What Is a Tax Deduction and How Does It Work?

Have you ever had a conversation with your dad when all of a sudden he starts going on and on about tax deductions—maybe for the mortgage interest on your childhood home or medical expenses for that knee replacement surgery he had last year—and your eyes began to glaze over? We’ve been there too. (Sorry, Dad.)

Not many words in the English dictionary can spontaneously cause folks to let out a yawn faster than tax deductions or tax write-offs, but they can help you pay less in taxes this year. . . so maybe Dad was on to something after all!

A lot of folks don’t know which tax deductions are available or how to claim them on their tax returns. But you don’t want to be that person, because it could mean you’re leaving a good chunk of money in the hands of the IRS without even knowing it!

What Is a Tax Deduction?

Simply put, a tax deduction (also known as a tax write-off) is an expense that can lower your taxable income to reduce how much you pay in taxes. By lowering your taxable income, you can shave hundreds, maybe even thousands, of dollars off your tax bill. Neat, right?

For example, charitable donations are one of the most common tax deductions. That means you might be able to reduce your taxable income by the amount you gave to charity last year. 

So, if your income was $50,000 and you gave a $1,000 gift to your favorite charity last year, you could claim that gift as a tax deduction, and you’d only be taxed on $49,000 instead of $50,000.

But that’s only scratching the surface! From retirement plan contributions to home mortgage interest, there are dozens of tax deductions you might be able to take advantage of. Maximize your deductions to minimize your taxes.

How Do Tax Deductions Work?

When you’re filling out your tax return, there are two ways to claim tax deductions: take the standard deduction or itemize your deductions. You have to pick one!

Standard Deduction

The standard deduction is an amount set by the IRS each year, and it’s the easy option—it’s like an automatic tax freebie. If you choose to take the standard deduction, your taxable income is automatically reduced by a set amount based on your filing status (like single, married filing jointly or married filing separately).

That lowers the amount of taxes you have to pay. No need to dig through receipts or bank statements to find your deductions.

Itemized Deductions

Itemizing your deductions takes more work—you’ll need to list all the deductions you want to claim one by one. And you’ll have to fill out a Schedule A form with your tax return and save your records to back up your claims.¹

Don’t settle for tax software with hidden fees or agendas. Use one that’s on your side—Ramsey SmartTax.

Yes, itemizing is a bit of a hassle, but it’s worth the effort if you can claim enough deductions to lower your taxable income more than the standard deduction.

How do you know which option is best for you? There are a few things you need to know before you make your decision this year.  

What Is the Standard Deduction for the 2024 and 2025 Tax Years?

When you sit down in the spring of 2025 to file your tax return for the 2024 tax year, the standard deduction is $14,600 for single filers. Married and filing together? Your standard deduction is $29,200. Those numbers were adjusted slightly for inflation for the 2025 tax year.^2,3

Filing Status	2024	2025
Single	$14,600	$15,000
Married Filing Jointly	$29,200	$30,000
Married Filing Separately	$14,600	$15,000
Head of Household	$21,900	$22,500

Those are the need-to-know numbers for most taxpayers, but there are some special cases that can affect your standard deduction amount:⁴

• Additional standard deduction: If you or your spouse are over 65 or legally blind, you might be able to get a larger standard deduction. For tax year 2024, the additional standard deduction based on age or blindness is $1,550 ($1,950 if you’re also unmarried and not a surviving spouse).
• Increased standard deduction: If you took on losses from a federally declared disaster—like a hurricane or a wildfire—in the past year, you might be able to increase your standard deduction by the amount of your loss on Schedule A (Form 1040).
• Standard deduction for dependents or nonresidents: If you’re a nonresident alien or dual-status alien or if someone else claims you as a dependent on their return, your standard deduction may be lower. 

Be sure to check with a tax pro if you have any questions.

What Expenses Are Tax Deductible?

First, let’s take a look at what you can write off from your taxes. Here are some of the most common deductions that many taxpayers can take advantage of:

Charitable Donations

The more you give, the more you can deduct from your taxes. If you itemize your deductions, any money you gave to your church, your alma mater or your favorite charities can all be written off your taxes. You can deduct any amount of charitable giving up to 60% of your taxable income.⁵ Nice!

Medical Expenses

Do you have health insurance but still find yourself paying out of pocket for medical or dental expenses? The IRS lets you deduct medical expenses that are more than 7.5% of your taxable income for things like appointments with medical professionals or dentists, prescription drugs, contacts or eyeglasses, and health insurance premiums (paid for with after-tax dollars and not reimbursed by your employer), just to name a few.⁶

To break it down: If your adjusted gross income was $50,000, then 7.5% of that is $3,750. So if you had $5,000 of medical expenses that weren’t covered by your health insurance, subtract the $3,750 from that and you get $1,250 as a tax deduction.

State and Local Taxes

A lot of folks forget this one! The IRS lets you choose to deduct either your state and local sales tax or income tax, along with some foreign taxes. This is sometimes called the SALT (state and local tax) deduction.

Example: You live in a state with no income tax, but you did pay sales tax on some big purchases this year like a new car or furniture set for the living room. In this case, deducting sales tax is the way to go. And if you’re a homeowner, you can deduct property taxes from your taxable income as well.

Keep in mind, this deduction is generally capped at $10,000 ($5,000 for married filing separately).⁷ To calculate your deduction, check out the IRS sales tax deduction calculator.

Student Loan Interest

While student loans are nothing but bad news, there is a silver lining when it comes to how those loan payments can affect your taxes.

See, student loan interest (up to $2,500) is one of the rare “above-the-line” deductions, which means you can claim it even if you don’t itemize.⁸ This deduction is an adjustment to income and gradually phases out as your income increases.

How does it work? Well, you can either deduct $2,500 in student loan interest or the amount of loan interest you paid during the tax year, whichever is less.⁹

Mortgage Interest

Ah, the joys of homeownership! There’s the big backyard, the white picket fence, the mortgage payments . . . okay, maybe not that last one. But at least you can deduct the interest you paid on up to $750,000 of mortgage debt.¹⁰ Sweet!

Retirement and Investing

If you happen to have a traditional IRA, those contributions are most likely tax deductible (and they lower your taxable income whether you take the standard deduction or not).

But your deduction might be limited based on your income and whether or not you (or your spouse if you’re married) have a retirement plan through your workplace.¹¹

Here’s the catch: You’ll have to pay taxes on the money you take out of your traditional IRA in retirement. Yuck. That’s why we recommend investing with a Roth IRA instead. Roth IRAs are funded with taxed income. You won’t be able to deduct Roth contributions from your taxable income now, but who cares? You’ll enjoy tax-free growth and withdrawals in retirement later. Future you will thank you!

Home Office Expenses

If you’ve turned part of your home into your own workspace used only for business, you can write off work-related expenses like rent, utilities and maintenance costs.¹² It might take some extra measuring and calculations as you prepare to file your taxes, but it’s worth the effort if you qualify for this deduction.

Itemizing vs. the Standard Deduction: Which Should I Choose?

Here’s the deal: When it comes to taxes, everyone’s situation is different. There’s no one-size-fits-all solution.

That being said, taking that automatic standard deduction makes sense for most taxpayers since they probably won’t have deductible expenses that add up to an amount that is greater than the standard deduction (see the chart above).

But if you’re a homeowner, a business owner, made a lot of charitable contributions or paid out of pocket for hefty medical expenses last year, it’s possible that itemizing might be the best move for you. But make sure you add up your itemized deductions before you make that decision.

Let’s look at a couple of examples:

Meet Shawn. He’s a single guy just starting out in his career. He’s putting in crazy hours at his accounting job and renting a small apartment while he tries to work through his debt snowball. Since he doesn’t have that many expenses to deduct, the standard deduction offers a much larger tax break than itemizing would. That’s a no-brainer!

But then look at Shawn’s neighbors down the street, Linda and Eric. They’re married and filing jointly, so they automatically qualify for the 2024 standard deduction amount of $29,200—and they’re excited about that huge amount! 

But just to be sure, they go through their records to find all the tax deductions they can claim if they choose to itemize. Would they save money that way? 

After adding up their itemized deductions, they see they can actually knock a lot more than $29,200 (i.e., more than the standard deduction) off their taxable income, potentially saving them hundreds of dollars in taxes. 

Do you think Linda and Eric regret going back through all their receipts, files and bank statements? Not a chance!

 

What’s the Difference Between a Tax Deduction and a Tax Credit?

Before we wrap up, let’s make an important distinction—tax deductions and tax credits are not the same thing. While tax deductions lower your taxable income, tax credits cut your taxes dollar for dollar. So, a $1,000 tax credit cuts your final tax bill by exactly $1,000.

A tax deduction isn’t as simple. If you get a $1,000 tax deduction and you’re in the 22% tax bracket, that deduction reduces your taxable income and saves you $220 when it’s all said and done.  

Tax credits fall into two main categories: refundable and nonrefundable. If you have a refundable tax credit of $500 but only owe $200 in taxes, the IRS will send you a check for $300. On the other hand, if it was a nonrefundable tax credit, the IRS won’t be sending that $300 check—but your tax bill will be reduced to $0, which is still good news.

Save Big on Your Taxes

Your tax return isn’t the place for shortcuts. Get on the ball early so you have time to gather all the receipts and forms you need to claim those sweet, sweet deductions. You could save hundreds—maybe even thousands—of dollars, which is definitely worth the effort.