What is a deductible?
A deductible is an expense that a taxpayer or business can deduct from their adjusted gross income when filing a tax form. Deductible expenses reduce your taxable income and, therefore, the income tax you owe.
Individual U.S. taxpayers can use the standard deduction or itemize all of their deductible expenses, depending on what results in lower taxable income.
Understanding Deductibles
Some of the most commonly used deductibles for the self-employed are state and local tax payments, mortgage interest payments, and charitable deductions. There is a deduction for reimbursable medical expenses. Even the self-employed can deduct many related expenses.
However, most Americans opted for the standard deduction in 2018, when that number nearly doubled.
For 2022, the standard deduction for single taxpayers and couples filing separately is $12,950. For couples filing jointly, it's $25,900. For heads of households (HoH), it is $19,400.
For the 2023 tax year (the tax you pay in 2024), the standard deduction for single taxpayers and couples filing separately is $13,850. For couples filing jointly, it is $27,700. For heads of household, it is $20,800.
Common Tax Deductions
Taxpayers can claim many tax deductions to ease their tax burden. These include mortgage interest deductions, student loan interest deductions, charitable donation deductions, home office deductions, gambling loss deductions, and self-employment expense deductions.
These are just a few tax deductions people can claim on their tax returns. When you file your tax return, it's worth checking with the IRS website or your tax advisor about the various deductions you can claim. Many of them require a person to be eligible for the tax credit, which can include income thresholds.
Business Deductions
Business deductions are much more complex than individual deductions and require much more record-keeping. A business or self-employed person must list all income received and all expenses paid to report the actual profit of the business. This profit constitutes the gross taxable income of the company.
Examples of common business deductibles include payroll, utilities, rent, lease, and other operating expenses. Additional deductibles include capital expenditures such as equipment or depreciation of real estate.
Allowable deductibles vary by business structure. LLCs and corporations differ in the amounts and types of deductions available to their owners.
Standard Deduction vs. Itemized Deductions
If a taxpayer uses the standard deduction or lists expenses as deductible, the amount is deducted directly from the adjusted gross income. For example, if an individual reports a gross income of $50,000 in 2022, based on the amount from Form W2, they can deduct $12,950, which reduces their taxable income to $37,050.
The standard deduction almost doubled with the Tax and Jobs Cuts Act 2017. In the first year of its implementation, 2018, about 90% of taxpayers used the standard deduction instead of itemized deductions.
Itemizing your deductible expenses instead of taking the standard deduction requires you to filing another piece of paper. A Schedule A form, which is used to record the various deductions claimed, must be attached to the main tax form, Form 1040 or Form 1040-SR.
The process requires extensive record keeping, including receipts or other proof of expenses.
Taxpayers who take advantage of the standard deduction can file Form 1040. Persons 65 and older can use Form 1040-SR. It is almost identical to Form 1040 but with larger fonts.
Tax credit vs. tax deduction
Tax deductions and tax credits can help taxpayers pay less tax, but there are clear differences between the two. A tax credit is an exact monetary reduction of your tax bill. For example, a $100 tax credit will reduce your bill by $100. You will be refunded the difference if your tax credits are higher than your tax bill.
Some tax credits are the Child Tax Credit, the Earned Income Tax Credit, the Adoption Credit, and the Child and Dependent Tax Credit.
On the other hand, a tax deduction reduces your taxable income, thereby reducing your taxes. A tax deduction reduces an amount from your income, while a tax credit reduces a dollar-for-dollar amount from your bill.
How are tax deductions calculated?
A tax deduction reduces your gross income to arrive at an adjusted gross income(AGI). There are several deductibles, depending on whether a person qualifies for them or not. The deductible amount is applied to an individual's income, reducing their income by the deductible amount, resulting in lower income and, therefore, a lower tax burden.
What is a standard tax deduction?
A standard deduction is a certain dollar amount determined by the IRS that reduces taxable income. The standard deduction for 2022 is $12,950 for single taxpayers and married couples filing separately, and for 2023 it is $13,850.
Do tax deductions increase your refund?
Tax deductions can increase your refund. A tax deduction reduces your taxable income, which means you end up paying less tax, which could result in a refund.
Should I take a standard deduction?
Whether you should take a standard deduction or itemize your deductions depends on your financial situation. If your standard deduction is higher than your itemized deductions, it may be worth taking the standard deduction. If your itemized deductions result in more tax savings, it may be worth itemizing them.
Summary
A tax deduction is an expense that a taxpayer or business can deduct from adjusted gross income, which reduces your income and, therefore, the total tax you owe.
Business deductibles include payroll, utilities, leases, rent, and other operating expenses.
Common tax deductions for individuals include student loan interest deductions, self-employment expense deductions, charitable donation deductions, and mortgage interest deductions.
Most employees use the standard deduction; however, those with very high deductibles can choose to itemize if it results in a tax reduction.
The Internal Revenue Service (IRS) provides lists, requirements, and amounts of all available deductibles.
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