Tax deductions, such as for donations to charity or interest on student loans, are amounts that you subtract from your income when calculating how much you owe in taxes. Claiming tax deductions helps you pay less tax.
If you earned $50,000 for the year but took $10,000 in deductions, the amount of tax you pay would be based on $40,000 of income.
Some of the main deductions include:
“Few of us ever test our powers of deduction, except when filling out an income tax form.“
—Laurence J. Peter
Both credits and deductions reduce what you owe in taxes. But tax credits give you more bang for your buck because they reduce your taxes dollar for dollar (while deductions reduce the amount of income you owe tax on).
Suppose you earned $50,000 and your tax rate is 25% (real-life rates are more complicated than this). Here’s how a deduction of $10,000 would work out compared with a credit of $10,000:
|$10,000 deduction||$10,000 credit|
|Your taxable income is:||$50,000 – $10,000 = $40,000||$50,000|
|At 25%, your taxes are:||$40,000 x 0.25 = $10,000||$50,000 x 0.25 = $12,500|
|Total tax you pay:||$10,000||$2,500|
Everyone has to choose between taking the standard deduction or itemizing. The standard deduction is simpler—there’s a set dollar amount that you deduct from your income, and you don’t need to do a lot of math or recordkeeping.
Itemizing is more complicated but results in bigger savings for some people—you figure out all the specific deductions you’re eligible for and add them up.
Some specific deductions you can still take even if you don’t itemize (such as the student loan interest deduction). But many you can’t take unless you itemize (such as the deductions for mortgage interest and charity donations).
“There may be liberty and justice for all, but there are tax breaks only for some.“
—Martin A. Sullivan
Here are a few pointers if you’re trying to make the most of your deductions:
And of course, be sure to keep records documenting your deductions—like receipts for charitable contributions or medical expenses. If you’re audited, you might have to show them to the IRS.
Tax deductions are amounts you can subtract from your income when figuring out how much you owe in taxes. There are deductions for student loan interest, charitable donations, medical expenses, IRA contributions, and more. Deductions are different from tax credits, which reduce how much you owe dollar for dollar.