Understanding tax deductions: A simple guide

Finding ways to reduce your tax bill or receive a refund from the Internal Revenue Service (IRS) can be a small thrill, especially when those savings help cover immediate expenses. These tax breaks aren’t just for the wealthy; deductions and tax write-offs are available to nearly all taxpayers, each with distinct rules that apply to different income levels. For example, some deductions reward retirement planning, charitable giving, or specific qualifying activities.

For taxpayers and aspiring tax professionals alike, grasping how deductions work is fundamental to maximizing tax refunds and minimizing what you or your clients owe the IRS. Deductions can substantially reduce federal income tax bills and increase potential savings. By understanding which programs and expenses you or your clients are eligible for, and how to take advantage of these opportunities as a responsible filer, you can ensure you’re claiming every available benefit.

What is a tax deduction?

A tax deduction, also known as a tax write-off, is an eligible expense the IRS permits taxpayers to subtract from their taxable income, thereby lowering the amount of taxes owed each year. These deductions may apply to certain expenses paid during the tax year, or to contributions made to tax-advantaged accounts, such as health savings or retirement investment accounts. Some examples of tax deductions include small-business tax deductions for necessary purchases (such as machinery for a small construction company or classroom materials for teachers), as well as deductions for state and local taxes paid. Both individuals and businesses can benefit from maximizing allowable deductions every tax season.

When evaluating what a tax deduction is and how it impacts you, it’s important to understand that there are two primary categories: the standard deduction and itemized deductions. Taxpayers can choose between the standard deduction, a set amount based on filing status, and itemizing eligible deductions to potentially save more. Many also qualify for “above-the-line” deductions, which directly reduce adjusted gross income (AGI) and can further decrease taxable income before calculating the final tax owed. Understanding the difference between a tax credit and a tax deduction is key before diving in, as each lowers your tax bill in different ways, but only deductions reduce your taxable income directly.

By carefully tracking qualifying expenses and understanding how individual tax deductions and personal write-offs work, you can make more informed decisions at tax time and reduce your overall tax burden within IRS guidelines.

Above-the-line deductions

A wide range of above-the-line deductions can be claimed during tax season, and unlike many common itemized deductions, these expenses do not need to be listed on separate documents like Form Schedule A (part of Form 1040). Instead, these deductions, ranging from medical costs to retirement plan contributions, are subtracted directly from your gross income. Taxpayers use the 1040 Schedule 1 addendum to the 1040 to report these qualifying payments and benefits that provide a tax advantage without requiring full itemization.

Some of the most common above-the-line deductions that filers can claim include:

• Contributions to an Individual Retirement Account (IRA)
• Payments made to Health Savings Accounts (HSA)
• Expenses for business use of your car (such as for Uber, Lyft, or independent ride-share drivers)
• Deductions for business use of your home (including Airbnb hosts and similar services)
• Qualified student loan interest paid
• Teacher, classroom, and educational expenses
• Alimony payments after divorce (specific to divorces finalized prior to 2019)
• Penalties paid for early withdrawal of savings
• Eligible work-related education expenses (applicable for military, government personnel, the self-employed, and certain individuals with disabilities)
• Qualified moving expenses for military servicemembers
• Investment losses (which can be deducted from capital gains for the year)

These above-the-line deductions, so named because they are entered above the AGI line on tax return Form 1040, reduce your taxable income right away and may help you qualify for additional income-based credits or programs. Additionally, certain costs incurred by self-employed individuals in running a small business qualify as above-the-line deductions, provided they are reported on Schedule C of Form 1040.

Recent legislative updates

Recent updates under the OBBBA have introduced several new deduction options and additional tax breaks, targeted primarily at working people:

• Tips income tax deduction: For those earning tips, up to $25,000 in qualified tips income now qualifies for a federal income tax deduction under the new rules. This deduction decreases gradually: single filers with a Modified Adjusted Gross Income (MAGI) above $150,000 and joint filers above $300,000 will face a phase-out of this benefit.
• Taxes on overtime: Taxpayers can now deduct up to $12,500 of qualified overtime pay for single filers and $25,000 for joint filers from their taxable income, which strengthens available benefits for eligible workers. The phase-out process mirrors that of the tips income deduction, with $100 of the deduction phased out for every $1,000 in excess income over MAGI limits.
• Autoloan interest deduction: Up to $10,000 in car loan interest paid on new vehicles assembled in the U.S., and purchased between 2025 and 2028, may be claimed (used vehicles do not qualify). Certain income limits apply for eligibility, resulting in a full or gradual phase-out.
• New senior tax deduction: Those age 65 or older may claim a higher deduction of up to $6,000 for single filers or $12,000 for joint filers meeting specific income requirements. This expanded deduction (available through 2028) applies to filers regardless of whether they ultimately claim the standard or itemized deductions.

These programs are applicable to tax years 2025 to 2028, and can be claimed even if a person claims standard or itemized deductions “below-the-line” of their return.

Standard tax deductions

Standard deductions, classified as “below-the-line” deductions (in contrast with above-the-line deductions), are primary federal tax deductions available to the vast majority of taxpayers who file a federal income tax return. The value of the standard deduction varies based on filing status, age, disability status, and income, and is adjusted annually for inflation or updated by relevant tax laws. Since the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, which nearly doubled the standard deduction, most individuals now opt for this rather than itemized deductions on their federal tax returns. In addition, the One Big Beautiful Bill Act (OBBBA) further increased the standard deduction for the 2025 tax year, establishing a new benchmark for future inflation adjustments.

For the 2026 tax year, the standard deduction will rise to $16,100 for single filers and $32,200 for joint (married) filers. Taxpayers who are age 64 or older or blind can also claim a supplemental standard deduction: $2,050 for single filers and $1,650 for qualifying married filers. It’s important to understand these amounts as part of a broader above-the-line vs. standard vs. itemized deductions strategy.

Remember that standard deductions are set dollar amounts that the IRS allows taxpayers to subtract from their taxable income, and typically include both a basic standard deduction and any additional deductions for age or blindness. Alongside the federal standard deduction, many states with an income tax also provide their own standard deduction, as well as options to claim itemized deductions.

The choice between one or the other depends on your specific tax picture: while most taxpayers realize a greater immediate benefit from the standard deduction amount, opting to itemize deductions may offer increased opportunities for tax savings if you have substantial qualifying expenses to deduct.

Itemized tax deductions

Itemized deductions allow taxpayers to list qualifying expenses that can be subtracted from their taxable income, rather than claiming a fixed amount. This process requires completing Schedule A on Form 1040 when filing tax returns, and each claimed expense must be clearly documented with supporting receipts, tax forms, or invoices. Common itemized deductions examples include qualifying medical expenses, mortgage interest, state and local taxes, and charitable donations.

Certain taxpayers are more likely to benefit from itemized deductions than from the standard deduction. You may need to use itemized deductions instead if you are:

• Married filing separately with a spouse who also itemizes deductions
• An individual filing a tax return for a period shorter than 12 months due to a change in their annual accounting period
• A nonresident alien or dual-status alien who cannot claim the standard deduction
• An estate or trust, common trust fund, or partnership

While the standard deduction offers simplicity, itemized deductions may yield greater tax savings if your eligible expenses exceed the deduction.

Recent legislative changes have impacted how high-income taxpayers can utilize itemized deductions. The TCJA temporarily removed the Pease limitation, which previously capped itemized deductions for certain filers. However, a new limitation was introduced under OBBBA, affecting taxpayers in the highest 37% tax bracket (single filers earning over $626,000 and married couples filing jointly with income over $752,000). This new “2/37 rule” means that for every dollar of itemized deductions, only 35 cents are deductible for those in the top tax bracket. This change directly affects how much high earners benefit from itemized deductions compared to those who claim the standard deduction.

By understanding the nuances, taxpayers can make informed decisions when preparing their returns.

Itemized tax deductions examples and recent updates

Taxpayers who itemize their deductions can take advantage of many allowable expenses. Here are common itemized deductions examples:

• Charitable contributions, subject to specific rules regarding adjusted gross income (AGI) and the type of donation
• Home mortgage interest paid on up to $750,000 of mortgage debt ($375,000 limit if married and filing separately)
• Eligible gains from home sales that qualify for exclusion
• Qualified opportunity zone investments, which may allow certain tax benefits
• Deductible losses arising from natural disasters and theft under specific IRS guidelines
• Unreimbursed medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI)
• State and local income, sales, real estate, and personal property taxes, subject to the state and local tax (SALT) deduction limit
• Certain bad debts are deemed wholly or partly uncollectible
• Canceled debt on a principal residence, under qualifying conditions
• Recognized capital losses that can offset taxable gains
• Documented gambling losses up to the amount of gambling winnings
• Certain miscellaneous itemized deductions, as allowed after schedule changes

Along with these examples, some previously listed payments, such as HSA and IRA contributions, may also be eligible for itemization under certain circumstances. For state and local tax deductions (commonly known as SALT deductions), the OBBBA law sets an upper limit of $40,000 from tax years 2025 to 2029, increasing by 1% annually, until returning to the TCJA-established $10,000 SALT cap in 2030. High-income taxpayers who benefit most from SALT itemized deductions will face these increased limits, based on an income threshold of $500,000 in the 2025 tax year, with the limits increasing by 1% each year thereafter.

Schedule A (Form 1040) for itemized deductions

If you decide to itemize your deductions, you are required to complete Schedule A and attach it to your Form 1040. Schedule A serves as a detailed worksheet that prompts you to list individual qualified expenses, such as medical and dental costs, mortgage interest, and charitable contributions. Working with Schedule A can streamline the process of organizing your deductible expenses throughout the year, not just during tax season, and help ensure that your records stay accurate and compliant.

Choosing between standard vs. itemized tax deductions

For most taxpayers, deductions are highest when choosing the standard option, which also offers a more streamlined reporting process. The choice should primarily come down to which deduction will reduce your owed tax amount the most.

Business deductions

Small business owners have access to a variety of business tax deductions that can help minimize their overall tax liability. One of the most significant business tax deductions is the qualified business income (QBI) deduction, which allows eligible business owners to deduct up to 20% of their QBI, including net income, gains, deductions, and losses, from a qualified trade or business. It’s important to note that certain professionals, such as doctors and lawyers, may face limits on the amount they can claim for business income.

For businesses structured as sole proprietorships, additional business tax deductions are available for ordinary and necessary expenses incurred in the normal course of business. These deductible business expenses can be claimed on the owner’s personal income tax return, regardless of whether they take the standard deduction or choose to itemize deductions. Qualifying business expenses under current IRS guidelines include:

• Advertising
• Cost of goods sold
• Depreciation
• Employee wages and benefit programs
• Insurance
• Mortgage or rent payments
• Repairs and maintenance
• Supplies
• Taxes and licenses
• Travel
• Utilities

These business tax deductions are considered above-the-line deductions, providing direct reductions to taxable income. If you operate as a sole proprietor, report your deductible business expenses on Schedule C, where these amounts are subtracted from your gross business income to determine your net profit or loss. This figure is then carried over to your Form 1040, appearing before the calculation of your AGI. By maximizing available business tax deductions, small business owners can retain more earnings and reduce their overall tax burden.

Difference between tax deductions vs. tax credits

Tax credits are another important tool for maximizing IRS benefits. Tax credits directly reduce your tax liability dollar-for-dollar, offering taxpayers incentives or benefits for qualifying circumstances. By distinction, tax deductions lower your taxable income before your tax is calculated. Popular examples of tax credits include the Child Tax Credit (CTC) for eligible dependents and the Saver’s Credit for eligible retirement plan contributions.

To clarify how credits and deductions affect your tax bill, consider this: If your taxable income is $50,000 and your tax rate is 22%, claiming a $1,000 tax deduction will reduce your taxable income to $49,000, lowering your federal tax bill by $220. On the other hand, if you qualify for a $1,000 tax credit, the entire amount is subtracted from your calculated taxes owed, delivering a more substantial saving than a deduction alone. While both a tax credit and a deduction reduce what you owe, taxpayers are encouraged to be strategic in their plans for minimizing tax liabilities.

Final thoughts

Tax planning isn’t just a concern in March: it’s something you should be thinking about year-round. Tax deductions, or write-offs, help lower the portion of your income that is subject to federal tax, which can potentially reduce the total amount you owe by thousands of dollars. While most taxpayers now benefit from the standard deduction, those with certain types of qualifying expenses may find that itemized deductions are the better option.

Given that the U.S. tax code is both intricate and continually evolving, it’s easy to miss valuable opportunities for tax savings. Consulting with a qualified tax professional can help you navigate the deduction process, ensuring that no potential deduction is overlooked. Properly identifying and reporting eligible deductions can result in significant financial savings, giving you more resources to support your family, invest in your business, or meet other financial goals.