A tax deduction is a type of tax benefit, like a tax credit or exemption, that could help reduce the taxes you owe.
Every tax season, as we all prepare to file our tax returns, tax payers have to think about things like what tax deductions, tax credits, or tax exemptions might apply to them. All of these are considered tax benefits that can help ease your tax liability in some way. But they each work in a different way and come with different qualifications for tax filers.
This article will go over what a tax deduction is, how it works, and the different types of tax deductions that could apply to you. If you think you might be eligible for a deduction this year, keep reading so you can learn how it all works.
What is a Tax Deduction?
A tax deduction is the amount you can subtract (or deduct) from your total income, which then reduces your total taxable income. By lowering the amount of your income that is taxed, you also lower how much you pay in taxes.
There are several different types of deductions that might apply to you but the most common type of deductions are the standard deduction or itemized deductions.
The standard deduction is a set amount established by the IRS that can be deducted from your total annual income and reduce how much of your income is taxable.
Meanwhile, itemized deductions are various expenses that are eligible to be deducted from your total annual income and reduce how much of your income is taxable.
Tax Deductions vs Credits
Tax deductions and credits are similar in that they both can help reduce your tax liability, but they’re different in the way they do this.
Tax deductions reduce your tax liability by reducing your total taxable income before taxes are applied to your income. For example, if your total income is $66,000 then a $15,000 standard deduction can reduce your taxable income to $51,000 instead.
Tax credits reduce your tax liability by reducing your total taxes owed after taxes are applied to your total taxable income. For example, if your total taxes owed is $6,134 then a $1,000 tax credit can reduce your tax payment to $5,134 instead.
What are the 2025 Standard Deductions?
The standard deduction amounts vary depending on the specific tax year and your tax filing status. To find which standard deduction you qualify to use, you must first determine whether you’re a single filer, married filing separately filer, married filing jointly filers, qualifying widow(er) filer, or head of household filer.
For 2025 tax filing, the standard deduction for single filers is $15,000, married filing separately filers is $15,000, married filing jointly is $30,000, qualifying widow(er) is $30,000, and head of household is $22,500.
This means that if you are a single or married filing separately filer you can deduct $15,000 from your total income, if you’re a married filing jointly or qualifying widow(er) filer you can deduct $30,000 from your total income, and if you’re a head of household filer you can deduct $22,500 from your total income to get your total taxable income.
- Single Filer: Total Income - $15,000 = Total Taxable Income
- Married Filing Separately: Total Income - $15,000 = Total Taxable Income
- Married Filing Jointly: Total Income - $30,000 = Total Taxable Income
- Qualifying Widow(er): Total Income - $30,000 = Total Taxable Income
- Head of Household: Total Income - $22,500 = Total Taxable Income
How Tax Deductions Work
The way that tax deductions work is by reducing your taxable income by subtracting deduction amounts (like the standard deduction or several itemized deductions) from your total income.
This reduces the amount of your annual income that is subject to taxation. By reducing the amount of your income being taxed, how much you end up paying in taxes is also reduced.
- Determine Your Tax Filing Status. The very first thing you need to figure out is what tax filing status you are going to use.
- Choose Between the Standard or Itemized Deductions. Choosing the standard deduction might be simpler, but depending on your eligible expenses itemizing could be a bigger deduction and reduce your taxable income more.
If you decide to itemize deductions, then you’ll have a few extra steps to take. You’ll need to determine which expenses qualify as tax deductions and outline those expenses on your 1040 tax form, or a 1040 schedule form, following the instructions on the form closely. Make sure to also attach any supporting documentation like receipts for these expenses in your submitted tax return.
- Subtract Deductions from Total Income. Once you have your deductions outlined, whether that’s the one standard deduction or several itemized ones, subtract your total deductions from your total income to get your total taxable income.
Total Income - Tax Deductions = Total Taxable Income
Once you have your total taxable income you can determine which tax brackets apply to you and start calculating how much you’ll pay in taxes for each tax bracket your income falls under.
Read our article all about tax brackets to find out which tax brackets apply to you and calculate how much you’ll pay in taxes, your marginal and effective tax rates, and more.
How Tax Deductions Work Example
For example, the average US worker makes about $66,000 a year ($66,621.80 to be exact). So if you are a single filer that makes $66k a year, and you decide to use the standard deduction ($15,000 for single filers), then your taxable income would be $51,000.
- Total Income = $66,000
- Standard Deduction = $15,000
- $66,000 - $15,000 = $51,000 total taxable income
If you itemize deductions, then this example will include a few more steps. For example, you’ll add up all your qualifying expenses together, provide supporting documentation of these costs in your tax return, and subtract these expenses from your income.
- Total Income = $66,000
- Alimony Payments = $10,000
- Business Use of Your Car = $2,000
- IRA Contributions = $4,000
- Charity Donations = $500
- $10,000 + $2,000 + $4,000 + $500 = $16,500 total itemized deductions
- $66,000 - $16,500 = $49,500 total taxable income
As you can see in this example, this single filer is better off itemizing their deductions since their qualifying expenses are able to reduce their total taxable income more than the standard deduction.
What Expenses are Deductible?
There are several tax deductions that can be used alongside the standard tax deduction and then there are several others that can only be used if you only itemize your deductions. What expenses qualify may vary depending on the tax year and whether you are an individual filer or not.
Individuals can deduct the following expenses alongside the standard deduction:
- Alimony Payments
- Business Vehicle Costs
- Home Business Costs
- IRA Retirement Contributions
- Health Savings Account Contributions
- Early Savings Account Withdrawal Penalty Fees
- Student Loan Interest Payments
- Teacher Expenses
- Work-Related Education Expenses for Some Military, Government, Self-Employed, and People with Disabilities
- Moving Expenses for Military Servicemembers
Individuals can deduct the following expenses if they decide to only itemize:
- Bad Debts
- Canceled Home Debts
- Capital Losses
- Donations to Charity
- Gains from Home Sale
- Gambling Losses
- Home Mortgage Interest Payments
- Income, Sales, Real Estate, or Personal Property Tax Payments
- Disasters or Theft Losses
- Medical or Dental Expenses (if they’re over 7.5% of your adjusted gross income)
- Opportunity Zone Investments
- Miscellaneous Itemized Deductions
What Business Expenses are Deductible?
If you’re filing taxes as a business, then there are different requirements your expenses need to meet to qualify as a deductible. Businesses especially need to have clear and detailed documentation showing all of the following eligible expenses:
- Energy Efficient Commercial Buildings Deduction. Includes expenses building owners pay to increase a commercial buildings energy efficiency by at least 25% or more.
- Home Office Deduction. Includes expenses business owners might pay as they use part of their home for their business.
- Standard Mileage Rates. Includes expenses for the use of vehicles for business purposes.
- Business Interest Deduction. Includes interest payments on certain business expenses.
