What Types of Deductions Are Optional?
Understand the elective tax deductions available to you. Learn how choosing the right options can significantly reduce your taxable income.
Tax deductions reduce the amount of income subject to taxation, lowering a taxpayer’s overall tax liability. While some deductions are automatically applied or are mandatory, many others are optional, offering taxpayers choices that can influence their tax outcomes. Understanding these optional deductions helps individuals strategically reduce their taxable income.
The Choice Between Standard and Itemized Deductions
Most taxpayers encounter a fundamental decision each tax season: whether to claim the standard deduction or to itemize their deductions. The standard deduction is a fixed dollar amount that reduces taxable income, designed to simplify tax filing for a large segment of the population. This amount varies based on filing status (e.g., single, married filing jointly), age, and whether a taxpayer is blind. For instance, in 2024, the standard deduction for a single filer is $14,600, while for those married filing jointly, it is $29,200. Individuals who are 65 or older or blind can claim an additional standard deduction, such as $1,950 for single filers or $1,550 per qualifying individual for married filers in 2024.
Itemized deductions are specific, eligible expenses that taxpayers can subtract from their adjusted gross income (AGI). These deductions are claimed on Schedule A of Form 1040. A taxpayer typically chooses to itemize if their total eligible itemized expenses exceed their standard deduction amount. The decision involves calculating both options to determine which one yields the lower taxable income.
Understanding Common Itemized Deductions
When itemizing, several common expenses can be deducted. Medical and dental expenses are one such category. These costs are deductible only to the extent they exceed 7.5% of the taxpayer’s adjusted gross income (AGI). Examples of deductible expenses include payments for doctor visits, prescription medications, and health insurance premiums not paid with pre-tax dollars.
State and local taxes (SALT) are another common itemized deduction. This includes income, real estate, and personal property taxes. The total deduction for state and local taxes is limited to $10,000 per household ($5,000 if married filing separately) for tax year 2024.
Home mortgage interest is another itemized deduction. Interest paid on a qualified home mortgage is deductible, generally up to a certain loan limit. For mortgages incurred after December 15, 2017, the interest on up to $750,000 of mortgage debt can be deducted ($375,000 if married filing separately). However, a higher limit of $1 million ($500,000 if married filing separately) applies to mortgage debt incurred before December 16, 2017.
Charitable contributions are also an itemized deduction. Cash contributions to qualified organizations can be deducted up to 60% of a taxpayer’s AGI. Non-cash contributions, such as appreciated assets, typically have lower AGI percentage limits. If contributions exceed these limits, the excess amount can generally be carried forward and deducted for up to five years.
Other Deductions You Can Choose To Take
Beyond the choice between standard and itemized deductions, other optional deductions can reduce a taxpayer’s adjusted gross income (AGI). These are referred to as “above-the-line” deductions because they are subtracted from gross income before AGI is calculated, meaning they can be taken even if a taxpayer claims the standard deduction.
Contributions to a traditional Individual Retirement Account (IRA) are tax-deductible, subject to income limits and whether the taxpayer or their spouse is covered by a retirement plan at work. For 2024, the maximum contribution limit for a traditional IRA is $7,000, with an additional catch-up contribution of $1,000 allowed for those age 50 or older. The deductibility of these contributions can be phased out or eliminated based on modified adjusted gross income levels for those covered by employer-sponsored retirement plans.
Contributions to a Health Savings Account (HSA) are also tax-deductible. To contribute to an HSA, an individual must be covered by a qualified high-deductible health plan. For 2024, an individual with self-only coverage can contribute up to $4,150, while those with family coverage can contribute up to $8,300. An additional catch-up contribution of $1,000 is permitted for individuals age 55 or older.
The student loan interest deduction allows taxpayers to deduct interest paid on qualified student loans, up to $2,500 annually. This deduction is subject to income limitations, phasing out for single filers with a modified AGI between $80,000 and $95,000 in 2024, and for married couples filing jointly between $165,000 and $195,000.
Educators can claim a deduction for certain unreimbursed business expenses. Eligible educators include teachers, instructors, counselors, principals, and aides who work at least 900 hours in a school providing elementary or secondary education. The maximum deduction for these expenses is $300 for 2024, with married educators filing jointly able to deduct up to $600, provided each spouse’s expenses do not exceed $300.
Self-employed individuals can also take a deduction for a portion of their self-employment taxes. One-half of the self-employment taxes paid can be deducted from gross income when calculating AGI. This deduction helps offset the self-employment tax burden, which covers Social Security and Medicare taxes for independent workers.