One of the best ways to save big this tax season is to know which tax deductions you qualify for. From charitable donations to home office deductions, we’ll explain the qualifications behind the top ten most popular tax deductions this year.
1. Retirement contributions deduction
Did you know your individual retirement account deposits may also be tax deductible? You can deduct contributions to the following retirement accounts:
- Traditional IRA (single): If you file under single status and earn under $73,000, you can deduct up to the full contribution limit of $7,000. You qualify for a partial deduction if you earn more than $73,000 but less than $83,000. Those who earn over $83,000 do not qualify for this tax deduction.
- Traditional IRA (joint): You can deduct up to the full contribution limit of $7,000 if you’re married or filing under joint status with a household income of $116,000 or less. You qualify for a partial deduction if you earn more than $116,000 but less than $136,000. Household incomes over $136,000 do not qualify for the tax deduction.
- Traditional 401 (k): The IRS does not tax up to the maximum contribution limit of $23,000 toward your 401(k).¹
According to the IRS, contributions to a Roth IRA are not tax deductible.²
2. Health Savings Account (HSA) deduction
To qualify for the health savings account (HSA) deduction, you’ll need to enroll in a high-deductible health care plan.³ Single filers can deduct up to the maximum contribution limit of $4,150, while joint filers can deduct up to the maximum household limit of $8,300.
In fact, an HSA may qualify you for three tax advantages:
- Withdrawals: Withdrawals from HSA accounts are tax-free.
- Earnings: Earnings from invested HSA contributions are generally tax-free.
- Distributions: HSA distributions for qualifying medical expenses are tax-free.
Use Form 8889 to report relevant HSA information for your federal income tax return.4
3. Charitable donations deduction
In general, you can deduct up to 50% of your annual gross income (AGI) in charitable donations to qualifying public charities and private foundations per year.5
Donations to a 501(c)(3) organization or similar entity can be cash or noncash contributions. Funds spent on driving, parking and tolls related to volunteer work can also be tax write-offs.
4. Student loan interest deduction
You can deduct up to $2,500 worth of qualified student loan payments.6 A student loan can qualify for this deduction if the loan is:
- Applicable to you, your spouse, or an individual who qualified as your dependent when you took out the loan
- Pertains to education received during an academic term by an eligible student
- Paid off within a reasonable time frame following the loan acquisition
The organization you submit loan payments to should give you a 1098-E Form if you pay more than $600 worth of interest.7
5. Mortgage interest deduction
You can deduct mortgage interest payments on the first $750,000 of your loan. If you are married but filing separately, it’s $375,000.8
Your lender will send you Form 1098 to declare our mortgage interest payments for the tax year. The mortgage interest deduction applies to both primary and secondary residences.9
7. Home office deduction
There are two ways to qualify for this tax deduction.11 You must use your home office for either regular and exclusive business use or as the principal place of business:
- Regular and exclusive use: You have to use a specific area within your home exclusively for business purposes and dedicate it to work-related activities regularly.
- Principal place of business: The home should be the primary location for substantial administrative or managerial activities related to your business.
If you satisfy the criteria above, keep the following in mind when claiming your home office tax deduction:
- You receive a standard deduction of $5 per square foot.
- This can apply to up to 300 square feet.
- The deduction can’t exceed $1,500.
Both self-employed individuals and small business owners can claim this deduction. Full-time employees of a company, however, generally won’t qualify.
8. Self-employment tax deduction
Speaking of being self-employed, if you are a freelancer or independent contractor, you can deduct up to 50% of what you pay in self-employment taxes.
The current self-employment tax rate is 15.3% and breaks down like this:
- Social Security: 12.4% of your payments go toward Social Security services.
- Medicare: 2.9% of your self-employment tax payments go toward Medicare.
If you earn more than $400 as a self-employed individual, you must file Form 1040 when filing your federal tax return.12
9. Small business deductions
Small business tax deductions can be broken down into expenses and asset depreciation.
Here’s what qualifies as a business expense deduction:
- Business travel: Qualifying expenses include airfare, lodging, and meals related to business travel. Vehicle expenses for business use, including mileage, fuel, and maintenance, are also deductible.
- Operating expenses: Operating expenses include rent, lease payments, utilities, cellular, and internet expenses.
- Office supplies: Office supplies include pens, papers, and ink cartridges.
- Marketing and advertising: These costs include website expenses, domain registration, and hosting fees.
- Professional services: Costs of hiring a lawyer, bookkeeper, or accountant can be tax deductible.
- Employees: You can potentially deduct your employees’ wages, health insurance, and retirement plans.
On the other hand, the following can qualify as business asset depreciations:
- Business buildings: Depreciation on the structural components of business buildings can be tax deductible.
- Business vehicles: You can deduct the depreciation on business vehicles used for company purposes.
- Office equipment: You can deduct the depreciation of office furniture, computers, and other electronic equipment.
- Machinery: You can deduct the depreciation of business machinery used to produce goods and services.
Business owners should consult with a tax professional to make sure they have accurate depreciation calculations and comply with tax regulations.
10. State and local tax deductions
If you make payments for state and local taxes, the following expenses are typically eligible for deduction from your federal income:
- Local income tax: A tax imposed by local jurisdictions on an individual’s income earned within a specific locality.
- State income tax: A tax levied by state governments on the income earned by individuals and businesses within the state’s boundaries.
- Sales tax: A consumption tax imposed on the sale of goods and services, typically calculated as a percentage of the purchase price.
Remember that you can only deduct state and local income tax or state and local sales tax in a given tax year.
How to claim tax deductions: Standard vs. itemized deductions
Standard deductions and itemized deductions can both reduce your taxable income. Let’s look at how each claiming method works.
The standard deduction is a fixed dollar amount set by the government that you can deduct from your adjusted gross income (AGI) without documentation of individual expenses. More specifically, this deduction method is:
- A simplified method designed to reduce the administrative burden
- Adjusted annually for inflation
- Based on filing status (single, married filing jointly, head of household, etc.)
Itemized deductions allow you to deduct specific qualifying expenses individually. When choosing to file an itemized tax return, remember that:
- You must maintain detailed records and receipts for each expense you claim.
- Itemizing deductions is often more beneficial if you have large deductible expenses that exceed the standard deduction.
You can choose between standard and itemized deductions, but you can’t use both methods in the same tax year.
Still have questions about tax deductions? Find answers below.
How do tax deductions work?
Tax deductions work by reducing the amount of your income that is subject to taxation. When you qualify for a deduction, you subtract the deductible expense from your total income, lowering your taxable income.
What’s the difference between a tax deduction and a tax credit?
While tax deductions and tax credits can lower your tax bill, deductions reduce the amount of income subject to taxation, while credits directly decrease the amount of taxes owed.
Can I use both standard and itemized deductions?
No, you cannot use standard and itemized deductions in the same tax year. Taxpayers must choose the method that provides the greater deduction based on their circumstances.
What are “above-the-line” deductions?
“Above-the-line” deductions are deductions that taxpayers can subtract from their total income to arrive at their adjusted gross income (AGI). These deductions are available before calculating the AGI and include contributions to retirement accounts, certain business expenses, and student loan interest.