Deductions are the part of the tax code most people half-understand, and the half that is missing usually costs money. This is the plain version: what a deduction is, where it goes on a return, and why the answer to “can I deduct this?” is so often “it depends where it sits.”
A deduction is not a credit
A deduction reduces the income you are taxed on. A credit reduces the tax itself, dollar for dollar. A credit is therefore worth more than a deduction of the same size — often considerably more. When people say a deduction “saves” them a sum, what it actually saves is that sum multiplied by their marginal rate.
Above the line and below it
Some deductions come off before your adjusted gross income is calculated. These are the useful ones, because you get them whether or not you itemise, and because a lower adjusted gross income can also improve your eligibility for other credits and deductions that phase out as income rises.
Common above-the-line items include deductible IRA contributions, health savings account contributions, student loan interest, half of self-employment tax, and self-employed health insurance premiums.
Standard or itemised
Below the line, you choose the larger of two numbers: the standard deduction, or the total of your itemised deductions. Since the standard deduction rose substantially, most filers take it — but “most” is not “all”, and the categories that push people over the line are predictable:
- Mortgage interest, particularly in the early years of a loan.
- State and local taxes, subject to the cap that applies in the year.
- Charitable giving, especially a large one-off gift.
- Medical expenses, but only the portion above a percentage of your adjusted gross income — which in practice means a difficult year, not a routine one.
Business deductions are a different animal
If you are self-employed or run a business, your business expenses are not itemised deductions at all. They come off your business income directly, before adjusted gross income, and they reduce self-employment tax as well as income tax. That is why a legitimate business expense is generally worth more than a personal deduction of the same size — and why the record-keeping standard is higher.
The rules that trip people up
- Personal expenses do not become deductible by being useful. A commute is not travel. Everyday clothing is not a uniform because you wear it to work.
- Mixed-use items must be split. A phone, a car, a room in your house — deduct the business proportion, and be able to show how you arrived at it.
- Donations to individuals are not charitable contributions, however deserving. The recipient has to be a qualified organisation.
- Documentation is part of the deduction. An expense you cannot substantiate is one you may lose on examination, years after you spent the money.
What good records look like
For most deductions, the standard is simple: what was spent, when, to whom, and why it was necessary. A bank statement establishes the first three. The fourth is the one people forget, and it is the one that matters most for anything unusual. A two-word note in your accounting software at the time is worth an hour of reconstruction later.
Where to get specific
Thresholds, caps and phase-outs move most years, and several of the rules above are stated in general terms for that reason. Whether a particular expense is deductible in your situation depends on facts this article cannot see. That is the conversation to have with a preparer — ideally before the money is spent, not after.
This article is general information about how the tax rules work, not tax advice for your situation, and the rules change. Speak with a qualified preparer — we are happy to be that preparer — before acting on anything you read here.