Tax Deductions: What Are They, Different Types, and More
What are tax deductions? Tax deductions reduce your taxable income, lowering the amount of taxes you owe. By claiming deductions, you can keep more of your earnings. Tax deductions can include costs like mortgage interest, student loan interest, medical expenses, and donations. Find out how you can save on your return by learning about itemized vs. standard deductions, deduction limits, and more.
The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
Key Takeaways
- Tax deductions claimed on Form 1040 and related schedules lower your federal taxable income, which in turn can reduce the amount of tax you owe.
- In addition to lowering your taxable income, certain deductions also lower your adjusted gross income. This can help you qualify for or increase other tax breaks.
- You can't claim both the Standard Deduction and itemized deductions on your federal income tax return. But you can usually pick whichever one benefits you the most.
- The Tax Cuts and Jobs Act of 2017 temporarily suspended or changed several federal tax deductions for the 2018 to 2025 tax years. The One Big Beautiful Bill passed in 2025 made many of the changes permanent.
What are tax deductions?
A tax deduction is an expense or other item that's subtracted from your taxable income. By lowering your taxable income, the deductions available on your 1040 form and related schedules cut your federal income tax bill and save you money.
But not all federal tax deductions work the same way or are available to the same taxpayers. For example, some are for expenses you paid during the tax year, while others are for contributions to certain tax-advantaged accounts (such as an IRA or health savings account). "Above-the-line" deductions affect your adjusted gross income, but "below-the-line" deductions don't. There are even a number of tax deductions that are only available for self-employed people or other business owners.
Let's explore the different types of federal income tax deductions in more detail. Hopefully, this will help you take full advantage of any tax deductions you may be able to claim, which will improve your bottom line.
TurboTax Tip:
Make sure to keep all receipts, invoices, and documents that support your tax deductions. This will make it easier to claim the deductions when it's time to file your taxes.
What are above-the-line deductions?
Above-the-line deductions are tax deductions found on Schedule 1. Although the IRS calls them adjustments to income, they're commonly referred to as "above-the-line" deductions. That's because you report the combined total of these deductions on Form 1040 right above the line showing your adjusted gross income (AGI).
How do above-the-line deductions work?
What makes above-the-line deductions special is that they reduce your AGI (in addition to lowering your taxable income). Since the amount of and/or qualifications for several other tax breaks are based on your AGI, this can have a ripple effect and result in additional tax savings.
For instance, the Child Tax Credit is gradually reduced – potentially to $0 – if your AGI (with some modifications) is above a certain amount. So, an above-the-line deduction that brings your AGI down could help you avoid or soften the blow of the credit's phaseout.
What are some examples of above-the-line deductions?
Common above-the-line deductions from Schedule 1 are available for:
- Student loan interest payments – You can generally deduct up to $2,500 of interest paid during the year on a qualified student loan. However, the deduction is gradually phased out if your income is above a certain amount.
- Traditional IRA contributions – If you put money in a traditional IRA, you may be able to deduct your contributions. But the deduction can't be greater than the IRA contribution limits for the tax year, and it may be limited if you (or your spouse) are covered by a retirement plan at work.
- Health savings account (HSA) contributions – If you have a high-deductible health insurance plan, you can make contributions to an HSA. Those contributions are generally deductible, up to the HSA contribution limits for the tax year.
- Teacher expenses – For the 2025 tax year, teachers and certain other educators can deduct up to $300 of their out-of-pocket costs for books and other classroom supplies (up to $350 for 2026).
- Alimony payments – You can deduct alimony payments to an ex-spouse, but only if it's paid according to a pre-2019 divorce or separation agreement.
- Moving expenses – Only members of the military can deduct moving expenses. To claim the deduction, you must be on active duty and your move must be because of a military order.
There are also a few above-the-line tax deductions that are only available to self-employed people, such as deductions for:
- Self-employment tax – You can deduct 50% of the self-employment taxes you pay for the year.
- Health insurance premiums – If you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental and qualifying long-term care insurance coverage for yourself, your spouse, and your dependents. However, you can only claim the deduction for months when neither you nor your spouse are eligible to participate in an employer-subsidized health plan.
- Retirement plan contributions – Self-employed people can deduct contributions to their own retirement plan – such as a SEP IRA, SIMPLE IRA, or 401(k) plan (including a sole 401(k)) – up to the plan's contribution limit.
What are below-the-line deductions?
There are also a number of "below-the-line" deductions. They're reported on your 1040 form below the line for your AGI. As a result, they don't affect your AGI, but they're still very valuable deductions.
Let's discuss the current below-the-line deductions available to individual taxpayers.
Standard Deduction
The most common below-the-line deduction is the Standard Deduction. Anyone can claim the Standard Deduction, and around 90% of all taxpayers do just that each year. It's also the single largest deduction for most people.
For the most part, the Standard Deduction is a set amount that's based on your filing status. For the 2025 tax year, it's worth:
- $15,750 for single filers and married people filing separately ($16,100 for 2026)
- $23,625 for head-of-household filers ($24,150 for 2026)
- $31,500 for married couples filing jointly and qualifying surviving spouses ($32,200 for 2026)
However, a higher Standard Deduction is available for people who are at least 65 years old and/or blind, while it can be lower if you can be claimed as a dependent on someone else's tax return.
Itemized Deductions
If you don't take the Standard Deduction, you can claim various itemized deductions (more on the relationship between the Standard Deduction and itemized deductions in a minute). These deductions are initially claimed on Schedule A, with the combined total of all itemized deductions reported on the 1040 form itself. The primary itemized deductions are for:
- Medical and dental expenses – The deduction is only available for qualified expenses that exceed 7.5% of your AGI.
- State and local taxes – Nicknamed the "SALT deduction," this write-off is for state and local income or sales taxes, real estate taxes, and personal property taxes you pay during the tax year. The deduction generally can't exceed $40,000 for the 2025 tax year ($40,400 for 2026), but this cap can be lower if your income is above a certain amount.
- Mortgage interest – You can generally deduct home mortgage interest paid during the year if your mortgage is used to buy, build, or substantially improve your primary or a second home. However, there are limits to the loan amount.
- Investment interest – You can generally deduct interest paid on money you borrow to invest, but there are restrictions on how much you can deduct and which investments qualify for the deduction.
- Charitable donations – Gifts to religious, charitable, or educational organizations may be tax deductible as an itemized deduction (although various limitations may apply).
- Disaster losses – You may be able to deduct the value of personal property that's damaged, destroyed, or lost during a federally declared natural disaster, such as a hurricane, flood, wildfire, tornado, or earthquake.
- Gambling losses – For the 2025 tax year, you can deduct gambling losses, but only to the extent you report gambling winnings as taxable income on your return. Beginning in 2026, the deduction is limited to 90% of your qualified losses, which still can't exceed your winnings.
New deductions established by the "One Big Beautiful Bill"
The "One Big Beautiful Bill" (also known as the Working Families Tax Cut), which was signed into law in July 2025, added four new below-the-line deductions for the 2025 to 2028 tax years. The deductions are available for:
- Tip income – If you qualify, you can deduct up to $25,000 of the qualified tips you receive at work.
- Overtime pay – Eligible workers can deduct up to $12,500 of qualified overtime pay, or up to $25,000 for married people filing a joint return.
- Seniors – If you're at least 65 years old, you can claim a deduction of up to $6,000. If you're married and your spouse is also 65 or older, you can claim up to $12,000 if you file jointly.
- Car loan interest – If you took out a loan after 2024 to buy a new car, van, truck, or motorcycle, you may be able to deduct up to $10,000 of interest paid during the year on the loan. The vehicle's final assembly point must be in the U.S. to qualify for the deduction.
All four deductions are available whether you itemize or take the standard deduction. However, they're also reduced, potentially to zero, if your income is too high. Schedule 1-A is used to calculate and claim these deductions.
In addition, starting with the 2026 tax year, the "One Big Beautiful Bill" added a permanent below-the-line deduction for up to $1,000 of cash donations to charity made during the year (up to $2,000 for married couples filing a joint return). This deduction is separate from the itemized deduction for charitable contributions and can only be claimed by people who don't itemize.
Qualified business income (QBI) deduction
Finally, there's the qualified business income (QBI) deduction. This below-the-line deduction is only available to certain business owners (including self-employed people). It's worth up to 20% of their QBI, which is generally the net total of:
- income
- gain
- deduction
- loss from any qualified trade or businesses
But the deduction is reduced (possibly to $0) for doctors, lawyers, accountants, and certain other service-oriented business owners if their business income exceeds a certain amount.
Starting with the 2026 tax year, a minimum QBI Deduction of $400 is available for certain people who have at least $1,000 of QBI during the year. The minimum deduction and QBI amount will be adjusted for inflation each year beginning in 2027.
Use either Form 8895 or 8895-A to calculate the deduction, which is then reported on the first page of your 1040 form.
Should you claim the Standard Deduction or itemized deductions?
Here's the thing about the Standard Deduction and itemized deductions – you can't claim both of them on the same federal income tax return. You have to pick one or the other.
But the choice is typically up to you. So, in most cases, you can go with whichever amount is larger and saves you the most money. As a result, it's a good idea to tally up your potential itemized deductions just to see if they're more than your Standard Deduction for the year. Then you can make an informed decision as to which option works best for you.
It's also important to note that, whether you take the Standard Deduction or itemize, you can still claim:
- any of the above-the-line deductions
- the below-the-line deductions added by the "One Big Beautiful Bill"
- the QBI deduction
What business deductions are available for sole proprietors?
In addition to the QBI deduction and the above-the-line deductions for health insurance, retirement plan contributions, and self-employment taxes, people operating a business as a sole proprietorship can also deduct their business expenses on their personal income tax return. This is true whether you claim the Standard Deduction or itemize deductions.
Which business expenses qualify for a deduction?
To be deductible, your business expenses must be both ordinary and necessary. "Ordinary" expenses are those that are common and accepted in your field of business. A "necessary" expense is one that's helpful and appropriate for your business.
Some of the more common deductible business expenses include costs for:
- advertising
- business use of your home
- cars and trucks
- cost of goods sold
- depreciation
- employee wages and benefit programs
- insurance
- mortgage or rent payments
- repairs and maintenance
- supplies
- taxes and licenses
- travel
- utilities
How are business expense deductions reported on your tax return?
If you're a sole proprietor, your business expenses are initially reported on Schedule C, where they are subtracted from your business income to determine your profit or loss. That amount is ultimately reflected on your 1040 form before the line for AGI. So, in essence, business expense deductions are a type of above-the-line deduction (see above) in that they can lower your AGI.
Can you deduct investment losses?
If you sell stock or investments for a loss, you can generally subtract that loss from any capital gain for the year. Since capital gain is included in your taxable income, this lowers your taxable income – and, therefore, your tax bill – like other deductions. And since capital gain is included on your 1040 form above the line for AGI, the deduction for investment loss reduces your AGI like other above-the-line deductions.
In addition, if your investment losses are greater than your capital gains, you might be able to deduct up to $3,000 of the excess from "ordinary" taxable income (such as wages, tips, interest, traditional IRA distributions, and the like). If you have more than $3,000 of excess losses, any amount over the $3,000 threshold can be carried forward and used to offset gains or ordinary income on future tax returns. Again, this deduction is another above-the-line deduction that can lower your AGI.
Are state tax deductions available?
Don't forget to look for available tax deductions when you file your state income tax return, too (unless you live in a state with no income taxes).
For example, most states with an income tax have a Standard Deduction. In some cases, it's the same as the federal Standard Deduction.
Many states also allow itemized deductions. Again, they're sometimes the same as the federal itemized deductions – but not always.
Various other state-level tax deductions may be available as well. Check with the state tax agency where you live to learn more.
What's the difference between tax deductions and tax credits?
In addition to saving money with tax deductions, you might qualify for one or more federal tax credits that can also cut your tax bill. In fact, tax credits are generally more valuable than deductions. Let's take a look at why.
As noted earlier, tax deductions lower your taxable income, which certainly can reduce the tax you owe for the year. But your actual savings are only a fraction of the deduction amount, which depends on the tax bracket you're in. For example, if you qualify for a $1,000 tax deduction and are in the 12% bracket, you end up with a tax savings of $120 ($1,000 x .12 = $120) – not $1,000.
On the other hand, a tax credit reduces the tax you owe on a dollar-for-dollar basis. For instance, if you qualify for a $1,000 credit, you can generally subtract the full amount from the tax you owe.
Plus, if the credit is what's known as a "refundable" credit, you can even get a tax refund (or a bigger refund) if the credit amount is greater than your total tax liability before applying the credit. So, for example, if you owe $600 in tax before applying a $1,000 refundable credit, you'll get a $400 refund. Nonrefundable credits can reduce your tax liability to zero, but they won't generate a refund.
What information do you need to claim deductions?
To claim a tax deduction, you need documents and records that show the expenses or losses you want to write off. The type of documentation needed depends on the deduction.
In some cases, you will need records showing how much money you paid for deductible expenses. For instance, this could include receipts, invoices, bank or credit card statements, canceled checks, or similar records.
Information returns reporting income you received might also be needed for some deductions. For instance, starting with the 2026 tax year, deductible amounts of tip income and overtime pay might be reported on a W-2, 1099-NEC, 1099-MISC, or 1099-K form that you receive. In addition, mortgage interest payments are reported on Form 1098, while student loan interest is shown on Form 1098-E.
Our handy Tax Preparation Checklist can help you identify the documents and records you need to file your federal income tax return. To see when you can get rid of your tax documents, check out our article on How Long To Keep Tax Returns and Records.
How do you know which tax deductions you can claim on your return?
A CPA, enrolled agent, or other tax professional can help you uncover all the state and federal tax deductions you're qualified to claim.
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