Takeaways
- Tax deductions are qualifying expenses that reduce your taxable income.
- Taxpayers choose between a standard or itemized deduction to reduce taxes.
- The Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction.
- Itemized deductions are qualifying reductions to your taxable income.
- Standard deductions for 2024 and 2025 for Married Filing Jointly are $29,200 and $30,000, respectively.
What Is a Tax Deduction?
A tax deduction is a qualified expense that reduces your taxable income, indirectly lowering your income taxes. Tax filers choose between the standard deduction or itemizing their deductions.
You should choose your tax deduction strategy based on what lowers your tax liability or boosts your tax refund. Itemized deductions are for specific qualifying expenses, like medical expenses, home mortgage interest, or gifts to charity.[1]
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How Tax Deductions Work
Tax deductions reduce your annual income in the eyes of the Internal Revenue Service (IRS). Whether you choose the standard deduction or itemized deductions, your overall taxable income drops once you apply the deductions.
Deductions do not give you money back directly and are not refundable like some tax credits. Instead, tax deductions reduce your taxable income, which can mean paying less tax. The more deductions you qualify for, the lower your taxable income and the less you may owe when filing your taxes.
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Pros of Tax Deductions
- Lowers taxable income: Tax deductions reduce your income, often resulting in a lower tax bill.
- Widely available: Most people qualify for the standard tax deduction and use it because it is often the best tax reduction strategy.
- Incentivizes good behavior: Tax deductions give you credit for donating to charities and buying your first house (or second), which benefits communities.
Cons of Tax Deductions
- Choosing a deduction strategy: While the standard deduction is simple, some people may be confused about which type of tax deduction to take or which would benefit them personally.
- Non-refundable: Tax deductions are non-refundable. If you make less than the standard deduction, you will not receive that money back as a tax refund.
- Not dollar-for-dollar reductions: Tax deductions, like tax credits, do not reduce your tax bill dollar for dollar. Instead, your tax liability is reduced by your tax rate on the taxable income, which you can shave off once your deductions are applied.
2024 and 2025 Standard Deductions
| Filing Status | 2024 Standard Deduction | 2025 Standard Deduction |
|---|---|---|
| Single | $14,600 | $15,000 |
| Married Filing Separately | $14,600 | $15,000 |
| Heads of Household | $21,900 | $22,500 |
| Married Filing Jointly | $29,200 | $30,000 |
| Surviving Spouses | $29,200 | $30,000 |
Source: IRS Website [2]
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Standard vs. Itemized Deductions
You must choose between using a standard or itemized deduction strategy based on your tax situation. Here are some differences to consider:
Standard Deductions
The IRS offers nearly all individuals the opportunity to reduce their taxable income by providing an annual standard deduction. A standard deduction reduces the amount of taxable income before your tax rate is calculated.
There are multiple benefits of taking the standard deduction versus itemized deductions. First, the standard deduction simplifies your tax return process. Additionally, even if you choose to calculate your itemized deduction, you still benefit from the full standard deduction if your deductions are below the standardized amount.
Itemized Deductions
For individuals with qualifying deductions that exceed the standard deduction amount, you can list your deductions individually, which is called itemizing your deductions.
With itemized deductions that exceed the standard amount, itemizing will have a more significant impact on reducing your tax liability. However, if you itemize your deductions, you will need proof and records of these expenses.
Here are common qualifying itemized deductions you can include in your calculation:[3]
- Charitable gifts and donations
- Medical and dental expenses
- Mortgage interest
- Property taxes
- State and local taxes
- Sales tax
- Losses from natural disasters
Tax Credit vs. Deductions
A tax credit is a dollar-for-dollar reduction to your tax bill. Some tax credits are refundable, meaning you might be owed refundable tax credits if your tax bill goes below zero dollars. In that case, you will receive a tax refund of the excess amount.
A tax deduction, however, reduces your income before it is taxed. Tax deductions are applied before your tax bill is calculated. While deductions and credits save you money, tax deductions are less beneficial than tax credits.
Example of Tax Deductions and Credits:
For example, let’s say you earn $50,000 a year. Your income taxes are calculated based on that amount. If you qualify for a $2,000 tax deduction, it reduces your taxable income from $50,000 to $48,000. Your taxes are now calculated based on the lower amount. For example, if your tax rate is 20%, the deduction saves you $400 because $2,000 × 20% equals $400.
Alternatively, if you qualify for a $2,000 tax credit, it directly reduces the amount of tax you owe. If your original tax bill is $10,000, the tax credit lowers it to $8,000.
Smart Summary
Tax deductions are qualified expenses that reduce your taxable income and lower your tax bill. Tax deductions can reduce taxable income but offer a smaller overall impact than tax credits. The standard tax deduction is available to most tax filers. The tax deduction amount is based on your individual tax filing status. Depending on your financial situation, you may be better off itemizing your tax deductions than taking the standard deduction.
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(1) Internal Revenue Service. Itemized Deductions. Last Accessed January 12, 2025.
(2) Internal Revenue Service. IRS releases tax inflation adjustments for tax year 2025. Last Accessed January 12, 2025.
(3) Internal Revenue Service. Topic no. 501, Should I itemize? Last Accessed January 12, 2025.
