Deductible

What is a tax deductible?

A tax deductible is an expense that an individual or business can subtract from adjusted gross income (AGI). Subtracting allowable deductions from AGI lowers your taxable income and, in turn, reduces the income tax you owe.

Why deductibles exist

Governments use deductions to encourage behaviors that promote economic growth, social welfare, or personal financial stability—such as saving for retirement, donating to charity, buying a home, or investing in education and healthcare. Deductions also help taxpayers retain more of their earnings, which can stimulate spending and investment.

Common deductions

• Individuals: mortgage interest, charitable contributions, student loan interest, certain medical expenses, and qualified business expenses for the self-employed.
• Retirement contributions: contributions to traditional IRAs, 401(k)s, SEP IRAs, and similar plans may be deductible (subject to limits and eligibility rules).
• Businesses: payroll, utilities, rent, leases, supplies, depreciation of capital assets, and other ordinary and necessary operating expenses. Deductible rules vary by business entity type.

Standard deduction vs. itemized deductions

Taxpayers choose whichever produces the lower taxable income: the standard deduction or itemizing deductions on Schedule A (Form 1040).

• Itemizing requires detailed recordkeeping (receipts, statements) and attaching Schedule A to Form 1040.
• Most taxpayers have used the standard deduction since the 2017 tax changes increased its amount and limited many itemized breaks.

Standard deduction amounts:
– 2023: Single or married filing separately — $13,850; Married filing jointly — $27,700; Head of household — $20,800.
– 2024: Single or married filing separately — $14,600; Married filing jointly — $29,200; Head of household — $21,900.

Choose itemizing when your total allowable itemized deductions exceed the standard deduction (for example, very large unreimbursed medical expenses or substantial mortgage interest and charitable gifts).

Retirement contributions and deductibility

Contributions to certain retirement accounts can reduce taxable income:
– Traditional IRAs and employer plans (401(k), 403(b), SEP IRA) have contribution limits and eligibility rules; some contributions are deductible, others receive different tax treatment.
– Example: If you earn $50,000 and contribute $5,000 to a deductible traditional IRA, that $5,000 reduces your taxable income.
– Limits and phase-outs depend on year, account type, age, and whether you or a spouse are covered by a workplace plan.

Tax deduction vs. tax credit

• Tax deduction: reduces taxable income. Its value depends on your marginal tax rate.
• Tax credit: directly reduces the tax bill dollar-for-dollar. A $1,000 credit reduces taxes owed by $1,000.

How deductions affect refunds and tax liability

A deduction lowers taxable income and therefore can reduce the amount of tax owed. If you overpaid taxes through withholding or estimated payments, a reduced tax bill can increase your refund. Whether you receive a refund depends on total payments versus total tax liability.

Pros and cons of tax deductibles

Pros
– Encourage socially or economically beneficial behavior (charitable giving, retirement saving).
– Reduce tax burdens and increase disposable income.
– Recognize individual circumstances (medical costs, business expenses).

Cons
– Add complexity to the tax code and increase compliance burdens.
– Can influence financial behavior in ways that distort markets (e.g., excessive borrowing).
– May disproportionately benefit higher-income taxpayers who can better use certain deductions.

Choosing between standard deduction and itemizing

• Compare the standard deduction to your total qualifying itemized deductions.
• Keep organized records throughout the year if you expect to itemize.
• Itemize for years with unusually large deductible expenses (major medical costs, large charitable gifts, significant mortgage interest).

Summary

A deductible lets taxpayers subtract eligible expenses from adjusted gross income to lower taxable income and taxes owed. Most taxpayers take the standard deduction, but those with substantial deductible expenses may benefit from itemizing. Retirement contributions, business expenses, and certain individual costs are common avenues for deductions—each governed by IRS rules and limits. Always compare your options and keep supporting documentation if you plan to itemize.