A tax deduction reduces your taxable income, which in turn lowers the amount of tax you owe.
Deductions are subtracted from your gross income to arrive at either your Adjusted Gross Income (AGI) or your taxable income, depending on the type of deduction.
🧮 How Tax Deductions Work
1️⃣ Start with Gross Income
Includes wages, interest, business income, retirement income, and other taxable income.
2️⃣ Subtract Certain Deductions
- Some deductions reduce income before AGI
- Others reduce income after AGI
3️⃣ Result: Lower Taxable Income
Lower taxable income means less tax owed.
🧩 Types of Tax Deductions
🟢 Standard Deduction
A fixed dollar amount based on filing status.
- ✅ Most taxpayers choose this instead of itemizing
- ✅ No documentation of expenses required
2025 Standard Deduction Amounts:
- 👤 Single: $15,750
- 👥 Married Filing Jointly (MFJ): $31,500
- 🏠 Head of Household (HOH): $23,625
🟢 Itemized Deductions
Based on actual eligible expenses paid during the year.
The program will automatically choose to itemize if the total itemized deductions exceed the standard deduction.
Common Itemized Deductions Include:
- 🏠 Mortgage interest
- 🏡 State and local taxes (SALT, subject to limits)
- 🏥 Medical expenses (amounts over 7.5% of AGI)
- ❤️ Charitable contributions
- 🔥 Casualty and theft losses (when allowed)
🟢 Above‑the‑Line Deductions
Also called adjustments to income.
- ✅ Taken before AGI is calculated
- ✅ Available even if you take the standard deduction
Common Above‑the‑Line Deductions:
- 🎓 Student loan interest
- 🍎 Educator expenses
- 🧑💼 Self‑employed health insurance
- 🏦 Retirement contributions (Traditional IRA, SEP, SIMPLE)
🧮 Tax Deduction Formula
Taxable Income = Gross Income − Adjustments − Deductions
💡 How a Deduction Saves You Money
📌 Example
- Gross income: $60,000
- Tax deduction: $10,000
✅ Taxable income becomes: $50,000
If the taxpayer is in the 22% tax bracket: $10,000 × 22% = $2,200
➡️ Tax savings = $2,200
📌 The value of a deduction depends on the taxpayer’s tax bracket.
🆚 Tax Deduction vs. Tax Credit
| Feature | Tax Deduction | Tax Credit |
|---|---|---|
| Reduces | Taxable income | Tax liability directly |
| Value | Depends on tax bracket | Dollar‑for‑dollar |
| Example | $1,000 deduction saves ~$220–$370 | $1,000 credit saves $1,000 |
| Types | Standard, Itemized, Above‑the‑Line | Refundable, Nonrefundable, Partially Refundable |
🆕 Recent Updates (OBBBA – Effective TY 2025)
📈 Standard Deduction Increased
- Single: $14,600 → $15,750
- MFJ: $29,200 → $31,500
👵 New Senior Deduction (Schedule 1‑A)
- ✅ $6,000 per person age 65+
- ✅ Available 2025–2028
- ✅ Available whether or not the taxpayer itemizes
- ⚠️ Subject to income phase‑outs
➕ New Above‑the‑Line / Additional Deductions (Schedule 1‑A)
- 💵 No Tax on Tips: Up to $25,000
- ⏱️ No Tax on Overtime (premium portion): Up to $12,500
- 🚗 Car Loan Interest: Up to $10,000 (qualified U.S.‑assembled vehicles)
📌 These deductions reduce taxable income, not AGI.