What is a Tax Deduction? Basics and Tips to Know

Tax breaks come in many forms, but all tax deductions have one common trait: They can reduce taxable income and lower your overall tax bill.

A tax deduction—often called a write-off—is an expense that the IRS allows you to subtract from your taxable income, which helps reduce the amount of income tax you owe. (Note that a deduction shouldn't be confused with a tax credit, which lowers your tax liability, dollar for dollar.) The federal tax code has two main tax deductions available: the standard deduction and the itemized deduction. Each tax year, you must choose one or the other.

So, how do these deductions work, and which one should you choose? Here are some basic tips to help you better understand the two main types of tax deductions and some other potential deductions that may be available to you.

The standard deduction is the primary federal tax deduction available to almost all taxpayers who file a tax return. The deduction varies depending on tax filing status (for example, single versus married), age, and other factors, such as blindness. The standard deduction is adjusted to account for inflation each year, but it can also change if Congress rewrites tax laws, or if a law sunsets.

Since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, most taxpayers claim the standard deduction when filing their federal income tax returns. That's because the TCJA effectively doubled the deduction, which means the standard is larger than the itemized deduction for most people.

The One Big Beautiful Bill Act (OBBBA) of 2025 builds on that by slightly increasing the standard deduction for 2025 and making it the baseline for future inflation adjustments.

As a result, for 2025, the standard deduction will rise by $750 to $15,750 for single filers, and $1,500 to $31,500 for joint filers. Taxpayers aged 65 and older also qualify for the additional standard deduction, amounting to an extra $2,000 for single filers and an extra $1,600 for each eligible married filer.

For 2026, the standard deduction will be $16,100 for single filers, and $32,200 for joint filers. Taxpayers aged 65 and older also qualify for the additional standard deduction, amounting to an extra $2,050 for single filers and an extra $1,650 for each eligible married filer.

The OBBBA also created a new tax deduction that grants taxpayers age 65 and older an even larger deduction of up to $6,000 for single filers, or $12,000 for qualified married couples. Along with the age requirement, both spouses must have a valid Social Security number, and the deduction phases out for income over a set limits. The phase-out limit is based on Modified Adjusted Gross Income (MAGI), and every dollar over the limit will lower the deduction by 6 cents.

• For single filers the MAGI limit is $75,000 and its completely phased out at $175,000.
• For joint filers the MAGI limit is $150,000 and its completely phased out at $250,000.

Importantly, this deduction is available whether you take the standard deduction or itemize. So, taken altogether, in 2025, a qualifying single filer could claim a total deduction of $23,750 ($15,570 standard deduction + $2,000 additional standard deduction for seniors + $6,000 new senior deduction), while qualifying married filers could claim up to $46,700 ($31,500 standard deduction + $3,200 additional standard deduction for seniors + $12,000 new senior deduction).

Unfortunately, this deduction is only temporary. Barring Congressional action, it will expire after 2028.

The following deductions from the OBBBA are also available if you take the standard deduction:

Up to $25,000 of "qualified" income from tips will now be eligible for a federal income tax deduction for tax years 2025 to 2028. The deduction is capped at $25,000 for both single filers and joint filers.

Note that though this provision is often referred to as "No Tax on Tips," qualified tip income will still be subject to payroll tax and potentially state income taxes (if applicable). The deduction starts to phase out once MAGI is over $150,000 for a single filer, and $300,000 for joint filers.

Up to $12,500 of qualified overtime pay is now eligible for a tax deduction. Joint filers can claim a larger deduction of $25,000. As with the provision on tips, this deduction is due to expire in 2028 and starts to phase out at a rate of $100 per $1,000 of income over a MAGI of $150,000 for a single filer, and $300,000 for joint filers.

Note that the deduction is available only for overtime pay required by the Fair Labor Standards Act (FLSA). Extra pay earned under state laws, collective bargaining agreements, or employers' compensation plans isn't eligible.

Some taxpayers may be able to deduct up to $10,000 in car loan interest for new vehicles purchased between 2025 and 2028. Used cars are ineligible. To qualify, the vehicle needs to have undergone final assembly in the United States. The deduction begins to phase out if your MAGI exceeds $100,000 for single filers, or $200,000 for joint filers.

Itemizing deductions means you need to list out each eligible expense to be deducted from your taxable income. Taxpayers who choose to itemize deductions must complete Schedule A (Form 1040). If you elect to report itemized deductions on your federal tax return, you'll have to track and keep evidence to support your deductible expenses.

Note that starting in 2026, higher earners could see the value of their itemized deductions capped thanks to a provision of the OBBBA.

The TCJA temporarily removed the prior cap—called the Pease limitation—on the amount of itemized deductions that could be claimed. Starting in 2026, however, the OBBBA will introduce a new cap that will apply only to taxpayers in the 37% tax bracket (i.e., single filers earning more than $626,350, or married filers earning more than $751,600).

Typically referred to as the 2/37 rule, this provision effectively limits the value of deductions available to those in the highest tax bracket to just 35 cents for every dollar of itemized deductions. For example, a married couple in the 37% tax bracket that claimed $100,000 in itemized deductions would see tax benefit capped at $35,000, instead of $37,000.

Here are some of the most common types of itemized deductions.

If you have unreimbursed medical or dental expenses, you may be able to get a tax deduction. However, those expenses need to exceed 7.5% of your adjusted gross income (AGI) to be deductible. For example, if your AGI was $100,000, any medical expenses more than $7,500 would be allowed as an itemized deduction. To learn more about this deduction, see the IRS website.

Before the TCJA, taxpayers could potentially deduct 100% of the value of the state and local taxes they paid from their federal tax obligation—an arrangement that made itemizing more appealing to more taxpayers, though it primarily benefited higher earners from a handful of higher-tax states, like New York and California. The TCJA then temporarily capped the SALT deduction at just $10,000. That cap would have expired at the end of this year.

The OBBBA keeps the cap but raises it to $40,000 for tax years 2025 to 2029. It will rise by 1% each year thereafter, before snapping back to $10,000 in 2030.

However, the law also directly limits SALT deductions for higher earners. In short, the deduction is cut by 30% of the amount by which one's income exceeds a certain threshold. In 2025, that threshold is a MAGI of $500,000 (which will also increase by 1% a year going forward).

Homeowners can deduct mortgage interest and points on the first $750,000 of their mortgage ($375,000 if married and filing separately). But if you bought a house before December 16, 2017, you may still be eligible for the higher limitation of $1 million of the mortgage ($500,000 if married and filing separately). It's also possible to deduct some interest expenses related to your investments.

Donations of money or property to a qualified tax-exempt organization may be deductible. There are numerous limits on this deduction based on your AGI. Cash donations can only be deducted up to 60% of your AGI, donations of property (like a car or stock) are generally limited to 30% or your AGI, and if you donate both cash and property, the AGI limit is generally 50%. Any charitable contributions that aren't deductible in the current year can be carried forward up to five years. There are many other rules about deducting charitable donations.

For 2025, the charitable contribution rules remain the same as in prior years. However, from 2026 onward the rules will change a bit. Itemizers who want to take a deduction for a charitable donation will need to exceed a 0.5% floor before they can claim that donation as an itemized deduction. The 0.5% floor is multiplied by the donor's adjusted gross income (AGI) to determine the portion of their donation that is disallowed. Anyone who takes the standard deduction can now also deduct up to $1,000 (single filers) or $2,000 (married couples filing jointly) for cash gifts to qualified operating charities, with inflation adjustments over time. Keep in mind, the deduction excludes donor-advised fund (DAF) contributions.

For most people, their total itemized deductions will likely be less than the standard deduction. If so, it's generally a good thing because you end up with a larger deduction and don't need to worry about keeping any supporting documents. In the end, the decision between taking the standard or itemized deduction is a simple one—you should generally take the larger deduction because it'll reduce your taxes the most.

Beyond standard and itemized deductions, there are other above-the-line deductions that can reduce your taxable income even if you don't itemize. These include:

• Contributions to tax-deferred retirement plans like a traditional IRA
• Health savings account (HSA) contributions (if you're enrolled in a high-deductible health insurance plan)
• Certain education expenses like student loan interest
• Losses on the sale of a capital asset like a stock loss
• Alimony payments made under divorce agreements finalized before 2019 may be deductible. Payments under newer agreements aren't tax deductible.

If you're self-employed or run a small business, you may also be able to deduct certain business expenses. These typically include costs that are ordinary and necessary to operate your business, such as office supplies, professional fees, or home office that is used exclusively for business. Business deductions are reported on Schedule C (Form 1040) rather than Schedule A, but they work the same way by lowering your taxable income and ultimately reducing your federal tax liability.

Tax deductions and tax credits work in different ways. While a tax deduction reduces the amount of income that's subject to tax, a tax credit directly reduces the amount of tax you owe.

Imagine your taxable income is $100,000 and your tax rate is 22%.

• If you claim a $1,000 tax deduction, your taxable income drops to $99,000, saving you $220 in taxes (22% of $1,000).
• If you qualify for a $1,000 tax credit, you simply subtract the full $1,000 from your tax bill.

Examples of tax credits include the Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit, and the Saver's Credit.

While both tax deductions and tax credits can lower what you owe, a credit generally delivers bigger savings because it cuts your tax bill dollar for dollar rather than just reducing your tax liability.

The tax code is large and complex, and Congress is constantly changing it, which makes it easy to overlook some potential tax savings opportunities. That's why it can be worthwhile to work with a tax professional and wealth advisor to help ensure you don't miss out on any tax deductions. Tax planning is a year-round endeavor, and with a good tax plan in place, you can potentially save more on taxes, which means you could have more money to invest and grow for your future.