. Subtract any eligible adjustments to income to determine your adjusted gross income (AGI).
3. Decide whether to claim the standard deduction or itemize your deductions.
4. Subtract your deduction from your AGI to determine your taxable income.

What Expenses Can Be Deducted?

The expenses you can deduct depend on whether you’re claiming personal or business tax deductions.

Personal tax deductions often include charitable donations, certain medical expenses, mortgage interest, state and local taxes, and other qualifying expenses. Business tax deductions cover a much broader range of ordinary and necessary expenses incurred while operating a business.

Examples of individual tax deductions include:

• Charitable donations
• Mortgage interest
• Certain medical expenses
• State and local taxes (subject to IRS limits)
• Student loan interest (if eligible)

Examples of business tax deductions include: 

• Business vehicle expenses and mileage
• Office supplies and furniture
• Home office expenses
• Utilities
• Software and subscriptions
• Cost segregation for qualifying commercial real estate

If you run a business, check out our complete list of small business tax deductions to make sure you’re taking all of the tax breaks you qualify for.

Pre-Tax Deductions VS Post-Tax Deductions

Not all tax deductions work the same way. Some deductions reduce your taxable wages before taxes are calculated, while others are taken after taxes have been withheld. Understanding the difference can help you better understand your paycheck and your tax return.

What Is A Pre-Tax Deduction?

A pre-tax deduction is taken from your paycheck before certain taxes are calculated, reducing your taxable wages. Common pre-tax deductions include:

• Traditional 401(k) contributions
• Health Savings Account (HSA) contributions
• Flexible Spending Account (FSA) contributions
• Certain health insurance premiums

Because these deductions are taken before taxes are calculated, they can lower the amount of federal income tax you owe.

What Is A Post-Tax Deduction?

A post-tax deduction is taken from your paycheck after taxes have already been withheld. Common post-tax deductions include:

• Roth 401(k) contributions
• Union dues
• Wage garnishments
• Certain insurance premiums

These deductions don’t reduce your taxable wages because they’re made after taxes have been calculated.

What Are Above-The-Line Tax Deductions?

Above-the-line deductions, also called adjustments to income, are claimed before calculating your adjusted gross income (AGI). Because they reduce your AGI, they may also affect your eligibility for certain tax credits and deductions.

Common examples include:

• Health Savings Account (HSA) contributions
• Student loan interest
• Certain retirement contributions
• Self-employed health insurance premiums

What Are Below-The-Line Tax Deductions?

Below-the-line deductions are claimed after your adjusted gross income has been calculated. Taxpayers can either claim the standard deduction or itemize their deductions, depending on which provides the greater tax benefit.

Itemized deductions may include expenses such as:

• Mortgage interest
• Charitable contributions
• Certain state and local taxes (subject to IRS limits)
• Certain medical and dental expenses

If you’re unsure whether to claim the standard deduction or itemize, choose the option that results in the lowest taxable income.

Standard Tax Deductions VS Itemized Tax Deductions

When you file your tax return, you’ll generally choose between claiming the standard deduction or itemizing your deductions. In most cases, the better option is the one that results in the lowest taxable income.

What Is A Standard Tax Deduction?

The standard deduction is a fixed amount set by the IRS that reduces your taxable income. The amount depends on your filing status and is adjusted periodically for inflation.

Most taxpayers qualify for the standard deduction, although some exceptions apply.

The biggest advantage of the standard deduction is its simplicity. You don’t need to track or calculate individual deductible expenses, and for many taxpayers, the standard deduction provides the greatest tax benefit.

What Is An Itemized Tax Deduction?

Itemizing allows you to deduct certain eligible expenses instead of claiming the standard deduction.

Itemizing requires more recordkeeping because you’ll need documentation for each deduction you claim. However, if your total itemized deductions exceed the standard deduction, itemizing can reduce your taxable income even further.

If you’re not sure which option is better, calculate your total itemized deductions and compare that amount to the standard deduction. Choose whichever method provides the larger deduction and the greatest tax savings.

Tax Deductions VS Tax Credits

Tax deductions and tax credits can both reduce the amount of tax you owe, but they work differently.

Tax deductions reduce your taxable income, which may lower your tax bill. Tax credits directly reduce the amount of tax you owe, dollar for dollar.

In many cases, you can claim both tax deductions and tax credits on the same tax return as long as you meet the eligibility requirements for each.

To learn more, check out our complete guide to tax credits.

How To Claim Tax Deductions

How you claim tax deductions depends on the type of tax return you’re filing. Individuals can claim either the standard deduction or itemize their deductions, while businesses claim eligible deductions on the appropriate business tax forms.

If you’re unsure which deductions you qualify for or how to claim them, consider working with a certified public accountant (CPA) or qualified tax professional. They can help ensure you claim every deduction you’re eligible for and file your return accurately.

If you run a small business, don’t forget to check out our free small business tax checklist to get ready for tax season.

FAQs About Tax Deductions