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. If those amendments are extended by Congress, the affected deductions will revert back to their pre-2018 form starting with the 2026 tax year.
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 itemized 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.
Above-the-line deductions on Schedule 1
Everyone ought to be familiar with the 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).
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.
Common above-the-line deductions from Schedule 1 are available for:
- student loan interest payments
- traditional IRA contributions
- health savings account (HSA) contributions
- teacher expenses for books and other classroom supplies
- alimony payments (only for pre-2019 divorces)
- moving expenses for members of the military
There are also a few above-the-line tax deductions that are only available to self-employed people, such as deductions for:
- 50% of the self-employment tax
- health insurance premiums paid by self-employed people
- contributions to their own retirement plan, such as a SEP IRA, SIMPLE IRA, or 401(k) plan (including a sole 401(k))
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.
Standard Deduction and other 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.
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 2024 tax year, it’s worth:
- $14,600 for single filers and married people filing separately ($15,000 or 2025)
- $21,900 for head-of-household filers ($22,500 for 2025)
- $29,200 for married couples filing jointly and qualifying surviving spouses ($30,000 for 2025)
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
- state and local taxes
- home mortgage interest payments
- investment interest
- charitable donations
- losses from natural disasters or theft
- gambling losses to the extent of gambling winnings
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, and 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. Use either Form 8895 or 8895-A to calculate the deduction, which is then reported on the first page of your 1040 form.
Standard Deduction vs. 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 you can claim any of the above-the-line deductions and the QBI deduction whether you take the Standard Deduction or itemize.
Business deductions 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.
However, to be deductible, your business expense 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
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.
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.
Tax deductions suspended or changed by the TCJA
Among other things, the Tax Cuts and Jobs Act (TCJA) of 2017 made changes to several federal tax deductions, starting with the 2018 tax year. But most of the revisions were only temporary and expire at the end of 2025.
Some or all of the changes could be extended or made permanent by Congress. But if that doesn’t happen, the modified deductions will revert back to their pre-2018 provisions starting with the 2026 tax year.
Here are some of the more significant changes to federal tax deductions you can expect in 2026 if the current law isn’t extended.
Standard Deduction reduced. The Standard Deduction would be roughly cut in half. With a smaller Standard Deduction, more people would end up itemizing.
Personal exemption deduction reinstated. You would once again be able to claim a personal exemption deduction for yourself, your spouse, and any dependents. In 2017, the deduction was worth $4,050 per eligible person. That amount would be increased for 2026 (and later years) to account for inflation.
Overall itemized deductions limited. The TCJA suspended rules that limited the total itemized deductions certain higher-income people can claim. The limit would be reinstated if the relevant TCJA provision isn’t extended.
SALT cap removed. The $10,000 limit on the deduction for state and local taxes would no longer apply.
Mortgage interest deduction expanded. You would be able to deduct interest paid on the first $1 million of mortgage debt, instead of on the first $750,000 (current amount). In addition, you would once again be able to deduct interest on home equity loans of up to $100,000.
Charitable gift deduction limit lowered. The income-based limit on charitable contributions of cash would be reduced from 60% to 50% of your AGI.
Miscellaneous itemized deductions allowed. Before the TCJA, you could write-off certain “miscellaneous” expenses as an itemized deduction to the extent the combined total of these expenses exceeded 2% of your AGI. Deductible expenses included unreimbursed employee expenses (such the cost of home offices, job-related travel, uniforms, equipment, and union dues), tax preparation fees, investment fees, hobby expenses (up to the amount of hobby income), and safe deposit box fees. These deductions would be available again, although they would still be subject to the 2%-of-AGI threshold.
Moving expenses deductible for non-military taxpayers. The TCJA limited the deduction for moving expenses to military personnel. The deduct would be available again to certain other people who move in connection with their job or to start a new job.
Tax deductions vs. tax credits: What’s the difference?
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.
State tax deductions
So far we’ve only discussed federal tax deductions. But 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.
Even though they were suspended at the federal level by the TCJA, some states still have personal exemption deductions, too.
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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