Tax Deductions 2024: What Can I Deduct and How Do They Work?
If you’re focused on your tax liability and not just the size of your tax refund, you should be paying attention to tax deductions.
The Internal Revenue Service offers scores of deductions to help you keep more of your earnings in your pocket. Here’s what you need to know about deductions for tax year 2024 (with a filing deadline of April 15, 2025).
How Tax Deductions Work
Understanding Tax Deductions
A deduction is a provision that lowers your taxable income, in turn lowering your tax bill. Every taxpayer qualifies for at least one tax deduction — the standard deduction — but people who pay for college, own a home, or save for retirement likely also qualify for many other types of tax deductions.
There are two broad types of tax deductions: above-the-line deductions and below-the-line deductions:
- Above-the-line deductions: These expenses are subtracted from your gross income. They’re also referred to as “adjustments” to income and include self-employed business expenses, educator expenses, student loan interest, pre-tax retirement account contributions, and military moving expenses. There is an annual maximum for each deduction; in some cases, income limits reduce the amount you can claim.
- Below-the-line deductions: After taking above-the-line deductions, you arrive at your adjusted gross income (AGI), listed on line 11 of Form 1040. There are two below-the-line deduction options: the standard deduction or itemized deductions. Taxpayers will need to crunch the numbers to find out which option nets them greater savings. Eligible business owners may also take the Qualified Business Income deduction.
Importance Of Maximizing Deductions
Tax deductions allow people to exclude certain income and account for losses when calculating the amount of federal income tax they owe, according to the Tax Foundation. Some deductions were designed to encourage certain behaviors, such as saving for retirement. If you contribute to a 401(k), for example, you put off paying taxes until retirement on the income that’s directed from your paycheck into the account.
Standard Deduction vs. Itemized Deductions
Standard Deduction
The standard deduction is a flat amount that taxpayers deduct from their AGI. How much you can get depends on your filing status. Here are the amounts for 2024 (the taxes you file in 2025):
- Single: $14,600
- Married, filing jointly: $29,200
- Married, filing separately: $14,600
- Head of household: $21,900
If you’re over age 65 or blind, you’re eligible for an additional standard deduction of $1,500 to $1,950, depending on your filing status. If you are both elderly and blind, this amount is doubled. The IRS adjusts the standard deduction amounts annually for inflation.
Itemized Deductions
Certain expenses fall under a category called itemized deductions. These include unreimbursed medical expenses, home mortgage interest, property taxes, state and local income taxes, and gifts to charity. Taxpayers must choose the higher of the standard deduction or their total itemized deductions.
Common Tax Deductions You Can Claim
Home-Related Deductions
Mortgage Interest
If you take out a mortgage to purchase a home, use a home equity line of credit, or take out a home equity loan, some or all of the interest you pay is eligible for a tax deduction. It is considered an itemized deduction, so you won’t be able to deduct it if you claim the standard deduction. Mortgage interest you paid throughout the tax year on the first $750,000 of indebtedness if you file as single or married, or $375,000 if you’re married and filing separately, is generally eligible for a deduction. Loans originated prior to December 16, 2017 have higher limits of $1 million, or $500,000 if you’re married and filing separately.
State And Local Taxes
State and local taxes, or SALT, are itemized deductions capped at $10,000 per year. SALT includes amounts paid for personal property taxes, property taxes on real estate, sales tax, and state and local income taxes.
Savings And Retirement Contributions
Contributing to a retirement plan like a 401(k), traditional IRA, or SEP IRA, is a tax-savvy way to prepare for retirement. You can contribute up to $23,000 to a 401(k), 403(b), and most 457 plans for 2024 and deduct that contribution on your federal tax return as an above-the-line deduction. Traditional IRA contributions, which may also be deductible on your taxes depending on your income and participation in a workplace retirement plan, are capped at $7,000 in 2024. There are additional catch-up contributions to all tax-deferred retirement accounts for people over age 50.
Medical And Dental Expenses
Qualified Medical And Dental Expenses
If you spent more than 7.5% of your AGI on medical or dental expenses for yourself, your spouse, or a dependent, the amount over that threshold may be deductible. The scope of qualifying expenses is broad but does not include nonprescription medications, cosmetic surgery costs, or funeral or burial costs. Also, expenses can only qualify if they have not been covered or reimbursed by your health insurance plan, or through a medical FSA or an HSA.
Health Savings Account (HSA)
If your health insurance plan allows you to contribute to an HSA, you can save $4,150 per year (or up to $8,300 as a family) directly from your paycheck. Come tax time, your contributions will count as an above-the-line deduction, reducing your taxable income. The money accumulated in your HSA can be used to pay for qualified medical expenses, including copays and prescriptions, or you can let it grow in the HSA account and use it for qualifying medical expenses during retirement or any time in the future.
Education Expenses
Student Loan Interest Deduction
Borrowers with a private or federal student loan can deduct up to $2,500 in interest payments per year as an above-the-line deduction — meaning you don’t have to choose between the standard deduction and itemized deductions to get this valuable benefit. However, income limits do apply. You can use an IRS tool to see if you qualify.
Educator Expenses
Teachers and other qualifying educators can deduct up to $300 (or $600 for married couples filing jointly in which both are educators) as an above-the-line deduction for expenses paid out-of-pocket for the classroom. K-12 teachers, counselors, principals, and aides who worked at least 900 hours in a public or private school are eligible.
Charitable Contributions
Gifts to charity are only deductible on your federal tax return if you itemize deductions. Also, the gifts must be received by a qualified nonprofit organization — gifts to individuals do not count. The charitable deduction can be tricky to navigate, but in general you can deduct the full amount of cash donated or the fair market value of property, such as clothing or stock holdings, up to overall limits. It is very important to keep detailed records of your donations and obtain appraisals for high-value items. You can use an IRS tool to help you determine whether, and how much, you can deduct charitable contributions.
Work-Related Deductions
Note that W-2 employees do not qualify for these deductions.
Business Expenses For The Self-Employed
Self-employed people and small business owners can deduct “ordinary and necessary” operating expenses without itemizing their deductions. Everything from office supplies and furniture to the cost of business insurance to legal fees can qualify for a deduction on the Schedule C tax form. Though you may not need to attach a receipt for every expense, it’s critical to keep a file should the IRS ask for documentation. There’s no perfect system for tracking business expenses — you can use an app like Empower, a spreadsheet of your own making, or a simple pen and paper.
Home Office Deduction
Self-employed people who use part of their home to “regularly and exclusively” conduct business may be able to deduct part of their homeownership or renters’ expenses, including mortgage payments, utility bills, and maintenance costs. There are two methods to calculate the home office deduction. They take into account either the square footage of your office space or the size of your office space in proportion to the rest of the home. You do not need to itemize your deductions to claim this deduction.
Investment-Related Deductions
Investment Interest Expenses
If you purchase an investment on margin, you may be able to deduct the interest you pay on the borrowed amount. However, it must be a taxable investment, such as a stock held in a traditional brokerage account, and not a tax-advantaged investment, such as a municipal bond. You must itemize to claim this deduction.
Losses On Investments
Capital losses can be used to reduce your capital gains, thereby reducing the amount of tax you’re required to pay on your investment profits. If your losses exceed your gains you can deduct up to $3,000 against your ordinary income for the year, and carry forward any additional losses to future years.
Maximizing Your Deductions
Keep Accurate Records
Recordkeeping is important when claiming tax deductions. For some deductions, the IRS will require you to attach receipts or supporting documents to your return. If your expenses don’t add up or a calculation is incorrect, the IRS may ask to see your records.
Time Your Deductions
If you anticipate a high-income year, it may be beneficial to time your deductions. For example, tax attorney Megan Gorman of Chequers Financial Management says “bunching” charitable giving can help you boost your itemized deductions. If 2024 is going to be a significant income year, for example, but you don’t believe 2025 will be, you may want to consider combining donations into the higher earning year, she says. You can also utilize a donor-advised fund to hold the funds until you are ready to disperse them to charity, Gorman says.
Consult With A Tax Professional
The more complex your tax situation is, the more likely you are to benefit from working with a tax preparer or advisor. While most online tax software is adept at calculating tax deductions, it relies on information that the user feeds into the platform. Speaking with a professional may help you uncover overlooked deductions and more sophisticated tax-saving strategies.
Source: Business Insider
