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 deductible expense reduces reported income and therefore the amount of income taxes owed.
U.S. individual taxpayers may either use the standard deduction or fill out a list of all of their deductible expenses, depending on which results in a smaller taxable income.
- Most wage-earners use the standard deduction. However, those with very high deductible expenses can choose to "itemize" if that results in a smaller tax bill.
- The list of deductible expenses for individuals shrank significantly with tax reform in 2018. At the same time, the standard deduction nearly doubled.
- Businesses must itemize all of their operating expenses in order to arrive at the correct taxable income figure.
For individual wage-earners, the most commonly-used deductibles are mortgage interest payments, state and local tax payments, student loan interest, and charitable deductions. There is a deduction for out-of-pocket medical costs, but only for costs that exceed 7.5% of the taxpayer's adjusted gross income.
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 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 the 2021 tax year, 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 deductible expenses, 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, they 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 deductible expenses 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.
The process requires a good deal of record-keeping, including receipts or other proof of expenditures.
Filers who take the standard deduction can file just 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 deductibles are considerably more complex than individual deductibles 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 business deductibles include payroll, utilities, rent, leases, and other operational costs. Additional deductibles include capital expenses, such as depreciating equipment or real estate.
Permissible deductibles 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.