Are you looking for a way to reduce your taxable income? For many, the easiest way is to claim popular tax deductions that immediately reduce your taxable income.
Some of the most common tax deductions include student loan interest and retirement plan contributions that don’t require filing an itemized tax return.
See if you qualify for these tax deductions before you file your taxes this year.
In This Article
- What are Tax Deductions?
- Common Tax Deductions
- Itemized Tax Deductions
- Claiming Tax Deductions
What are Tax Deductions?
Whether you file your taxes yourself online that walks you step-by-step through the tax prep process or use an accountant, it’s always a good idea to see what deductions are possible.
That way, you can make sure you don’t accidentally overlook any.
Tax deductions reduce your taxable income to determine the total income tax you owe. Deductions are separate from tax credits that reduce your tax bill.
Some deductions, like student loan interest payments, are available to every taxpayer. You’d don’t need to file an itemized tax return to claim common tax deductions if you only qualify for the standard deduction amount.
But other deductions such as charity deductions and medical expenses require itemizing.
If you’re single, you need at least $12,400 in itemized deductions to itemize on your 2020 taxes. You can itemize if you donate at least $13,000 to charity, for instance.
Most filers qualify for the “standard deduction amount” meaning you won’t file an itemized return.
You automatically qualify for the standard deduction on your 2020 taxes that you file in 2021.
Here are the current deducton amounts:
- Tax year 2020: $12,400 (single) & $24,800 (married, filing jointly)
- Tax year 2021: $12,550 (single) & $25,100 (married, filling jointly)
Just for filing a tax return in 2021 for 2020, the “standard deduction” reduces your taxable income by up to $24,800. You can claim other common tax deductions to reduce your taxable income even more.
Common Tax Deductions
You don’t have to itemize to claim these popular tax deductions. Keep in mind that certain deductions have income restrictions. It’s possible you only qualify for a partial deduction if you earn a high income.
1. Student Loan Interest
You can deduct up to $2,500 in paid student loan interest each year per tax return.
This means single filers can deduct $2,500. Married filers can only deduct $2,500 (not $5,000), even when both spouses have student loan payments.
Your student loan lenders will provide you with Form 1098-E showing the amount of interest you paid.
2. Traditional IRA and 401k Contributions
Traditional IRA and 401k contributions reduce your taxable income for the current tax year. As a tradeoff, you will pay taxes on the entire amount you withdraw in the future.
Note that if you are contributing to your 401k at work, you already contributed from your pre-tax income, so there’s nothing to note on your tax return.
You can contribute to a 401k and an IRA at the same time.
Roth IRA and Roth 401k contributions aren’t tax-deductible because you fund them with your after-tax income.
IRA Contribution Limits
- Tax year 2020: $6,000 ($7,000 if age 50 or older).
- Tax year 2021: $6,000 ($7,000 if age 50 or older).
Each taxpayer can contribute up to the contribution limits listed above. So if you are married, each spouse can contribute $6,000 for tax year 2020 and you can deduct $12,000 from your combined taxable income.
The annual contribution limit is the combined limit. You may contribute the full amount to either a Roth IRA or a traditional IRA or a little to both.
But you can’t exceed the annual contribution limit or you can pay a penalty.
The IRA tax deduction is different than other tax deductions. You have until the April 15 tax deadline to make contributions for the previous tax year.
You might make traditional IRA contributions to reduce your taxable income if you have a surprise tax bill.
401k Contribution Limits
- Tax year 2020: $19,500 ($26,000 if age 50 or older)
- Tax year 2021: $19,500 ($26,000 if age 50 or older)
Like a traditional IRA, your tax-deferred 401k contributions reduce your taxable income for the current tax year, but you will pay taxes when you make a withdrawal.
Your employer’s W-2 form lists your 401k contribution amounts in Box 1. The W-2 form includes other pre-tax withholdings as well, like health insurance.
It is good to understand the contribution limits so you can reduce your income taxes this year.
3. FSA and HSA Contributions
If your employer offers health insurance, you might qualify for this tax deduction.
Like a 401k, your FSA is employer-sponsored, so you’ll contribute pre-tax income from your paycheck and there’s nothing to note on your tax return.
For an HSA, you’ll need to prepare Form 8889 with your tax return to deduct your HSA contributions.
There are many similarities between an FSA and HSA, but the annual contribution limits (i.e., your tax deduction) differ.
Before maxing out this deduction, read the savings plan rules. It’s not uncommon for a portion of your unused contributions to an FSA to expire at the end of the year.
Your plan might let you roll up to $500 of your unused balance into the next calendar year.
Flexible Spending Arrangements
- Tax year 2020: $2,750.
- Tax year 2021: $2,750.
FSAs are linked to the individual taxpayer like an IRA or 401k. This means joint filers can each have an FSA and each enjoy the tax savings.
Health Savings Accounts
- Tax year 2020: $3,550 for single filers ($7,100 for families).
- Tax year 2021: $3,600 for single filers ($7,200 for families).
Contributors at least 55 years or older can make an annual $1,000 catch-up contribution.
If you have a high-deductible health plan, your employer may offer an HSA instead of an FSA. This can work to your advantage because of the higher contribution limits.
These are the best places to open a health savings account.
4. Investment Losses
Nobody wants to sell investments for a loss. But sometimes selling for a loss can help you at tax time.
Selling your losers first offsets any taxable capital gains you earn by selling profitable investments.
After that, you can deduct up to $3,000 in annual investment losses in excess of your capital gains with the capital loss deduction.
You can manually decide which investments to sell for a loss. But there are certain rules you must follow as some losses may not qualify for the deduction.
If you use a robo-advisor to manage your portfolio, you may be able to sell for a loss with the “tax loss harvesting” feature.
Betterment uses this strategy to minimize your potential capital gains taxes while maintaining a balanced portfolio. Tax-loss harvesting is standard with all Betterment investment accounts.
Read our Betterment review to learn more.
5. Educator Expenses
If you teach students between grades kindergarten and 12, you can deduct up to $250 in unreimbursed supply, training and equipment purchases each year.
If both spouses teach, you can deduct up to $500 annually.
The following vocations qualify for the educator expense deduction:
6. Self-Employment Expenses
If you have a side hustle or are self-employed, you can deduct many business-related expenses, including:
- Materials and supplies
- Digital services
- Small business apps
- Business mileage
- Licenses and permits
- Training courses
- Payments to subcontractors
As a delivery app driver, you can deduct the miles you drive, plus parking and tolls.
If you solely use a portion of your house for business purposes, you might also be able to deduct the square footage of your home office.
However, the home office deduction isn’t available to employees that are not self-employed but who work from home with a remote-based job.
If neither you nor your spouse has employer health insurance, you can also deduct your monthly health insurance premiums.
7. Rental Property Expenses
A growing trend for earning extra income is to own rental property or become an Airbnb host.
Whether you rent a spare bedroom or an entire house, it’s possible to deduct business-related property expenses.
Some rental property tax deductions include:
- Mortgage interest
- On-property services like internet and cable TV
- Cleaning fees and maintenance costs
Keep a running log of your rental property expenses to save time calculating your deduction.
If you prefer short-term rentals, become an Airbnb host can be a good option. You can qualify for similar tax deductions as a long-term rental landlord.
Itemized Tax Deductions
Itemizing your expenses for the deductions below only makes sense if, when totaled up, they exceed the standard deduction amount.
That means single filers need at least $12,400 in qualified deductions and married couples filing a joint return should have at least $24,800 in qualified deductions.
For example, a single filer with at least $12,000 in charitable contributions and state and local taxes should itemize. Each dollar above the standard deduction further reduces your taxable income.
Online tax software will add your itemized deductions to see if you qualify to file for an itemized return. If not, they automatically apply the standard deduction and any common tax deductions that non-itemizers qualify for.
1. Charitable Contributions
Cash donations to tax-exempt organizations are probably the easiest way to make charitable contributions.
You can also donate physical items like clothing, used cars or canned food.
Make sure you receive a written receipt for each cash or non-cash contribution. Most charities send a year-end donation summary listing every donation amount.
It’s also possible to deduct charitable mileage and other out-of-pocket expenses you might encounter.
Tip: Accurately track your various charitable contributions with TurboTax. Their ItsDeductible tool lets you track your donations in real-time during the year.
Read our TurboTax review to learn more.
Cares ACT Charitable Contribution Tax Deduction
It’s possible for non-itemizers to deduct up to $300 in charitable contributions thanks to the Cares Act stimulus bill in 2020.
For tax year 2020, singles and joint taxpayers can deduct up to $300 in charity contributions.
In 2021, singles can deduct $300 and joint taxpayers can deduct up to $600 ($300 per filer).
2. State and Local Taxes
Current tax rules let you deduct up to $10,000 in state and local taxes (SALT). The $10,000 mark is the combined deductible limit.
You can deduct these state and local taxes on your itemized federal return:
- Income tax
- Property tax
- Sales tax
When married taxpayers file separate returns, each filer can deduct up to $5,000.
3. Home Mortgage Interest
The home mortgage interest deduction still exists, but is only $750,000 for mortgages originating after December 16, 2017. If your mortgage originated before this date, you can deduct up to $1 million in paid home mortgage interest.
Your mortgage lender will send you a Form 1098 each year stating the amount of interest you paid.
4. Medical and Dental Expenses
Medical bills are a leading cause of financial problems. Itemizers might be able to get some relief with deductions for unreimbursed medical and dental expenses.
On your 2020 tax return (due April 15, 2021), you can deduct medical and dental expenses exceeding 7.5% of your adjusted gross income.
Most bills that health insurance and dental insurance don’t reimburse can qualify. However, only the amount above 7.5% of your AGI are deductible.
Almost any medical or dental expense is eligible, including:
- Fees to doctors, surgeons, chiropractors, and psychiatrists.
- Inpatient hospital care or residential nursing home care.
- Alcohol or drug addiction treatment.
- Insulin and prescription medication.
- Medical supplies including false teeth, eyeglasses, crutches and wheelchairs.
Please refer to IRS Topic Number 502 for a detailed list of eligible expenses.
5. Casualty and Theft Losses
These unreimbursed losses from a federally-declared disaster are itemizable:
- Property damage
- Loss of property
Before claiming this tax deduction, you will need to file a claim with your homeowner’s insurance policy. Any insurance reimbursement reduces your deduction amount.
According to the IRS, for personal property losses, you can deduct the lesser of the adjusted basis of your property or the decreased fair market value as a result of the disaster.
Claiming Tax Deductions
So how do you claim tax deductions?
Online tax prep programs make it easy to claim the most popular ones. As you go through the filing process, you will answer different questions that determine if you qualify for deductions.
Most filers will be able to file their own taxes without forgetting a deduction.
For instance, your tax prep program may ask these questions:
- Did you donate to charity?
- Did you make student loan interest payments?
- What is your annual home mortgage interest or property tax?
The online tax prep programs can also help you claim industry-specific tax deductions if you’re self-employed.
You may decide to hire an accountant if you have a complex tax situation and are inexperienced with the tax code.
Two examples may include navigating self-employment deductions or deducting casualty and theft losses. An accountant can cost more but can help you file an accurate return while saving you time.
If you decide to file your own tax return, you might use one of these programs to file an accurate tax return at the lowest cost.
Credit Karma Tax
Credit Karma Tax lets you file the most complex tax returns for free.
Other programs may charge up to $175 when you report investment income or self-employment income.
With Credit Karma Tax, you could file that exact same federal and state return for free.
Some of the best perks include:
- Upload W-2 forms with a smartphone
- Free audit defense (include in-person representation)
- Import last year’s return from other tax software
- Live chat technical support
- Knowledge base articles for common tax questions
Despite being 100% free, Credit Karma Tax offers many exciting features.
Read our Credit Karma Tax review to learn more.
You can file a basic federal and state return for free on H&R Block. It’s also possible to file for free when you have student loan interest that other software charges for.
H&R Block can offer more support and auto-import features than discount tax software. Their platform can also be easier to use if you have a complex tax return.
For an additional fee, Block’s Online Assist package lets a tax professional answer your questions about potential tax deductions before you file.
If you want a tax professional to prepare your taxes, File with a Tax Pro is available too. You can upload your documents or have a local H&R Block tax expert prepare your return.
Read our H&R Block review to learn more.
TurboTax is one of the most popular tax prep programs because it’s so easy to use.
It’s possible to file a free federal and state return, but you will have to pay if you have common tax deductions like student loan interest.
The TurboTax Live add-on lets a tax expert answer your personal questions. The Live Full Service feature lets a tax expert prepare your return after you upload your documents.
It’s possible to track your deductions in real-time online or using the TurboTax app. This convenience might be worth the higher fee if you itemize.
Read our TurboTax review to learn more.
Tax deductions are an easy way to reduce your taxable income. Tracking your tax deductions during the year is the best way to not forget any at tax time.
Also keep any end-of-year tax documents you receive. You submit the information and the tax software finishes your tax return.
What deductions can you claim this year? Share your favorite deduction in the comments.