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If you can claim a tax deduction, you may end up owing less federal income tax. But while the concept is simple, figuring out which deductions you can take and what they may be worth to you can be a bit more complicated.
There are various types of tax deductions you can choose at different points in your tax return. You might qualify for some deductions but not for others. And even if you do qualify for certain itemized deductions, itemizing might not always be your best bet — especially if your total itemized deductions are less than the standard deduction.
Let’s take a look at tax deductions and how they can lower the amount of income you have to pay federal income tax on.
- What is a tax deduction?
- Why are tax deductions important?
- 3 things to know about tax deductions
- How tax deductions can affect your taxes
At a basic level, 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.
As you walk through your tax return, you’ll notice different types of deductions you may be able to claim based on your eligibility. Here are a few you might come across.
- Standard deduction — 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.
- Itemized deductions — These are deductions 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.
- Above-the-line deductions — These are also considered adjustments to income, but you don’t need to itemize them in order to claim them. Some examples include educator expenses, student loan interest, IRA contributions, self-employment tax and more.
- Business deductions — If you’re a business owner, you can deduct business expenses that are considered “ordinary and necessary.” This includes just about any expense that’s common and accepted — as well as helpful and appropriate — for your trade.
As previously mentioned, tax deductions can reduce your taxable income, which could ultimately lower your tax bill. But because many different deductions are available, it’s important to know which ones you might qualify for and how to take advantage of them in the future.
For example, if you have student loan debt you may be able to deduct up to $2,500 of the interest you pay on a qualified student loan each year. The resulting tax savings from that one deduction may not be a lot, but it can add up along with other deductions.
Also, knowing what deductions are available can help you maximize their value in future years. For example, generally, if you itemize, you can deduct charitable donations of cash that equal up to 60% of your adjusted gross income for the year in which you make the donation. But what if you want to make donations that exceed the allowed percentage of your annual AGI? You may be able to carry the excess amount forward and take the deduction in a future tax year.
Familiarizing yourself with the different deductions that can affect you personally may give you a better shot at claiming more.
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.
1. Standard deduction vs. itemizing: You choose
With some exceptions, the IRS lets you choose between the standard deduction for your filing status and the total of any itemized deductions you may be eligible to take.
Itemizing allows you to add up and deduct the total of certain qualifying expenses that you actually incurred during the tax year. The standard deduction is a simple set amount you can deduct based on your filing status.
If you add up all the itemized deductions you qualify for and the total exceeds your standard deduction, you’ll gain more tax savings by itemizing than by taking the standard deduction. But if your standard deduction amount is more than your total itemized deductions, itemizing could result in a higher tax bill instead of a lower one.
It’s up to you to determine which approach to deductions will deliver the most benefit — though Credit Karma Tax®, a free online tax preparation and filing service, can help you compare both options.
2. 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.
It’s important to know these limitations as you strategize around how to take advantage of the deductions that are available to you.
3. 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 2018 return had their student loan interest deduction gradually reduced if their modified adjusted gross income, or MAGI, was between $65,000 and $80,000 (or $135,000 and $165,000, if married filing jointly). If your MAGI was $80,000 or more ($165,000 if married filing jointly), you didn’t qualify for the deduction at all.
And, 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.
Generally, tax deductions can be a good thing, because they lower your taxable income and therefore can also help reduce the amount of tax you owe. But they’re not much help if you’re not taking advantage of all the deductions you qualify for.
On the flip side, you should never claim a deduction you don’t actually qualify for, and it’s important to claim the correct amount for any deductions you do qualify for. Faking deductions or padding legitimate ones can get you in trouble with the IRS.Learn more about how IRS penalties work
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 Publication 501: Dependents, Standard Deduction and Filing Information | IRS Topic No. 551 – Standard Deduction | IRS Topic No. 500 – Itemized Deductions | IRS Schedule 1 | IRS: Deducting Business Expenses | IRS Topic No. 456: Student Loan Interest Deduction | IRS Topic No. 502: Medical and Dental Expenses | IRS Publication 936: Home Mortgage Interest Deduction | IRS Publication 970: Tax Benefits for Education | IRS: IRA Deduction Limits – Effect of Modified AGI on Deduction if You are Covered by a Retirement Plan at Work | IRS’ 2019 “Dirty Dozen” tax scams list highlights inflating deductions, credits
Troy Grimes is a tax product specialist with Credit Karma Tax®. He’s worked in tax, accounting and educational software development for nearly 30 years. He has a bachelor’s degree in business administration with an emphasis in business analysis from Texas A&M University. You can find him on LinkedIn.