Tax Deductions: List of Types and How to Calculate

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Annuity.org partners with outside experts to ensure we are providing accurate fiscal content. A tax discount is an expense you can subtract from your taxable income. This lowers the sum of money you pay taxes on and reduces your tax bill. A criterion subtraction is a single, specify come of money you can deduct. itemize deductions allow you to deduct several types of qualify expenses .

What Is a Tax Deduction and How Does It Work?

A tax discount lets you subtract certain expenses from your income before you file taxes. You are then taxed on this lower come of income rather of the amount you actually earned .
The government allows deductions for expenses that are seen as benefiting the economy or the coarse good. For example, tax deductions may encourage people to buy homes or to save money by subtracting some of those expenses from your taxable income .
The benefit for you is that tax deductions can save you money when it comes to paying your personal taxes .

Tax Deduction vs. Tax Credit vs. Tax Exemption

tax deductions are one of three chief types of individual income tax incentives — the other two are tax credits and tax exemptions .
tax incentives are government policies that attempt to get taxpayers to spend money, save money or encourage a particular behavior that benefits the country ’ s economy by reducing their tax bill. Tax deductions, tax credits and tax exemptions do this in different ways. Understanding the differences between them and how each may apply to you can help you get the most out of your personal finances .

Differences Between Tax Incentives

Tax deductions
Tax deductions reduce the amount of your income that is actually taxed. Deductions, for example, let you subtract how much you spent on interest payments on your mortgage or how much you contributed to qualified retirement plans. These two deductions encourage home ownership and retirement savings — both are things the government sees as beneficial to the economy.
Tax credits
A tax credit is a specific dollar amount reduction in your tax bill. You subtract this dollar amount from your tax bill. Instead of reducing the amount of your income that’s taxed, a tax credit reduces how much you owe. An example is the Earned Income Tax Credit (EITC). The EITC benefits low wage workers, by reducing their tax bill or even returning them money. The goal is that this will encourage single parents to participate in the workforce.
Tax exemptions
A tax exemption either reduces or eliminates your requirement to pay taxes. Personal exemptions were done away with in the 2017 Tax Cuts and Jobs Act and will be gone until at least 2025 and existing exemptions overlap with certain tax deductions — both reduce your taxable income. Income from unemployment compensation or municipal bond may be tax exempt.

Standard Deduction vs. Itemized Deductions

Your income, filing status and amount of likely deductions determine whether you should claim the standard deduction or itemize deductions when filing your income tax retort. You have to choose one road or the other — you can not choose both .
The standard deduction is a specific amount determined by the government based on your filing status. The amount varies based on your filing condition and is adjusted each year .

Standard Deduction

FILING STATUS 2021 TAX YEAR 2022 TAX YEAR
Single $12,550 $12,950
Married filing separately $12,550 $12,950
Married filing jointly $25,100 $25,900
Head of household $18,800 $19,400

reservoir : Internal Revenue Service The standard deduction is besides higher for taxpayers who are 65 or older and for blind taxpayers .
flush if you have no other deductions or tax credits, you can claim the standard discount. But taking the criterion deduction means that you can not claim other deductions .
Itemizing deductions is more byzantine. not every dollar you spent on dependent deductions can be subtracted from your income to lower your tax bill. sometimes there ’ s a cap on how much you can deduct .
Itemizing besides requires that you keep records of your qualifying deductions throughout the year, fill out more tax paperwork and preserve all these records in case you ’ re audited in the future.

Federal Tax Brackets

Types of Itemized Tax Deductions

The Internal Revenue Service determines what qualifies as an itemize deduction — and the IRS may besides cap how much of your expenses you can claim .
There are several stipulate expenses that you can itemize, but you must be able to show records for the expenses you are claiming as deductions .

Seven of the Most Common Itemized Tax Deductions

Mortgage interest deduction
You can deduct the interest you pay on your mortgage — up to a point. If you took out a mortgage after Dec. 15, 2017, the mortgage interest deduction is limited to interest on $750,000 of mortgage debt.
Charitable contributions
You can deduct your gifts to charity up to 60 percent of your adjusted gross income — your gross income after it’s adjusted for certain deductions.
IRA contributions deduction
Your contributions to a traditional IRA are deductible. Contributions to a Roth IRA are not. The maximum amount you can contribute to an IRA in a single year is $6,000 — or an additional $1,000 if you are 50 or older.
Medical expense deduction
You can only deduct qualified, unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income (AGI) as of 2021. That means if your AGI was $55,000, you’d not be able to deduct the first $4,125 of qualified medical expenses.
State, local and property tax deduction
The 2017 Tax Cuts and Jobs Act limits the deductions you can make for state and local taxes – including income and property taxes. You can only deduct a total of $10,000 collectively. It’s only $5,000 total if you are married filing separately.
Real estate expense deduction
You can deduct premiums for your mortgage insurance and real estate taxes on your home for the year.
Student loan interest deduction
The maximum student loan interest deduction is $2,500. But you can’t claim the deduction if your adjusted gross income is over $80,000 — or $165,000 and married filing jointly.

There are other, less common tax deductions such as personal property tax deductions or sales tax on sealed certified purchases. Moving and business related expenses may qualify for deductions in certain cases .
You should besides check with your state tax representation to find out what state or local anesthetic tax deductions you may qualify for when filing your country income tax return .
A tax professional or tax cooking software can help you find these less park deductions .

Pre-Tax Deductions

Pre-tax deductions are money taken out of your wages or wage before you get your paycheck. These can include payroll taxes and modify health and retirement plans. Rules for what qualifies as a pre-tax deduction may change from year-to-year based on changes to federal tax law .

Examples of Pre-Tax Deductions

  • 401(k) or other retirement plan
  • Commuter benefits
  • Dental insurance
  • Flexible spending accounts (FSA)
  • Health insurance
  • Health savings account (HSA)
  • Life insurance
  • Long-term and short-term disability insurance
  • Supplemental insurance coverage
  • Tax-deferred investments
  • Vision benefits

Pre-tax deductions in these cases allow you to pay for your plowshare of these employer-sponsored benefits before your money is taxed. At the like prison term, most benefits have limits on how much you can contribute in a given year to prevent you from running up the measure of your pre-tax deductions .

How to Calculate Tax Deductions

Calculating your tax deductions can determine if it ’ s better to take the standard deduction or itemize each individual tax write-off for which you qualify. You want to choose the option that saves you the most money .
There are several ways to calculate whether the standard tax write-off or enumerate deduction is better for you. No count what method you choose to find your best choice, you will need respective different records before you start .

Records Needed to Calculate Tax Deductions


You will need your most recent pay stub to determine

  • Most recent pay period income
  • Year-to-date income
  • Year-to-date federal income tax paid
  • State and local income taxes paid
  • 401(k) or other employer sponsored retirement plan
  • HSA, FSA or other cafeteria plan contributions


You will also need records showing other sources of income, including

  • Scholarship or grants
  • Unemployment compensation
  • Self-employment income
  • Investment income
  • Estimated tax payments
  • All other forms of taxable income
  • Student loan interest paid (capped at $2,500)
  • Educator expenses (capped at $250)
  • IRA contributions not deducted from your paycheck


Lastly, you will need records for other deductions for which you may qualify, such as

  • Medical and dental expenses
  • Taxes you have already paid
  • Qualified interests you have paid (such as student loan or mortgage interest)
  • Charitable contributions
  • Casualty losses

Determining Whether to Itemize or Take the Standard Deduction

A professional tax preparer can calculate which path is the better matchless for you. Tax preparation software can besides walk you through the steps to calculate your tax tax write-off options .
Another quick way to figure out if you should take the standard deduction or itemize your deductions is to merely add up the items that would result in the largest deduction.

These are typically the mortgage interest deduction, charitable donations and state and local anesthetic tax deductions. But you are capped at claiming no more than $ 10,000 in deductions on department of state and local taxes — including country and local income taxes and place taxes .
normally, if adding up these larger deductions don ’ metric ton come close to the standard tax write-off, you ’ re probably going to have to claim the standard tax write-off .
ideally, you want to choose the choice — the standard deduction or itemize deductions — that saves you the most money on taxes. once you ’ ve calculated your enumerate deductions and compared them to the standard subtraction, you ’ ll know which to call .

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