Common Tax Deductions You Should Be Using
Advertiser Disclosure: Our first priority is to provide valuable information to help our readers gain insight into financial topics. Although we receive compensation from some of the brands listed on our site, we only highlight companies we believe can benefit our readers and their financial situations.
Every year, millions of taxpayers overlook deductions that could save them hundreds or even thousands of dollars. With so many expenses eligible for deductions, knowing which ones apply to you can make a big difference in your tax bill.
From mortgage interest to student loan payments and medical expenses, the tax code offers plenty of ways to reduce what you owe. Knowing what to claim and how to document expenses properly ensures you don’t leave money on the table.
How Tax Deductions Work
Tax deductions lower the portion of your income that is subject to taxation, which can reduce the amount you owe to the IRS. By subtracting eligible expenses from your total income, deductions help decrease your taxable income and potentially place you in a lower tax bracket.
It’s important to distinguish deductions from tax credits. While deductions reduce taxable income, tax credits directly lower your tax bill dollar for dollar. For example, a $1,000 deduction reduces taxable income, while a $1,000 tax credit reduces the final amount owed. Understanding this difference can help maximize savings when filing your tax return.
Standard vs. Itemized Deductions: Which Should You Choose?
When filing taxes, you can either take the standard deduction or itemize your deductions. Choosing between the two depends on your financial situation, eligible expenses, and whether itemizing provides a larger deduction than the standard amount.
The Most Common Itemized Deductions
Itemized deductions require listing eligible expenses such as mortgage interest, medical costs, and charitable donations. If your total deductible expenses exceed the standard deduction amount, this method can result in greater tax savings. Here are some itemized deductions for which you may be eligible.
Mortgage Interest and Property Tax Deductions
Homeownership comes with tax benefits, including the ability to deduct mortgage interest on qualifying loans. For most homeowners, interest paid on a mortgage up to IRS limits can be deducted, reducing taxable income and making homeownership more affordable. This deduction applies to primary and, in some cases, secondary homes, as long as the loan meets IRS guidelines.
In addition to mortgage interest, property taxes paid to state and local governments may also be deductible. Keeping accurate records of mortgage payments and property tax bills ensures that homeowners maximize their deductions when filing their tax returns.
Medical and Dental Expense Deductions
Qualified medical and dental expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted. This applies to a variety of healthcare costs, including doctor visits, hospital stays, prescription medications, and necessary medical equipment. Expenses for dental treatments, vision care, and some long-term care services may also qualify.
To claim this deduction, medical expenses must be unreimbursed and meet IRS guidelines. While insurance premiums, co-pays, and out-of-pocket costs may be deductible, cosmetic procedures and non-essential treatments are typically not covered. Keeping detailed records and receipts of all medical-related expenses ensures taxpayers can accurately calculate their deductions and maximize potential savings.
Charitable Contributions and Donation Deductions
Donations made to qualified charitable organizations can reduce taxable income. These contributions can be in the form of cash, goods, or even appreciated assets like stocks. Donations must be made to IRS-recognized nonprofits, such as religious groups, educational institutions, and charitable foundations, to qualify.
Proper documentation is essential when claiming this deduction. For cash donations, a bank statement, receipt, or written acknowledgment from the charity is required. Non-cash donations, such as clothing or household goods, must be in good condition, and donations exceeding $500 require additional IRS forms.
State and Local Tax (SALT) Deductions
Up to $10,000 in combined state and local income, sales, and property taxes can be deducted. This deduction is especially beneficial for those living in high-tax states, where state and local taxes significantly impact annual expenses.
The SALT deduction includes either state income taxes or state sales taxes (but not both), along with property taxes. Taxpayers must choose whether to deduct state income tax or sales tax based on which provides the greatest benefit. Keeping detailed records of tax payments ensures taxpayers maximize their eligible deductions.
Self-Employment Tax and Business Expense Deductions
Self-employed individuals, including freelancers and small business owners, can deduct 50% of their self-employment tax. Since self-employed workers pay both the employer and employee portions of Social Security and Medicare taxes, this deduction helps offset the additional tax burden.
Business-related expenses can also be deducted, including home office costs, equipment, software, travel expenses, marketing, and professional development. To qualify, these expenses must be ordinary and necessary for running the business. Keeping detailed records and receipts ensures that you can accurately report and maximize deductions when filing taxes.
Most Common Standard Deductions
The standard deduction is a fixed amount set by the IRS each year and is the easiest option for most taxpayers. It simplifies the filing process and provides a guaranteed deduction without needing as much documentation. Here are some common deductions for those who take the Standard Deduction route.
Retirement Contributions and Savings Deductions
Saving for retirement secures your financial future and can also provide certain tax benefits. Contributions to traditional IRAs and 401(k) plans may be tax-deductible, reducing your taxable income for the year in which they are made.
The amount deductible depends on factors such as income level, filing status, and employer-sponsored retirement plans. While 401(k) contributions are automatically deducted from pre-tax income, IRA contributions may require a manual deduction when filing taxes. Additionally, contributions to Health Savings Accounts (HSAs) and self-employed retirement plans like SEP IRAs and SIMPLE IRAs can further reduce taxable income while promoting long-term financial stability.
Deductions Available to All Filers
Some tax deductions and credits can be claimed regardless of whether you take the standard deduction or itemize. These deductions help lower taxable income and provide savings for a wide range of taxpayers, including students, parents, and those planning for retirement. Understanding these options ensures you maximize your tax benefits.
Student Loan Interest and Education Deductions
Education-related tax benefits can help lower the financial burden of tuition and student loan payments. Borrowers can deduct up to $2,500 in student loan interest per year, reducing their taxable income.
Beyond student loan interest, other education-related deductions and credits can further reduce tax liability. The Lifetime Learning Credit (LLC) helps offset tuition and educational expenses for those pursuing higher education, while the tuition and fees deduction allows eligible taxpayers to deduct qualified expenses. Each of these deductions and credits has specific income limits and eligibility requirements.
Child and Dependent Care Deductions
Parents and caregivers who pay for childcare while working or seeking employment may qualify for the Child and Dependent Care Credit. This tax benefit helps offset the costs of daycare, babysitters, after-school programs, and even some in-home care for dependents.
Unlike most deductions, this is a tax credit, not an itemized deduction, meaning it can be claimed regardless of whether you take the standard deduction or itemize. The amount of the credit depends on income level and total care expenses, with a percentage of qualifying costs eligible for reimbursement. To claim this credit, the care provider must be identified, and expenses must be properly documented.
Conclusion
Taking advantage of tax deductions can significantly lower taxable income and increase savings. Whether you qualify for itemized deductions, standard deductions, or credits available to all filers, reviewing eligible deductions before filing can ensure you don’t miss valuable tax benefits. Staying informed on tax laws and keeping proper records helps avoid missed opportunities for deductions.
Tax laws change frequently, and keeping up with new deductions can help you save even more. Sign up for Consumer Insite for more insights on tax strategies, financial tips, and the latest updates to help you make the most of your money.
