Tax Deduction Basics

What Is a Tax Deduction?

Unlike a tax credit, which reduces the amount of tax owed, a tax deduction reduces the amount of income subject to taxation before taxes owed are calculated.

Tax deductions typically fall into three main categories:

  • The standard deduction
  • Itemized deductions
  • Schedule 1 deductions (also known as above-the-line deductions). 

Standard Vs. Itemized Deductions

Filers must choose between the standard deduction and itemized deductions, typically opting for the larger of the two, but can use other Schedule 1 deductions regardless of whether they itemize

The Standard Deduction

The standard deduction is by far the most common route for taxpayers. This deduction is a set amount, which is adjusted each year and determined based on factors like a taxpayer’s filing status.

The Standard Deduction Typically increases every year. Keep in mind that 2018 and prior was a significantly lower Standard Deduction.

Every year, we look at the standard deduction compared with the itemized

deduction, and we’re always going to take what’s bigger. You don’t have to lock in

to one or the other. Every year can be different.

Here are the standard deduction amounts for 2021 (taxes filed in 2022):

Married Filing Jointly$25,100
Head of Household$18,800
Married Filing Separately$12,550

Taxpayers who are over 65 or blind receive an additional deduction of $1,350 and an additional $1,700 for those individuals who are also unmarried and not a surviving spouse.

Itemized Deductions

Itemized deductions are qualified expenses subtracted from a taxpayer’s adjusted gross income. individuals who itemize are often homeowners and high-income earners.

The most common reason someone itemizes is they own a home and have a mortgage. If you don’t own a home, it would be very difficult to itemize unless you had substantial charitable contributions. And the thing you have the most control over the outside of the mortgage and mortgage rate is how much money you donate to charity.

In order to itemize the taxpayer’s expenses, need to be in excess of the Standard deduction.

Itemized Deductions Include the following

  • Charitable contribution deduction

Filers interested in donating to charity can use these contributions to boost their deduction amount. To qualify, contributions must be made in cash to a qualifying organization during the 2021 calendar year.

  • Mortgage interest tax deduction

For debt accrued after Dec. 15, 2017, taxpayers can deduct home mortgage interest on their first $750,000 or $375,000 of mortgage debt for married filing separately. For home loans taken out before Dec. 15, 2017, the previous maximum of $1 million or $500,000 if married filing separately still applies.

  • Medical expenses tax deduction 

Qualified health care expenses may be subtracted from a taxpayer’s adjusted gross income as itemized deductions. These might include costs for diagnosis, treatment or prevention of a disease but do not include unnecessary procedures like cosmetic surgery.

  • State and local tax deduction

Filers can deduct taxes paid in 2021 up to $10,000 or $5,000 if married filing separately for state and local taxes.

  • Property tax deduction

One popular state and local tax deduction is for a filer’s property tax. This deduction applies to taxes on real estate property, like a home, and personal property, like a car or boat.

Other Tax Deductions

Even if a taxpayer doesn’t itemize deductions, there are some other deductions they may utilize. Previously called “above-the-line” tax deductions, taxpayers can take certain deductions on the 1040 Schedule 1 form.

Common Schedule 1 deductions for 2021 are:

  • Alimony
  • Educator expenses
  • Health savings account contributions
  • IRA contributions
  • Self-employment deductions
  • Student loan interest
  • Higher education tuition and fees
  • Charitable contributions
  • Alimony

Taxpayers can deduct alimony payments for divorce agreements dated before Dec. 31, 2018.

  • Educator expenses

Taxpayers who work as educators in schools can deduct up to $250 of unreimbursed expenses.

  • Health savings account contributions

A health savings account, or HSA, is a dedicated health care savings account for individuals enrolled in a qualified high-deductible health insurance plan. This account receives special tax treatments, including the option to deduct contributions, which are limited to $3,600 for single filers and $7,200 for families in 2021.

Consider taking advantage of this deduction if you contributed to your HSA directly. If you fund an HSA through your employer, your contributions may be deducted directly from your paychecks instead.

  • IRA contributions

Individuals who make traditional IRA contributions, which are subject to income and participation requirements, can deduct some or all of the amount of their contribution limit. Roth IRA contributions, however, are not deductible.

  • Self-employment deductions

Taxpayers who are self-employed can take advantage of a number of deductions, such as a deduction for health insurance premiums and the deductible part of self-employment taxes. Those who opt for itemized deductions or additional deductions must be prepared for an audit.

  • Student loan interest

Borrowers who paid interest on a qualified student loan in 2021 can deduct the lesser of $2,500 or the amount of interest actually paid during the year. However, this deduction is gradually reduced and eventually eliminated as a taxpayer’s modified adjusted gross income reaches the annual limit. This is reported on the tax Form 1098E

  • Charitable contributions

Taxpayers can deduct charitable contributions to qualified organizations of up to $300 for single filers and $600 for married filers. This is a new occurrence during the pandemic. The amounts for contribution varied in the 2020 and 2021 tax years. This may or may not exist in the 2022 tax year.