What Type of Tax Deductions Are Optional?

Tax deductions allow individuals to reduce their taxable income, lowering their overall tax liability. While some tax benefits are automatic, others require taxpayers to meet specific criteria or make deliberate choices.

Understanding the Core Choice: Standard or Itemized

A primary decision for most taxpayers involves choosing between the standard deduction and itemized deductions. The standard deduction is a fixed dollar amount that taxpayers can subtract from their income before taxes, simplifying tax filing. This amount varies based on filing status, such as single, married filing jointly, or head of household. For the 2024 tax year, the standard deduction is $14,600 for single filers and married individuals filing separately, $21,900 for heads of household, and $29,200 for those married filing jointly or surviving spouses. These amounts are adjusted annually for inflation.

Taxpayers who are 65 or older or who are blind may qualify for an additional standard deduction. For 2024, this additional deduction is $1,550 for married individuals and $1,950 for single or head of household filers. This amount is added to their base standard deduction. Approximately 88% of taxpayers choose the standard deduction, often finding it more beneficial than itemizing.

In contrast, itemized deductions allow taxpayers to subtract specific eligible expenses from their adjusted gross income, such as medical expenses, state and local taxes, and home mortgage interest. Taxpayers choose to itemize if their total qualifying expenses exceed their standard deduction. This choice is made by filing Schedule A (Form 1040) with their tax return.

The decision to itemize requires careful record-keeping of all eligible expenses. If itemized expenses are less than the standard deduction, it is generally more beneficial to claim the standard deduction. The primary choice for many taxpayers is between the standard deduction and itemizing specific expenses.

Common Itemized Deductions

When taxpayers itemize, several common expense categories can be deducted. Medical and dental expenses cover payments for medical care. Only the amount exceeding 7.5% of the taxpayer’s adjusted gross income (AGI) can be deducted.

State and local taxes (SALT) paid during the year are deductible, including income, sales, and real property taxes. For 2024, the maximum deduction for state and local taxes combined is $10,000 per household, or $5,000 for married individuals filing separately.

Home mortgage interest is an itemized deduction for homeowners. Taxpayers can deduct interest paid on mortgage debt for their main home and a second home. For mortgages incurred after December 15, 2017, the deduction is limited to interest on the first $750,000 of mortgage debt ($375,000 if married filing separately). Mortgages taken out before this date allow interest deductions on up to $1 million of debt ($500,000 if married filing separately). Interest on home equity loans or lines of credit is deductible only if used to buy, build, or substantially improve the home.

Charitable contributions made to qualified organizations can also be itemized. Deduction limits vary by contribution type and organization. For cash contributions to public charities, taxpayers can deduct up to 60% of their adjusted gross income (AGI). Donations of non-cash assets, such as appreciated stock, have lower AGI limits. If contributions exceed these limits, the excess can be carried forward and deducted in up to five subsequent tax years.

Casualty and theft losses are deductible only if they occurred in a federally declared disaster area. The deductible amount is limited to the loss exceeding 10% of the taxpayer’s adjusted gross income, after subtracting a $100 per-casualty reduction.

Adjustments to Income

Beyond itemized deductions, certain expenses can be deducted “above-the-line,” meaning they reduce gross income to arrive at adjusted gross income (AGI). These adjustments are available whether taxpayers itemize or take the standard deduction. AGI is a significant figure because it affects eligibility for various other tax credits and deductions.

Educator expenses allow K-12 educators to deduct certain unreimbursed costs. For 2024, those working at least 900 hours in a school can deduct up to $300 for classroom supplies and professional development. If two married educators file jointly, they can each deduct up to $300, for a combined maximum of $600.

Contributions to a Health Savings Account (HSA) are deductible. These accounts are available to individuals covered by a high-deductible health plan. The specific contribution limits are set annually by the IRS.

Deductible contributions to Individual Retirement Arrangements (IRAs) are another adjustment. For 2024, individuals can contribute up to $7,000 to a Traditional or Roth IRA, with an additional $1,000 for those age 50 or older, totaling $8,000. While Roth IRA contributions are not deductible, Traditional IRA contributions may be fully or partially deductible depending on income and workplace retirement plan coverage.

The student loan interest deduction allows taxpayers to deduct interest paid on qualified student loans. For 2024, individuals can deduct up to $2,500 in student loan interest. This deduction is subject to income limitations, where it is gradually phased out for single filers with modified adjusted gross income (MAGI) between $80,000 and $95,000, and for married filing jointly between $165,000 and $195,000.

Self-employed individuals can deduct one-half of their self-employment taxes paid. This deduction accounts for the employer-equivalent portion of Social Security and Medicare taxes. This adjustment reduces their taxable income, but it does not affect their net earnings from self-employment for calculating the self-employment tax itself.

Deductions for the Self-Employed

Self-employed individuals and small business owners have access to specific deductions related to their business operations. The home office deduction allows taxpayers to deduct certain home expenses if a portion of their home is used exclusively and regularly for business. Taxpayers can calculate this using a simplified option of $5 per square foot for business use, up to a maximum of 300 square feet ($1,500 maximum deduction). Alternatively, they can use the regular method, deducting a percentage of actual home expenses like mortgage interest, utilities, and repairs, based on the proportion of the home used for business.

General business expenses encompass costs directly related to operating a trade or business. These include supplies, professional development, and business travel. These deductions reduce the business’s net income, which lowers the individual’s taxable income. Proper record-keeping is essential to substantiate these expenses.

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, allows self-employed individuals and owners of pass-through entities to deduct up to 20% of their qualified business income. This applies to income from sole proprietorships, partnerships, and S corporations. For 2024, the full deduction is available to single filers with taxable income below $191,950 and joint filers below $383,900. Above these thresholds, the deduction may be limited or phased out. This deduction is claimed on the individual’s personal income tax return and does not reduce net earnings for self-employment tax purposes.