Tax deductions can be a powerful way to lower your taxable income and reduce your tax bill. But with multiple deduction options, how do you know which one is right for you? Here’s a breakdown of the two main types of deductions—standard and itemized—plus other potential ways to maximize your tax savings.
Standard vs. Itemized Deductions: What’s the Difference?
Standard Deduction: The Simple Option
The standard deduction is a fixed amount that reduces taxable income, available to nearly all taxpayers. The amount varies based on filing status (single, married, etc.) and is adjusted annually for inflation.
Since the Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction, most taxpayers now take this route rather than itemizing. However, unless Congress extends it, this higher deduction is set to expire after 2025.
Itemized Deduction: A Customized Approach
Itemizing requires more effort but can lead to greater tax savings if your total deductions exceed the standard deduction. Common itemized deductions include:
- Medical & Dental Expenses – Deductible only if they exceed 7.5% of your adjusted gross income (AGI).
- State & Local Taxes (SALT Deduction) – Includes state/local income taxes and property taxes, but the deduction is capped at $10,000 ($5,000 for married filing separately).
- Mortgage Interest – Deductible on mortgage balances up to $750,000 ($375,000 if married filing separately). Higher limits apply to homes purchased before December 16, 2017.
- Charitable Contributions – Donations to qualified charities may be deductible, with limits based on AGI.
If you itemize, be sure to keep detailed records to support your deductions in case of an audit.
Which Deduction Should You Choose?
The general rule: Take the larger deduction. If your eligible itemized deductions total more than the standard deduction, itemizing may save you more money. Otherwise, the standard deduction is the easiest and most beneficial choice.
Other Tax Deductions to Consider
Beyond the standard and itemized deductions, you may be eligible for additional tax-saving opportunities, including:
- Retirement Contributions – Contributions to a traditional IRA may be deductible, reducing taxable income.
- Health Savings Account (HSA) Contributions – Available if you have a high-deductible health plan.
- Student Loan Interest – You may deduct up to $2,500 in interest paid on student loans.
- Capital Losses – If you sell investments at a loss, you may deduct up to $3,000 annually against ordinary income.
The Bottom Line
Tax deductions can significantly impact your overall tax liability, but choosing the right strategy requires careful planning. Since tax laws change frequently, working with a tax professional can help ensure you don’t miss out on valuable deductions.
By taking a proactive approach to tax planning, you can minimize your tax burden and keep more of your hard-earned money working for you.
