What Is a Deductible?
For tax purposes, a deductible is an expense that an individual taxpayer or a business can subtract from adjusted gross income (AGI) while completing a tax form. The deductible expense reduces taxable income and, therefore, the amount of income taxes owed.
U.S. individual taxpayers may use either the standard deduction or fill out a list of all of their deductible expenses, depending on which results in a smaller taxable income.
- A deductible for taxes is an expense that a taxpayer or business can subtract from adjusted gross income, which reduces their taxable income, thereby reducing the amount of taxes owed.
- Most wage-earners use the standard deduction but those with very high deductible expenses can choose to itemize if that results in a smaller tax bill.
- The Internal Revenue Service (IRS) provides lists, requirements, and amounts of all available deductibles.
- Common deductions for individuals include student loan interest, self-employment expenses, charitable donations, and mortgage interest.
- Business deductibles include payroll, utilities, rent, leases, and other operational costs.
For individual wage-earners, some of the most commonly-used deductibles are mortgage interest payments, state and local tax payments, and charitable deductions. There also is a deduction for out-of-pocket medical costs.
Self-employed people may also be able to deduct many of their work-related expenses.
Nevertheless, the vast majority of Americans have taken the standard deduction since 2018, when that figure was nearly doubled while many allowable deductions were eliminated or capped.
- For the 2023 tax year, the standard deduction for single taxpayers and married couples filing separately is $13,850. For married couples filing jointly, it is $27,700. For heads of households, it is $20,800.
- For the 2024 tax year, the standard deduction for single taxpayers and married couples filing separately is $14,600. For married couples filing jointly, it is $29,200. For heads of households, it is $21,900.
Common Tax Deductibles
Many deductions were removed or capped with the tax code overhaul of 2018 but there remain a few that are important to many taxpayers. These include student loan interest, charitable donations, mortgage interest, gambling losses, and self-employment expenses.
When preparing to file taxes, it's worth checking the IRS site or consulting with a tax professional to determine which deductions you qualify for.
Business deductibles are considerably more complex than individual deductibles and require a great deal more record-keeping. A business or self-employed individual must list all of the income that was received and all of the expenses that were paid out in order to report the real profit of the business. That profit is the gross taxable income of the business.
Examples of ordinary business deductibles include payroll, utilities, rent, leases, and other operational costs. Additional deductibles include capital expenses such as depreciating equipment or real estate.
Permissible deductibles vary by the structure of the business. Limited-liability companies (LLCs) and corporations differ in the types and amounts of deductions available to their owners.
Standardized Deduction vs. Itemized Deduction
Whether a taxpayer uses the standard deduction or itemizes deductible expenses, the amount is subtracted directly from adjusted gross income.
For example, say a single taxpayer reports $50,000 in gross income in 2023, as recorded on the person's W2 form. By using the standard deduction, that taxpayer may deduct $13,850, reducing taxable income to $36,150.
The standard deduction nearly doubled with the Tax Cuts and Jobs Act of 2017. In the first year of the Act's implementation, 2018, about 90% of taxpayers used the standard deduction rather than itemizing deductions.
If You Itemize
Itemizing deductible expenses rather than taking the standard deduction requires filing one more piece of paper. A Schedule A form, used to record the various claimed deductions, must be attached to the main tax form, Form 1040 or Form 1040-SR.
The process requires a good deal of record-keeping throughout the year, including saving receipts or other proof of expenditures.
Filers who take the standard deduction can file Form 1040. Those who are age 65 or older can use Form 1040-SR. It's nearly identical to Form 1040 but with larger print.
What's the Difference Between Tax Credit vs. Tax Deduction?
Both tax credits and tax deductions can help taxpayers pay less in taxes but there are distinct differences between the two.
A tax credit is a straight subtraction from your tax bill. For example, a $10 tax credit will reduce your tax bill by $10. A tax deduction lowers your taxable income, and therefore lowers the total amount you owe.
A tax deduction reduces your taxable income while a tax credit reduces your tax bill dollar-for-dollar.
How Are Tax Deductibles Calculated?
All tax deductibles (or the standard deduction) are subtracted from your gross income in order to arrive at an adjusted gross income, which is the amount that is subject to taxes.
Taxpayers who itemize deductions rather than taking the standard deduction add a Schedule A form to Form 1040. This form is used to list the expenses being deducted.
What Is the Standard Tax Deduction?
The standard deduction is a specific dollar amount that taxpayers may use to reduce their taxable income if they do not choose to itemize their deductible expenses.
- For 2023, the standard deduction for single taxpayers and married couples filing separately is $13,850. For married couples filing jointly, it is $27,700. For heads of households, it is $20,800.
- For 2024, the standard deduction for single taxpayers and married couples filing separately is $14,600. For married couples filing jointly, it is $29,200. For heads of households, it is $21,900.
Do Tax Deductions Increase Your Refund?
A tax deduction lowers your taxable income, which reduces your total amount of taxes owed. That can result in a refund if you overpaid taxes during the year.
Should I Take the Standard Deduction?
You should take the standard deduction or itemize deductions depending on which results in a lower tax bill.
You may have to estimate your allowable deductions, at least roughly, to figure that out. Also, keep in mind that you have to maintain records and receipts of deductible expenses throughout the year in order to back up the numbers you enter on Schedule A.
There may be some years when you have good reason to itemize your deductions. For example, if you have very high unreimbursed medical expenses for one year, they could amount to tax savings greater than the standard deduction.