Understanding Tax Deductions: Itemized vs. Standard Deduction (2024)

Taxpayers at least 65 years old or blind can claim an additional standard deduction. For 2023, the amount rose to $1,500 ($1,850 for single filers and heads of household). For 2024, these amounts were changed to $1,550 and $1,950, respectively.

Common Tax Deductions

Here are some of the most common tax deductions that you can claim on your federal income tax return:

• Up to $2,500 of student loan interest
• Mortgage interest on up to $750,000 of secured home mortgage debt ($1 million if you bought the home before Dec. 16, 2017)
• Contributions to a traditional individual retirement account (IRA), 401(k) plan, or another qualified retirement plan, up to annual limits
• Up to $10,000 of state and local taxes
• Contributions to a health savings account, up to annual limits
• Medical and dental expenses exceeding 7.5% of your adjusted gross income
• Self-employment expenses, including the home office deduction and health insurance premiums deduction
• Charitable contributions
• Investment losses
• Gambling losses

Most of these deductions should be entered on Schedule A of your 1040, but there are some exceptions. For example, you must use Form 8949 and Schedule D to report investment losses and Form 5498 to record IRA contributions. Contributions to an employer-sponsored 401(k) retirement account are reflected in your paycheck, so you don't need the extra form.

Deductions Impacted by TCJA

Some once-common tax deductions were eliminated or capped by the Tax Cuts and Jobs Act of 2017 (TCJA). You can no longer deduct the following—at least until 2025 when the act is due to expire:

• Home equity loan interest (unless you spent the money to improve the home)
• Mortgage interest on more than $750,000 of secured mortgage debt
• Unreimbursed work expenses
• State and local taxes above $5,000 (or $10,000 for a couple)
• Dues for professional societies
• Moving expenses (except for military personnel)
• Casualty and theft losses (except in federally declared disaster areas)
  
• The personal exemption
• Tax preparation fees
• Alimony payments
  
• "Miscellaneous" itemized deductions
  

Tax Deductions for the Self-Employed

The ranks of freelancers and gig workers are growing. According to a Pew Research study, more than 16 million Americans now identify as self-employed.

Luckily for them, they have retained some of the tax deductions that wage earners lost in the 2017 tax reform law. Some deductions are complex because you have to determine how much of every expense is business, thus deductible—and how much is personal and nondeductible.

Some of the most important deductions for the self-employed include those for half of your Medicare and Social Security taxes, the home office deduction, and the health insurance premiums deduction.

One particularly valuable deduction for self-employed people defers taxes on their contributions to retirement plans. Tax-deferred retirement plans—including the SEP-IRA, the SIMPLE IRA, and the solo 401(k)—are designed specifically for the self-employed, solo operators, and small business owners.

Small Business Tax Deductions

Businesses large and small pay taxes on their profits, which is their total receipts minus their total business costs. That means recording every single expense and reporting it to the IRS. Some of the top deductions for small business owners include:

• Advertising and promotion
• Bad debts
• Books
• Business travel
• Charitable contributions
• Continuing education
• Equipment
• Insurance
• Legal and professional fees
• License and regulatory fees
• Loan interest
• Pass-through tax deduction
• Repair and maintenance
• Taxes (local, sales, and property taxes)
• Vehicle expenses
• Startup costs

The rules for many of these deductions are complex, particularly for shoestring operations. Vehicle expenses and travel expenses, for example, must be carefully separated between deductible business use and nondeductible personal or family use.

Tax Deductions vs. Tax Credits

Tax deductions reduce your total taxable income—the amount you use to calculate your tax bill. On the other hand, tax credits are subtracted directly from the taxes you owe. Some tax credits are even refundable, meaning that if the credits reduce your tax bill to below zero, you'll get a refund for the difference.

Even if they aren't refundable, a tax credit is more valuable than a tax deduction. A tax deduction may kick your taxable income down a few notches on the tax tables, but a tax credit reduces the tax you owe, dollar for dollar.

Example of a Tax Deduction

Here's an example. Sarah is a single taxpayer in the United States with a gross annual income of $50,000. She wants to optimize her tax situation by considering whether to claim itemized deductions or take the standard deduction for the tax year. Relevant information for Sarah includes:

• Mortgage interest: $8,000
• State and local taxes (SALT): $3,000
• Charitable contributions: $1,200
• Medical expenses (above 7.5% of adjusted gross income): $2,500
• Unreimbursed business expenses: $800

Sarah's potential total itemized deductions equals $15,500. This is the sum of her mortgage interest, SALT, charitable contributions, medical expenses above 7.5% of her AGI,, and business expenses.

If Sarah is filing single in 2024, she should take note that the standard deduction of $14,600 is higher than her potential itemized deduction. Therefore, Sarah would want to claim the standard deduction.

Standard Deductions vs. Itemized Deductions

Generally speaking, U.S. taxpayers will choose to itemize their deductions or take the standard deduction, depending on which most reduces their taxable income.

Contrary to what many taxpayers may think, they might benefit most from the standard deduction because the TCJA nearly doubled the standard deduction amount and eliminated (or capped) many itemized deductions.

If you itemize, you need to keep receipts for eligible expenses throughout the year and organize them into categories. At tax time, you tally and record the expenses on a Schedule A—and hold onto the receipts in case you're audited.

The standard deduction is substantially less work: You simply fill in the amount of your standard deduction on line 12a of Form 1040 or 1040-SR.

State Tax Deductions

Most of the 41 states that impose an income tax follow the format of the federal forms as closely as possible. However, the states set their own tax rates and standard deductions, and they may have additional allowable deductions or different restrictions on deductions.

Some states do not permit taxpayers to itemize state taxes if they take the federal tax deduction.

In any case, it's worth reading your state's tax forms closely to see if there are any additional deductions for which you might qualify. For example, in New Mexico, you are exempt from state income tax when you reach age 100. And Nevada taxpayers can get a free pack of cards for filing their tax returns.

Limits on Tax Deductions

Keep in mind that there are limitations on some deductions. For example, current federal tax law limits the mortgage interest deduction to a maximum of $750,000 of secured mortgage debt (or $1 million if you bought the home prior to Dec. 16, 2017). That 2017 change was a severe blow to the very wealthy and to some not-so-wealthy residents of the cities with the most expensive homes.

Then there's the limit on the healthcare deduction. If you're itemizing healthcare costs, the expenses that you paid (for yourself, your spouse, and your dependents) must exceed a certain percentage of your adjusted gross income (AGI) to be deductible. For your 2023 and 2024 tax return, the threshold for medical expenses is 7.5% of AGI for alltaxpayers.

Capital Loss Carryforward

One additional deduction not included in the standard or itemized tax deductions is the one for capital losses. These are recorded on Schedule D, along with capital gains, rather than on Schedule A.

A tax loss carryforward is a legal way to rearrange earnings for the taxpayer's benefit. You can carry forward individual and business capital losses from previous years. You can claim up to $3,000 ($1,500 if married filing separately) in capital losses as a tax deduction as of the 2024 tax year. If your losses were greater than that, you can "carry them forward" to the following year or years.

The Bottom Line

A tax deduction is an amount that the IRS allows taxpayers to deduct from their taxable income, thus reducing the tax that they owe.

Taxpayers can either itemize individual deductions that they're entitled to on their tax returns or opt for the standard deduction allowed (a single amount). The approach you choose will most likely be the one that lowers your tax bill the most.