What Is a Deductible?
For tax purposes, a deductible is an expense that an individual taxpayer or a business can subtract from adjusted gross income while completing a tax form. The deduction reduces reported income and therefore the amount of income taxes owed.
U.S. individual taxpayers may choose to use the standard deduction or itemize their allowable deductions, depending on which results in a smaller taxable income.
Understanding the Deductible
For individual wage-earners, the most commonly-used tax deductions include those for mortgage interest payments, state and local tax payments, student loan interest, and charitable deductions. There also is a deduction for out-of-pocket medical costs, but only for costs that exceed 7.5% of the taxpayer's adjusted gross income.
- Wage-earners may take the standard deduction or itemize allowable deductions. The vast majority now choose the standard deduction.
- People who work from home may be able to deduct many of the expenses of a dedicated work space.
- Businesses must itemize all of their operating expenses, as these are deducted from their gross income in order to arrive at the correct taxable income figure.
People who work from home and maintain an exclusive space for their work may be able to deduct many of the related expenses.
Nevertheless, the vast majority of Americans have taken the standard deduction since 2018, when that figure was doubled.
- For the 2020 tax year, the standard deduction for single taxpayers and married people filing separately is $12,400. For married people filing jointly, it is $24,800. The deduction for a head of household is $18,650.
- For tax year 2021, the standard deduction for single taxpayers and married couples filing separately is $12,550. For married couples filing jointly, it is $25,100. For heads of households, it is $18,800.
Example of Standard Deduction
Whether a taxpayer uses the standard deduction or itemizes, the amount is subtracted directly from adjusted gross income. As an example, if a single taxpayer reports $50,000 in gross income, based on the figure on a W2 form, he or she may then deduct $12,400. The person's taxable income is now $37,600.
The standard deduction nearly doubled with the Tax Cuts and Jobs Act of 2017. About 90% of taxpayers now use it rather than itemizing deductions.
Itemizing deductions rather than taking the standard deduction requires filing one more piece of paper. A Schedule A form, used to record the various deductions being claimed, must be attached to the main tax form, Form 1040 or Form 1040-SR. (It also requires a good deal of record-keeping, including receipts or other proof of expenditures.)
Filers who take the standard deduction can file just the Form 1040. Those who are age 65 or older can use Form 1040-SR. It's nearly identical to Form 1040, but with larger print.
Business tax deductions are considerably more complex than individual tax deductions and require a great deal more record-keeping. A business or self-employed individual must list all of the income that was received and all of the expenses that were paid out in order to report the real profit of the business. That profit is the gross taxable income of the business.
Examples of ordinary deductible business expenses include payroll, utilities, rent, leases, and other operational costs. Additional deductions include capital expenses, such as depreciating equipment or real estate.
Permissible deductions vary by the structure of the business. Limited-liability companies (LLCs) and corporations differ in the types and amounts of deductions available to their owners.