What Are Tax Deductions?

Tax deductions are specific expenses the tax code allows you to subtract from your adjusted gross income (AGI) to arrive at your taxable income. The lower your taxable income, the less tax you owe. Deductions are a cornerstone of tax planning, but they are often confused with tax credits. A deduction reduces the income subject to tax; a credit reduces your tax bill dollar for dollar. For example, a $1,000 deduction saves you $220 if you are in the 22% bracket, while a $1,000 credit saves you the full $1,000.

Deductions fall into two broad categories: standard deductions and itemized deductions. Most taxpayers choose whichever option gives them the larger reduction. In addition, there are "above-the-line" deductions (also called adjustments to income) that you can claim regardless of whether you itemize. These include contributions to traditional IRAs, student loan interest, and health savings account contributions. Understanding which deductions apply to your situation is the first step toward legally minimizing your tax bill.

Standard Deduction vs. Itemized Deductions

The Standard Deduction

The standard deduction is a flat amount set by the IRS each year. You can claim it without providing any documentation of actual expenses. For the 2023 tax year, the amounts are:

  • Single or Married Filing Separately: $13,850
  • Married Filing Jointly or Qualifying Surviving Spouse: $27,700
  • Head of Household: $20,800

Taxpayers who are blind or age 65 or older receive an additional standard deduction amount. The IRS adjusts these figures annually for inflation. For many filers with straightforward finances and relatively few deductible expenses, the standard deduction is the simplest and most beneficial choice. According to IRS guidance, roughly 90% of taxpayers now take the standard deduction following the Tax Cuts and Jobs Act of 2017.

Itemized Deductions

Itemizing means listing eligible expenses on Schedule A (Form 1040) to claim deductions that exceed the standard deduction amount. Common itemized deductions include mortgage interest, state and local taxes (SALT), medical expenses, and charitable gifts. You should itemize if the total of your eligible expenses surpasses your standard deduction. Itemizing also makes sense if you have large unreimbursed medical bills or made significant charitable contributions in a given year.

One important rule: you cannot take both the standard deduction and itemized deductions. You must choose one method for the entire tax year. However, there is a strategic exception for certain "above-the-line" deductions, which are available regardless of your choice. We will cover those later.

Key Itemized Deductions in Detail

Medical and Dental Expenses

You can deduct unreimbursed medical and dental expenses that exceed 7.5% of your AGI. Qualifying expenses include payments to doctors, dentists, hospitals, prescription medications, long-term care services, and certain health insurance premiums (if you are self-employed, premiums may be deductible above the line). Travel costs for medical care, such as mileage or public transportation, also qualify. Keep meticulous records of receipts, cancelled checks, and a mileage log if you claim driving expenses. The IRS Topic No. 502 provides a comprehensive list of allowable medical deductions.

State and Local Taxes (SALT)

You may deduct state and local income taxes or sales taxes (but not both), plus property taxes on real estate you own. The total SALT deduction is capped at $10,000 ($5,000 if married filing separately). This cap applies to the combined deduction for income/sales taxes and property taxes. For homeowners in high-tax states, this limit often means the SALT deduction is less generous than before 2018. If you pay estimated state taxes, you might accelerate payments into the current year to maximize the deduction, but be mindful of the cap.

Home Mortgage Interest

Interest paid on mortgage debt used to buy, build, or substantially improve your primary residence or a second home is generally deductible. For debt incurred after December 15, 2017, the deduction is limited to interest on the first $750,000 of mortgage principal ($375,000 if married filing separately). Older loans (originated before that date) are subject to a $1 million limit. Points paid to obtain a mortgage may also be deductible over the life of the loan or in full in the year paid if certain conditions are met.

Charitable Contributions

Cash contributions to qualified charitable organizations are deductible up to 60% of your AGI (50% for most other types of contributions). Non-cash donations, such as clothing or household items, are deductible at their fair market value. You must obtain a written acknowledgment from the charity for any single donation of $250 or more. For donations of property worth more than $500, you need to file Form 8283. The IRS publication on charitable organizations can help you verify that your chosen charity is recognized.

Above-the-Line Deductions (Adjustments to Income)

Above-the-line deductions reduce your AGI and are available even if you take the standard deduction. They can be powerful because lowering your AGI may also increase eligibility for other tax benefits, such as the child tax credit or IRA contribution deductibility. Key above-the-line deductions include:

  • Traditional IRA contributions – up to $6,500 ($7,500 if age 50 or older) for 2023, subject to income limits.
  • Health Savings Account (HSA) contributions – up to $3,850 for self-only coverage, $7,750 for family coverage, plus $1,000 catch-up for those 55+.
  • Student loan interest – up to $2,500, phased out at higher incomes.
  • Self-employed retirement plan contributions – SEP-IRA, SIMPLE IRA, or Solo 401(k) contributions.
  • Self-employed health insurance premiums – deducted directly from net self-employment income.
  • Alimony paid – for divorces finalized before 2019.

Strategies for Maximizing Your Deductions

Bunching Deductions

If your itemizable expenses typically fall just below the standard deduction threshold, consider "bunching" them into alternating years. For example, make two years' worth of charitable donations or property tax payments in one year, then take the standard deduction the next year. This strategy works well when you can control the timing of payments, such as by paying property taxes in late December rather than early January.

Above-the-Line Deductions First

Always claim any above-the-line deductions you qualify for before deciding whether to itemize. Contributions to a traditional IRA or HSA not only lower your AGI but may also increase the percentage of medical expenses that exceed 7.5% of AGI. Review your entire financial picture each fall to see if accelerating certain payments could boost your deduction.

Keep Impeccable Records

Documentation is your best defense if the IRS ever questions your deductions. Maintain digital or physical files for receipts, bank statements, and canceled checks. Use apps that log mileage for medical or charitable travel. For non-cash charitable contributions, take photos of donated items and obtain signed receipts. The IRS may require records for up to three years after you file, or longer if you underreported income.

Review Filing Status

Married couples can choose between "Married Filing Jointly" (MFJ) and "Married Filing Separately" (MFS). MFS typically results in higher taxes, but in some cases it may allow one spouse to itemize while the other takes the standard deduction, or it can preserve eligibility for certain deductions that phase out at joint income levels. Use tax software or consult a professional to compare outcomes.

Common Misconceptions About Tax Deductions

“All Expenses Are Deductible”

No. Only expenses explicitly allowed by the tax code are deductible. Personal living expenses—such as groceries, clothing, and commuting costs—are not deductible. Even business expenses must be "ordinary and necessary" and properly substantiated.

“Only Businesses Can Claim Deductions”

False. Individuals can claim many deductions, including mortgage interest, charitable contributions, and medical expenses. The key is understanding which deductions apply to your personal situation.

“Deductions and Credits Are the Same”

This is a common confusion. A deduction reduces taxable income; a credit reduces tax liability. For instance, the Child Tax Credit is a credit that reduces tax dollar for dollar, while the child care expense deduction (if eligible) reduces income. Always prioritize credits, but do not overlook deductions.

“You Can Claim the Standard Deduction and Itemize”

As discussed, you must choose one. However, you can still claim above-the-line deductions (adjustments to income) in addition to either choice. That is the only way to combine deduction types.

Special Situations: Self-Employed and Investors

Self-Employed Deductions

If you earn self-employment income, you can deduct ordinary and necessary business expenses such as home office costs (using the simplified or regular method), equipment purchases (Section 179 or bonus depreciation), business travel, meals (subject to a 50% limit), and health insurance premiums. You may also contribute to a SEP-IRA or Solo 401(k) and deduct those contributions above the line. Keep separate business accounts and track all expenses meticulously.

Investor Deductions

Investment interest expense (margin interest) is deductible against net investment income. You may also deduct expenses for managing taxable investments, such as advisory fees, safe deposit box rentals, and subscriptions to financial publications—but only if they exceed 2% of AGI (this threshold is suspended through 2025 due to the TCJA). Capital losses can offset capital gains plus up to $3,000 of ordinary income each year.

Eligibility and Documentation Requirements

To claim any deduction, you must satisfy three general criteria:

  1. Incurred during the tax year – Expenses paid in 2023 can only be deducted on your 2023 return.
  2. Allowable by the IRS – The expense must fall under a specific deduction category (e.g., medical, charitable).
  3. Properly substantiated – Keep written evidence: receipts, invoices, bank statements, mileage logs, and acknowledgment letters from charities.

The IRS often disallows deductions that lack supporting documentation, even if the expense was legitimate. For cash donations under $250, a bank record or receipt is sufficient. For donations of $250 or more, a written acknowledgment from the charity is required. For business expenses, maintain a contemporaneous log (e.g., an app or spreadsheet) to prove the time, place, amount, and business purpose of each expense.

Conclusion

Understanding and applying tax deductions correctly can save you thousands of dollars every year. Start by determining whether the standard deduction or itemizing works best for you, and do not forget above-the-line deductions that reduce your AGI. Keep thorough records, be aware of phase-out limits and caps, and stay updated on changes in tax law. For complex situations—especially if you are self-employed, have significant investment income, or own rental property—consider consulting a tax professional or using reputable tax preparation software. The IRS publishes Publication 17 as an authoritative guide to individual income taxes, which is updated annually and available for free. By taking a proactive approach, you can legally maximize your returns and keep more of what you earn.