what is a tax deduction 
a tax deduction is an amount that you can deduct from your taxable income to lower the amount of taxes that you owe you can choose the standard deduction a single deduction of a fixed amount or itemize deductions on schedule a of your income tax return if the total for your itemized expenses is greater than the standard deduction for your filing status it makes sense to itemize allowable itemized deductions include mortgage interest charitable gifts unreimbursed medical expenses and state and local taxes understanding tax deductionsindividuals can take the standard deduction which nearly doubled under the tax cuts and jobs act or itemize their deductions here s a rundown of the standard deduction amounts for the 2023 and 2024 tax years 23taxpayers at least 65 years old or blind can claim an additional standard deduction for 2023 the amount rose to 1 500 1 850 for single filers and heads of household 4 for 2024 these amounts were changed to 1 550 and 1 950 respectively 5you can take the standard deduction or itemize your deductions you can t do both for the same tax year 6common tax deductionshere are some of the most common tax deductions that you can claim on your federal income tax return most of these deductions should be entered on schedule a of your 1040 but there are some exceptions 17 for example you must use form 8949 and schedule d to report investment losses and form 5498 to record ira contributions 18 contributions to an employer sponsored 401 k retirement account are reflected in your paycheck so you don t need the extra form 19deductions impacted by tcjasome once common tax deductions were eliminated or capped by the tax cuts and jobs act of 2017 tcja you can no longer deduct the following at least until 2025 when the act is due to expire tax deductions for the self employedthe ranks of freelancers and gig workers are growing according to a pew research study more than 16 million americans now identify as self employed 21luckily for them they have retained some of the tax deductions that wage earners lost in the 2017 tax reform law some deductions are complex because you have to determine how much of every expense is business thus deductible and how much is personal and nondeductible some of the most important deductions for the self employed include those for half of your medicare and social security taxes the home office deduction and the health insurance premiums deduction one particularly valuable deduction for self employed people defers taxes on their contributions to retirement plans tax deferred retirement plans including the sep ira the simple ira and the solo 401 k are designed specifically for the self employed solo operators and small business owners 22contributions to traditional iras and qualified plans such as 401 k s are an above the line deduction that means the contribution will reduce your taxable income even if you choose to take the standard deduction instead of itemizing small business tax deductionsbusinesses large and small pay taxes on their profits which is their total receipts minus their total business costs that means recording every single expense and reporting it to the irs some of the top deductions for small business owners include the rules for many of these deductions are complex particularly for shoestring operations vehicle expenses and travel expenses for example must be carefully separated between deductible business use and nondeductible personal or family use tax deductions vs tax creditstax deductions reduce your total taxable income the amount you use to calculate your tax bill on the other hand tax credits are subtracted directly from the taxes you owe some tax credits are even refundable meaning that if the credits reduce your tax bill to below zero you ll get a refund for the difference even if they aren t refundable a tax credit is more valuable than a tax deduction a tax deduction may kick your taxable income down a few notches on the tax tables but a tax credit reduces the tax you owe dollar for dollar example of a tax deductionhere s an example sarah is a single taxpayer in the united states with a gross annual income of 50 000 she wants to optimize her tax situation by considering whether to claim itemized deductions or take the standard deduction for the tax year relevant information for sarah includes sarah s potential total itemized deductions equals 15 500 this is the sum of her mortgage interest salt charitable contributions medical expenses above 7 5 of her agi and business expenses if sarah is filing single in 2024 she should take note that the standard deduction of 14 600 is higher than her potential itemized deduction therefore sarah would want to claim the standard deduction standard deductions vs itemized deductionsgenerally speaking u s taxpayers will choose to itemize their deductions or take the standard deduction depending on which most reduces their taxable income contrary to what many taxpayers may think they might benefit most from the standard deduction because the tcja nearly doubled the standard deduction amount and eliminated or capped many itemized deductions if you itemize you need to keep receipts for eligible expenses throughout the year and organize them into categories at tax time you tally and record the expenses on a schedule a and hold onto the receipts in case you re audited the standard deduction is substantially less work you simply fill in the amount of your standard deduction on line 12a of form 1040 or 1040 sr state tax deductionsmost of the 41 states that impose an income tax follow the format of the federal forms as closely as possible 24 however the states set their own tax rates and standard deductions and they may have additional allowable deductions or different restrictions on deductions some states do not permit taxpayers to itemize state taxes if they take the federal tax deduction in any case it s worth reading your state s tax forms closely to see if there are any additional deductions for which you might qualify for example in new mexico you are exempt from state income tax when you reach age 100 and nevada taxpayers can get a free pack of cards for filing their tax returns 25limits on tax deductionskeep in mind that there are limitations on some deductions for example current federal tax law limits the mortgage interest deduction to a maximum of 750 000 of secured mortgage debt or 1 million if you bought the home prior to dec 16 2017 that 2017 change was a severe blow to the very wealthy and to some not so wealthy residents of the cities with the most expensive homes then there s the limit on the healthcare deduction if you re itemizing healthcare costs the expenses that you paid for yourself your spouse and your dependents must exceed a certain percentage of your adjusted gross income agi to be deductible for your 2023 and 2024 tax return the threshold for medical expenses is 7 5 of agi for all taxpayers 52capital loss carryforwardone additional deduction not included in the standard or itemized tax deductions is the one for capital losses these are recorded on schedule d along with capital gains rather than on schedule a 26a tax loss carryforward is a legal way to rearrange earnings for the taxpayer s benefit you can carry forward individual and business capital losses from previous years you can claim up to 3 000 1 500 if married filing separately in capital losses as a tax deduction as of the 2024 tax year if your losses were greater than that you can carry them forward to the following year or years 27