What is a tax deduction?
Your income determines how much you’ll have to pay in taxes. A tax deduction can lower that amount.
That’s because a deduction, also known as a tax write-off, is a dollar amount that the IRS allows you to subtract from your income, thus lowering the amount of income subject to tax — and thus trimming your tax bill. The government tends to use tax deductions to incentivize certain behaviors, such as investing in your retirement and donating to charity.
Some of the most popular tax breaks are the deductions for property taxes (which is part of the state and local tax (SALT) deduction), mortgage interest, charitable contributions and IRA contributions.
Tax deduction vs. tax credit
Tax deductions shouldn’t be confused with tax credits, which are another valuable tool that can be used to reduce your tax liability. While you can claim both when you file your taxes — and both of them will lower your bill — tax deductions and credits work in different ways.
Tax credits give you a dollar-for-dollar reduction on the amount you owe. In other words, a $2,000 tax credit will lower your tax bill by $2,000. Tax credits can be nonrefundable, meaning that you can decrease your tax liability to zero, or refundable, meaning if you lower your tax liability to below zero, you can get the leftover amount back as a refund. The earned income tax credit and child tax credit are two popular tax credits.
Unlike tax credits, tax deductions don’t give you a dollar-for-dollar reduction on your tax bill. Instead of directly cutting your tax bill, deductions reduce your taxable income — which, in turn, lowers the amount you owe. (The federal tax brackets and income tax rates apply to your taxable income.)
The value of a tax deduction can be calculated this way: Multiply your marginal tax rate times the dollar amount of your deduction. For example, if your marginal tax rate is 12 percent, then a $2,000 deductible IRA contribution will cut your tax bill by $240 (that’s 0.12 x $2,000). If, however, your marginal tax rate is 22 percent, then that same $2,000 deduction will reduce your tax bill by $440.
Standard deduction vs. itemized deductions
There are two main types of deductions: the standard deduction and itemized deductions. You can either use the standard deduction or itemize your deductions. (Read more on how to decide between the standard deduction vs. itemized deductions.)
The standard deduction is a set dollar amount, based on your filing status, that reduces the amount of your income that’s subject to tax.
Standard deduction for 2024
Here are the current standard deduction amounts for 2024, for returns filed in 2025:
| Filing status | 2024 standard deduction |
|---|---|
| Single | $14,600 |
| Head of household | $21,900 |
| Married filing jointly | $29,200 |
| Qualifying surviving spouse | $29,200 |
| Married filing separately | $14,600 |
Standard deduction for 2025
Here are the current standard deduction amounts for 2025, for returns filed in 2026.
| Filing status | 2025 standard deduction |
|---|---|
| Single | $15,000 |
| Head of household | $22,500 |
| Married filing jointly | $30,000 |
| Qualifying surviving spouse | $30,000 |
| Married filing separately | $15,000 |
While most people take the standard deduction, it can make sense to itemize your deductions if the amount that you can deduct is greater than the standard deduction. Itemizing is a more complicated process that involves deducting eligible items one-by-one from your income.
Examples of itemized deductions include medical expenses above 7.5 percent of your AGI, charitable contributions and mortgage interest.
Above-the-line deductions
There’s a third set of deductions that don’t fall into the standard deduction or itemized deduction categories. These are called above-the-line deductions, which you can take along with either the standard deduction or itemized deductions. The name comes from the fact that they appear on Form 1040 above the line where your adjusted gross income is entered. (After you calculate your adjusted gross income, you then subtract the standard deduction or your itemized deductions to get your taxable income.)
These above-the-line deductions include:
- Deductible IRA contributions
- HSA contributions
- Student loan interest
- Certain alimony payments
- Penalties on early withdrawals from savings
- Teacher expenses
How to claim a tax deduction
The process for claiming a tax deduction will depend on what type of deduction it is:
- Itemized deductions: If you choose to itemize, you should use Schedule A to calculate your total deduction amount, adding up qualified expenses for charitable contributions, mortgage interest, property taxes and more. Then, you enter your total itemized deductions onto Form 1040. Luckily, the best tax software providers will make this process relatively painless by asking you questions to guide you through the process of filling out your tax return.
- Standard deduction: If you choose to claim the standard deduction instead of itemizing, then you simply enter the correct dollar amount for your filing status onto Form 1040. (The 1040 even lists the relevant dollar amounts in the margin.)
- Above-the-line deductions: These items are entered onto Schedule 1, in the “adjustments to income” section, and then entered onto Form 1040.
Bottom line
A tax deduction is a valuable tool for reducing your tax bill. You can choose to claim the standard deduction or — if the amount you can deduct is greater than the standard deduction — itemize your deductions. You can also claim above-the-line deductions and tax credits, as long as you’re eligible.
Learn more
Read the full article here
