What is a tax deduction?

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In a Nutshell

A tax deduction is a type of tax break that allows you to reduce the amount of your income that you have to pay tax on. That could mean a lower federal income tax bill or a bigger refund, if you’re getting one.

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This article was fact-checked by our editors and a member of the Credit Karma Tax® product specialist team, led by Senior Manager of Operations Christina Taylor. It has been updated for the 2019 tax year.

A tax deduction is one way to potentially lower your tax bill.

Deductions reduce the amount of income you have to pay tax on, which in turn could lower the amount of tax you actually pay.

Let’s answer some tax deduction questions and look at some available federal income tax deductions.



How do tax deductions work?

A tax deduction reduces the amount of your income that’s considered taxable, which means it could help lower your final tax bill — or increase your tax refund if you’re due one. Deductions get subtracted from your income before you calculate how much you owe, and how much a deduction actually saves you depends on your marginal tax rate.

A tax deduction is not the same as a tax credit, which offers a dollar-for-dollar reduction of the amount of tax you owe rather than reducing your taxable income.

There are three types of deductions that you may use on a 1040 income tax return: standard, itemized and above-the-line.

Generally, you have a choice between taking the standard deduction or itemizing deductions. Above-the-line deductions reduce taxable income regardless of whether you choose the standard deduction or itemized deductions.

Standard deduction vs. itemized: What’s the difference?

The standard deduction is a set dollar amount you can shave off your adjusted gross income based primarily on your dependency and filing status. And you may qualify for an additional standard deduction if you’re 65 or older or blind.

Here are the standard deduction amounts for 2019 and 2020 federal income taxes.

Filing status 2019 standard deduction 2020 standard deduction

Married filing jointly

$24,400

$24,800

Married filing separately

$12,200

$12,400

Single

$12,200

$12,400

Head of household

$18,350

$18,650

Itemized deductions are actual expenses you can compile to take instead of the standard deduction. Some examples of itemized deductions include medical and dental expenses, charitable contributions, mortgage interest, disaster and theft losses, and more.

Generally, you’ll want to choose the deduction option that gives you the most tax benefit. If your total itemized deductions are more than the standard deduction amount for your filing status, itemizing might save you more money. But if your standard deduction amount is more, then that option might result in a bigger tax savings for you.

Learn more about the standard deduction vs. itemized deductions.

More details about tax deductions

Because tax deductions are such an important part of your tax return, it’s good to know how to determine whether you can qualify for them — and for how much.

Some deductions have floors and ceilings

Just because you’ve incurred a deductible expense doesn’t mean you can claim all or even some of it on your tax return.

With dental and medical expenses, for instance, you can only deduct the amount you paid in qualified expenses during the tax year that exceeded a certain percentage of your adjusted gross income. And if you’re a homeowner whose mortgage was initiated on or after Dec. 16, 2017, you can only deduct mortgage interest on up to $750,000 ($375,000 if married filing separately). Limitations are $1 million, or $500,000 for married filing separately, for mortgages initiated before Dec. 16, 2017.

Take note of these limitations as you strategize around how to take advantage of the deductions that are available to you.

The more you earn, the less you may be able to deduct

Some tax deductions have phase-outs for taxpayers with higher incomes.

For example, taxpayers filing a 2020 return may be able to claim a student loan interest deduction if their modified adjusted gross income, or MAGI, was less than $85,000 ($170,000, if married filing jointly). If your MAGI was $85,000 or more ($170,000 if married filing jointly), you wouldn’t qualify for the deduction.

The amount you can deduct for IRA contributions may be limited based on your MAGI and filing status.

Depending on your income level, it may be a good idea to check whether deductions you’re planning to claim have income limits, and how that might affect you.

What are some tax deductions?

Whether you choose the standard deduction or itemize your deductions, you may be able to take multiple deductions to reduce your taxable income (and possibly the tax you owe). Here are a few to explore.

Contributions to an IRA

Provided you meet qualifications, you can fully deduct the amount you contribute to a traditional IRA — up to $6,000 (or $7,000 if you’re 50 or older). You don’t need to itemize deductions in order to take this one.

Student loan interest

If you paid interest on a qualifying student loan and meet MAGI limitations, you may be able to take this above-the-line deduction. It can be worth up to $2,500.

Charitable contributions

If you itemize your deductions, you may be able to deduct charitable donations you made to qualifying charities during the tax year. Generally, the total amount of contributions you can deduct can’t be more than 60% of your adjusted gross income, though there are exceptions with lower limits.

FAST FACTS

What is adjusted gross income?

Adjusted gross income is your gross income (all the income you receive in a year) minus certain adjustments you may qualify for — like HSA contributions, IRA contributions and student loan interest.

Home mortgage interest

If you qualify for it, this deduction allows you to deduct interest on up to $1 million (or $500,000 if married filing separately) for loans that were taken out on or before Dec. 15, 2017. If you took out your mortgage after Dec. 15, 2017, you can only deduct interest on up to $750,000 of the loan amount ($375,000 if married filing separately). You must itemize to take this deduction.

Private mortgage insurance

For the 2019 and 2020 tax years, private mortgage insurance premiums are deductible on your federal tax return. You must itemize to take this deduction, and your deduction will be reduced (and ultimately phased out) if your adjusted gross income is more than $109,000 ($54,500 for people who are married filing separately).

Casualty and theft losses

You may be able to itemize and take this deduction if you suffered a theft loss or a casualty loss (such as damage to your home) that’s due to a federally declared disaster. There are a lot of rules on who can take this deduction and who can’t. Read IRS Publication 547 to learn more.

Medical and dental expenses

You’ll have to itemize deductions in order to take this one, but if you meet qualifications you may be able to deduct the cost of certain medical and dental expenses. You can only deduct the amount of total expenses (for yourself, your spouse and dependents) that are more than 7.5% of your AGI.

Educator expenses

If you taught children in kindergarten through 12th grade, or were an instructor, counselor, principal or aid, and you worked at least 900 hours during the school year, you may be eligible to deduct up to $250 of certain education expenses ($500 for joint filers who were both eligible educators). This is an above-the-line deduction.

Home office

You can’t deduct home office expenses if you’re an employee working from home for someone else. But if you’re self-employed and work from a home office, you may be able to take this deduction. You’ll have to meet criteria to qualify, and you’ll also need to calculate how much the deduction is worth for you.

State and local taxes

If you itemize deductions, the federal tax code allows a deduction for certain state and local taxes, up to $10,000 ($5,000 if you’re married filing separately). Generally, you’re allowed to deduct (up to the limit) state and local property taxes and income taxes or state and local property taxes and sales taxes you paid during the tax year.


Bottom line

Tax deductions can help reduce your taxable income and, ultimately, how much federal income tax you owe. But it’s important to get things right when claiming a tax deduction.

While tax preparation software, tax professionals, and free online tax preparation and filing services can help you understand what deductions you might qualify for — and how much you can deduct — you’re ultimately responsible for what’s on your tax return. Learning about a tax deduction before you try to claim it could help ensure you file an accurate return.

Relevant sources: IRS: Credits and Deductions for Individuals | IRS Form 1040 U.S. Individual Income Tax Return for 2019 | 1040 and 1040-SR Instructions for 2019 Tax Year | IRS News Release: IRS provides tax inflation adjustments for tax year 2020 | IRS Publication 970: Tax Benefits for Education | IRS: IRA FAQs- Contributions | IRS Topic No. 456: Student Loan Interest Deduction | IRS Publication 526 (2019) Charitable Contributions | IRS Topic No. 502 Medical and Dental Expenses | IRS: Home Office Deduction | Tax Cuts and Jobs Act of 2017


Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.


About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Cr… Read more.