What are Deductions?
There are two types of federal tax deductions. An ‘above-the-line’ deduction is subtracted from your gross income to arrive at ‘Adjusted Gross Income,’ or AGI. Examples of above-the-line deductions are IRA contributions, student loan interest payments, self-employment tax, and health savings account contributions. Below the line, or after AGI, is where you either add up your itemized deductions and apply that total, or you take the standard deduction, which is a set amount based on your filing status. Some popular itemized deductions are mortgage interest, state and local income taxes, charitable contributions, property taxes, and unreimbursed medical expenses. Choose the larger of either your standard deduction or itemized deductions to reduce your taxable income and ultimately lower your tax bill.
Remember that tax deductions are different from tax credits; both reduce your taxable bill, but deductions reduce the income you are taxed on, while credits directly reduce your tax amount. For more information, see our video on tax credits.