TRADE
DEDUCTIONS & CREDITS TAX DEDUCTIONS
Deduction Definition
and Standard
Deductions for 2023
and 2024
By THE INVESTOPEDIA TEAM Updated December 05,
2023
Reviewed by LEA D. URADU
Fact checked by VIKKI VELASQUEZ
What Is a Deduction?
A deduction is an expense that can be
subtracted from a taxpayer's gross income in
order to reduce the amount of income that is
subject to taxation. It lowers your taxable
income for the year.
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For example, if you earn $50,000 in a year and
make a $1,000 donation to charity during that
year, you are eligible to claim a deduction for
that donation, reducing your taxable income to
$49,000. The Internal Revenue Service (IRS)
often refers to a deduction as an allowable
deduction.
Taxpayers can itemize deductions, which
means taking individual deductions one by one
based on their family situation, charitable
donations, medical expenses, and other
individual financial actions taken throughout
the year. Alternatively, taxpayers can choose to
take the standard deduction, which is a set
deduction based on tax filing status that is
available to everyone.
KEY TAKEAWAYS
A deduction is an expense that can be
subtracted from taxable income to
reduce the amount owed.
Most taxpayers who take the standard
deduction only need to file Form 1040.
Taxpayers who itemize deductions
must use Schedule A Form 1040 to list
all of their allowable deductions.
The standard tax deductions have
increased steadily since the passage of
the Tax Cuts and Jobs Act in 2017.
Understanding Deductions
Taxpayers in the United States have the choice
of claiming the standard deduction or itemizing
their deductions. Claiming the standard
deduction is easier and requires less
paperwork and record-keeping. Taxpayers who
take the standardized deduction do so on Form
1040 of their tax return. The standard
deduction is a set amount based on tax filing
status that reduces taxable income for the year.
[1]
FAST FACT
The Internal Revenue Service (IRS) has
revamped Form 1040, which most
taxpayers now use, and retired the old
1040A and 1040EZ forms. [2]
An itemized deduction is an expense
subtracted from adjusted gross income (AGI),
which reduces taxable income and, therefore,
the amount of taxes owed. Taxpayers who
itemize deductions must use Schedule A Form
1040, an attachment to the standard 1040 form,
and are required to fill in a list of their
allowable deductions. [3] Taxpayers who
itemize deductions must keep receipts to prove
these deductions in case they are audited. [4]
Common itemized deductions include:
Interest on a mortgage loan
Unreimbursed healthcare costs
Charitable contributions
State and local taxes [5]
Please consult a tax professional to determine
whether a standard deduction or itemizing
works for your financial situation.
Important: Taxpayers who itemize
have substantial deductions that add
up to more than the standard
deduction. If your itemized
deductions would be less than your
standard deduction, you will save
more money on your taxes if you
take the standard deduction.
Standard Tax Deductions in 2023 and
2024
Since the passage of the Tax Cuts and Jobs Act
of 2017 (TCJA), the standard deduction has
increased over the years to help keep pace with
rising prices, or inflation.
Below are the standard deductions for tax years
2023 and 2024, depending on tax filing status:
[6] [7]
Filing
Filing Status
Status 2023
2023 2024
2024
Married Filing Jointly and $27,700 $29,200
Surviving Spouse
Head of Households $20,800 $21,900
Single $13,850 $14,600
Married Filing Separately $13,850 $14,600
The current standard deductions are a
significant upgrade from levels before the Tax
Cuts and Jobs Act was passed. For example, in
the 2017 tax year, the standard deduction was
$6,350 for single filers and $12,700 for married
people filing jointly. [8]
Tip: If you opt to claim the standard
deduction, there are still some
itemized deductions you can claim
on your income tax return, including
eligible student loan interest and
tuition and fees. [9]
Deductions vs. Credits
A deduction is different from a tax credit, which
is subtracted from the amount of taxes owed,
not from your reported income. [10]
There are both refundable and non-refundable
credits. Non-refundable credits cannot trigger a
tax refund, but refundable credits can. [11]
For example, imagine that after reporting your
income and claiming your deductions, you owe
$500 in income tax; however, you are eligible
for a $600 credit. If the credit is non-refundable,
your tax bill is erased, but you do not receive
any extra money. If the credit is refundable, you
receive a $100 tax refund.
Some businesses qualify for business tax
credits, which offset or reduce a company’s
taxes owed to the federal government.
Business tax credits are designed to encourage
a particular behavior that benefits the overall
economy, such as upgrading a building or
factory and investing in research. While tax
deductions reduce taxable income, business
tax credits reduce the taxes owed.
Special Considerations
Business owners have a much more involved
process during tax time since they're taxed on
business profits, not business proceeds or
revenue. That means documenting their costs
of doing business to subtract them from the
gross proceeds, revealing the taxable profits.
The process is the same for the smallest
businesses to the largest corporations,
although the corporations at least have
accounting departments to take care of the
paperwork.
Businesses are required to report all of their
gross income and then deduct business
expenses from it. The difference between the
two numbers is the business's net taxable
income. Thus, business expenses work in a way
that is similar to deductions.
Although the process of tracking expenses can
be burdensome, the total amount of these
expenses can help reduce a company's taxable
income substantially, thus, lowering the taxes
owed.
If you are a sole proprietor or own another type
of pass-through business, you may end up both
deducting business expenses from your gross
proceeds and either itemizing or taking the
standard deduction from your total taxable
income.
What Are Tax Deduction Examples?
Examples of common tax deductions include
mortgage interest, contributions towards
retirement plans, student loan interest,
charitable contributions, certain health
expenses, gambling losses, and HSA
contributions. [10]
Are Tax Deductions Good?
Yes, tax deductions are good because they
lower your income and, therefore, the amount
of taxes you owe. For example, if you had to
pay 10% in taxes on your income and your
income was $1,000, you would owe $100 in
taxes; however, if you had a tax deduction of
$200, that would lower your income to $800,
and you would now owe $80 in taxes.
What Is the Tax Deduction for 2023?
The standard tax deduction for single filers is
$13,850 in 2023. This is the same for married
individuals filing separately. For those married
and filing jointly, the deduction is $27,700 in
2023. For heads of households, it is $20,800 in
2023. [7]
For tax year 2024, the standard deduction
increases to $14,600, $29,200, and $21,900,
respectively. [6]
The Bottom Line
A deduction is an expense that a taxpayer can
use to reduce their gross income, thereby
reducing the overall taxes they pay. The IRS
allows for a variety of deductions that
individuals can use to reduce their gross
income.
Taxpayers are allowed to itemize their
deductions or to take the standard deduction,
which is much larger now than in the past
thanks to the TCJA of 2017. It is best to consult
a tax professional or financial advisor to see
which method of deductions has the greatest
benefit for your individual tax situation.
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ARTICLE SOURCES
Related Terms
What Does Tax Deductible Mean,
and What Are Common
Deductions?
For tax purposes, a deductible is an expense that can
be subtracted from adjusted gross income in order to
reduce the total amount of taxes owed. more
What Are Itemized Tax Deductions?
Definition and Impact on Taxes
Itemizing deductions allows some taxpayers to
reduce their taxable income, and thus their taxes, by
more than if they used the standard deduction. more
Standard Deduction in Taxes and
How It's Calculated
The standard deduction is a portion of income that is
not subject to tax and can be used to reduce a tax bill
instead of itemizing deductions. more
Tax Benefit: Definition, Types, and
IRS Rules
Tax benefits, including tax credits, tax deductions,
and tax exemptions, can reduce your tax liability if
you meet the various eligibility requirements. more
What Is Tax Relief? How It Works,
Types, and Example
The term tax relief refers to various programs that
help individuals and businesses lower their tax bills
and settle their tax-related debts. more
All About Schedule A (Form 1040 or
1040-SR): Itemized Deductions
Schedule A (Form 1040 or 1040-SR) is an IRS form for
U.S. taxpayers who choose to itemize their tax-
deductible expenses rather than take the standard
deduction. more
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Standard Deduction in
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Deductions && Calculated
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