Tax deductions sound complicated, like something only accountants understand. But they’re actually one of the simplest ways to keep more of your money when tax season rolls around.
- What is a tax deduction anyway?
- Standard deduction vs. itemized: which one should you use?
- The most common tax deductions people actually use
- How to track your deductions throughout the year
What is a tax deduction anyway?
A tax deduction lowers your taxable income. Think of it this way: if you earned $50,000 last year and you have $5,000 in deductions, you only pay taxes on $45,000. That’s real money back in your pocket.
Deductions are different from tax credits. A deduction reduces the income you’re taxed on. A credit reduces the actual tax you owe. Both help you save money at tax time.
The math is pretty straightforward. If you’re in the 22% tax bracket and you have a $1,000 deduction, you save $220 on your taxes. The higher your tax bracket, the more each deduction saves you.
Standard deduction vs. itemized: which one should you use?
Every taxpayer gets to choose between two types of deductions. You can take the standard deduction, which is a flat amount set by the IRS each year. Or you can itemize, which means adding up all your individual deductible expenses.
The standard deduction
For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. Most people take this option because it’s easier and because their itemized deductions wouldn’t add up to more anyway.
You don’t need receipts or documentation for the standard deduction. You just claim it on your tax return and move on.
When itemizing makes sense
You should only itemize if your deductible expenses add up to more than the standard deduction. This usually happens if you:
- Pay a lot of mortgage interest
- Have significant medical expenses
- Made large charitable donations
- Paid high state and local taxes
You can’t do both. You pick whichever saves you more money.
The most common tax deductions people actually use
Some deductions get talked about way more than others because they apply to more people. Here are the ones you’re most likely to use.
Retirement contributions
Money you put into a traditional 401(k) or traditional IRA reduces your taxable income for the year. This is different from a Roth IRA, where you pay taxes upfront.
Student loan interest
You can deduct up to $2,500 of the interest you paid on student loans. You don’t even need to itemize to claim this one. There are income limits though, so check if you qualify.
Home office expenses
If you’re self-employed and work from home, you can deduct a portion of your rent, utilities, and internet. The space needs to be used exclusively for work. The IRS has a simplified option that lets you claim $5 per square foot up to 300 square feet.
Medical expenses
You can deduct medical expenses that exceed 7.5% of your income. For most people, this bar is too high to clear. If you had a major surgery or ongoing treatment, though, it might be worth calculating.
Charitable donations
Cash donations, goods you donated, and even mileage driven for volunteer work can be deducted if you itemize. Keep receipts for anything over $250.
Just like being honest about your budget, being accurate about your deductions matters. Don’t claim things you can’t prove.
How to track your deductions throughout the year
Waiting until April to hunt down receipts is a nightmare. Start tracking deductible expenses now, even if it’s only February.
Keep a simple folder system
Create a folder on your computer or in your email for tax documents. Anytime you get a receipt for something potentially deductible, drop it in there. Medical bills, donation receipts, mortgage interest statements, all of it goes in one place.
Use apps or spreadsheets
A basic spreadsheet works fine. List the date, expense type, amount, and where you can find the receipt. Some banking apps will let you tag transactions, which makes end-of-year sorting way easier.
Save digital copies
Take photos of paper receipts. Paper fades and gets lost. A photo saved to cloud storage lasts forever. Just like you’d secure your accounts with two-factor authentication, protect your financial documents by backing them up.
Review quarterly
Don’t wait until December to see where you stand. Check in every few months. If you’re close to the standard deduction threshold, you might decide to bunch deductible expenses into one year instead of spreading them out.
For example, if you normally donate $3,000 a year, consider donating $6,000 in one year and nothing the next. This can push you over the itemizing threshold in the year you donate.
Frequently Asked Questions
Can I deduct my credit card interest?
No. Personal credit card interest isn’t deductible. Only mortgage interest, student loan interest, and business loan interest qualify. This is one reason why carrying a balance on credit cards costs you so much more than you think, similar to how APR affects your total cost.
Do I need to keep receipts for the standard deduction?
No. The standard deduction requires no documentation. You simply claim the amount you’re entitled to based on your filing status. Receipts only matter if you itemize.
Can I deduct expenses for my side hustle?
Yes. If you have self-employment income, you can deduct business expenses like supplies, equipment, mileage, and a portion of your phone bill. These are reported on Schedule C of your tax return.
What happens if I get audited and can’t prove a deduction?
The IRS will disallow the deduction. You’ll owe the tax you should have paid, plus interest and possibly penalties. This is why keeping good records matters so much. The IRS recommends keeping tax records for at least three years.
Are my emergency fund savings tax deductible?
No. Money you put into a regular savings account isn’t deductible. Your emergency fund is funded with after-tax dollars. Only retirement accounts like traditional IRAs and 401(k)s give you a tax deduction for contributions.
Enjoyed this article? Subscribe to our newsletter for more tips delivered straight to your inbox.