Understanding Tax Deductions: What You Can and Can’t Claim
Tax deductions are valuable tools that help reduce your taxable income, potentially saving you hundreds or even thousands of dollars each year. But many taxpayers miss out on deductions simply because they don’t know what they can claim—or worse, claim deductions they’re not eligible for. Understanding what you can and can’t deduct is crucial to filing accurate, optimized returns.
What Are Tax Deductions?
A tax deduction lowers your taxable income. For example, if you earn $50,000 and have $5,000 in deductions, you’re taxed on $45,000.
There are two main types:
- Standard Deduction: A flat amount the IRS lets you deduct without itemizing.
- Itemized Deductions: Specific eligible expenses you list individually.
You can only choose one method, so compare both to see which offers more savings.
Common Tax Deductions You Can Claim
1. Mortgage Interest
Homeowners can deduct mortgage interest on their primary residence (and sometimes second homes).
2. State and Local Taxes (SALT)
You can deduct up to $10,000 in state and local property, income, or sales taxes.
3. Charitable Donations
Cash or goods donated to IRS-qualified nonprofits are deductible, but you must have documentation.
4. Medical Expenses
Out-of-pocket medical costs exceeding 7.5% of your adjusted gross income (AGI) are deductible.
5. Student Loan Interest
You can deduct up to $2,500 in interest paid on qualified student loans, even if you don’t itemize.
6. IRA Contributions
Traditional IRA contributions may be deductible depending on your income and retirement plan coverage.
Deductions You Can’t Claim
1. Personal Expenses
Groceries, clothing, and personal care aren’t deductible.
2. Commuting Costs
You can’t deduct regular commuting expenses to your workplace (unless you’re self-employed and working from a home office).
3. Political Contributions
Donations to political campaigns or candidates are not tax-deductible.
4. Club Dues or Entertainment
Meals may be partially deductible for business, but most entertainment and club dues are not.
Special Considerations for Self-Employed Individuals
If you’re self-employed, you can deduct:
- Home office expenses
- Business travel
- Equipment and software
- Health insurance premiums
Keep detailed records and separate personal and business expenses.
Documentation and Recordkeeping
To claim deductions legally and defend them if audited:
- Keep receipts
- Save bank statements
- Use tax prep software or a CPA
Conclusion
Tax deductions can significantly reduce your tax liability, but only if used correctly. Knowing what you can and can’t claim helps you avoid costly mistakes and take full advantage of the tax code. When in doubt, consult a tax professional to ensure accuracy and compliance.
