What types of deductions are available on a personal income tax return?

Tax deductions lower your personal income tax by bringing down taxable income.

The 2017 Tax Cuts and Jobs Act significantly revised and changed many tax provisions, including changes to deductions to help offset the reduction in tax rates, boosted the standard deduction, suspended the personal exemptions, limited the exclusion for student loans, revised income tax rates and tax brackets, and increased the child care credit. Many of the changes apply in 2018 and before 2026. The changes are noted below.

There are four main types of deductions:

Business deductions

Those are deductions for the cost of operating a business or being self-employed.  Basically, they are the typical day-to-day costs of running a business. The list of business expenses is very long, but some of the most common are:  cost of materials, cost of goods sold, supplies, rent, utilities, taxes, advertising, legal and professional costs, etc.

To be deductible, the expenses must be both ordinary and necessary.   They must be the typical types of expenses that a business of that specific nature would incur in order to be able to do business.  For example, a plumber would have business miles as an expense because his or her work must be performed at their customer’s location.  However, someone engaged in web design would be unlikely to have legitimate business miles as their work would be done at their office location.

If you have both personal and business expenses, you can deduct the business portion.  The most common types of expenses that have both a personal and business element are cell phones, internet service, big box club memberships, etc.

They are deducted either on Schedule C (Form 1040 or Form 1040NR) or on the return for the type of business entity that is being operated (i.e., 1120, 1120S, or 1065)

Above the line non-itemized deductions

2018-2025: Beginning 2018 through 2025, much of the above-the-line miscellaneous deductions that were previously listed in the “Adjusted Gross Income” section of Form 1040 on returns filed before 2018 were moved and are now listed as “Adjustments to Income”, on the new Schedule 1, of Form 1040, lines 23–36.

On returns filed before 2019, these above-the-line deductions which directly reduced gross income were listed on the front page of IRS Form 1040 in the “Adjusted Gross Income” section. You can take the deductions regardless of whether you itemize deductions or take the standard deduction.

Common examples of the deduction are (note: some of the following remain in place for tax years 2018 and beyond):

1) Certain business expenses for reservists, performing artists and others: These could include travel expenses and certain personal expenses.  Performing artist expenses can be written off if the artist meets certain qualifications (see Form 2106 instructions).
2) Health savings account deduction:  A health savings account is pretax dollars that are allocated to medical expenses when you have a high deductible medical insurance policy. See IRS form 8889.
3) Job-based moving expenses:   Starting 2018 through 2025, qualified moving expenses when you relocate for a job or for self-employment are not deductible, except for a relocation move by an active member of the military.
4) One-half of self-employment tax:  Self employment tax covers social security and Medicare taxes for self employed taxpayers.
5) Contributions by self-employed to SEP, Simple, Keogh, MSAs and HSAs plans
6) Self-employed health insurance deduction:  Covers health insurance for the self employed taxpayer and their family.
7) Penalty on early withdrawal of savings:  Example:  The fee charged by your bank for cashing in a CD early.
8) Alimony paid:  Must be court-ordered alimony, spousal support or maintenance. This deduction is in effect through 2018, but disappears for couples divorced in 2019.
9) IRA deduction:  Up to $5,500 per person if you are under 50, and $6,500 per person if you are over 50, for 2018.  This deduction was preserved by the 2017 Tax Cuts and Jobs Act and the amount you can contribute was bumped up to $6,000 in 2019 (the catch up contributions if you are age 50 or older remains unchanged in 2019).
10) Up to $2,500 student loan interest.  This provision was left untouched by the 2017 Tax Cuts and Jobs Act for 2018 and beyond. The deduction begins to gradually phase out for taxpayers with modified adjusted gross income of $70,000 ($140,000 for joint filers).
11) Educator expenses:  You can deduct up to $250 ($500 for filing jointly) in 2018 of qualified expenses.
12) Legal fees in unlawful discrimination cases as well as IRS tax law violation cases (enter on Line 36, Schedule 1).

Itemized deductions found on Schedule A

2018 law changes: Several changes were made in itemized deductions with the passage of the 2017 Tax Cuts and Jobs Act:

(1) the overall limit on itemized deductions is suspended for 2018 through 2025;

(2) the threshold for the medical and dental expense deduction is reduced to 7.5% of adjusted gross income (AGI) for 2017 and 2018; it rises to 10% of AGI starting in 2019;

(3) the deduction for state and local income taxes, state and local real property taxes, and general sales taxes is capped at $10,000 ($5,000 for married filing separately) combined; this deduction reverts to pre-2018 levels in 2026;

(4) mortgage interest paid on a home, including a portion of the points paid to reduce the interest rate, is deductible. The amount of interest you can deduct is impacted by the date you took out your mortgage or home equity loan. For mortgages taken out before December 15, 2017, you can deduct interest up to the first $1,000,000 ($500,000 if married filing separately); mortgages executed after that date, only the first $750,000 ($375,000 for married filing jointly) of interest on the loan is deductible. The loan must be secured by the taxpayer’s main home or second home. Beginning in 2026, the deduction reverts back to $1 million, no matter when your mortgage was executed;

(5) interest on home equity loans is not deductible beginning 2018 through 2025, regardless of when the debt was incurred;

(6) the deduction for casualty and theft losses is gone for tax years 2018 through 2025, except for losses incurred in a federally-declared disaster area. Claims must include the FEMA code assigned to the disaster. The loss must exceed $100 per casualty and the net total loss must exceed 10% of your adjusted gross income (AGI); and

(7) the percentage limitation for charitable cash donations to public charities and certain private foundations is increased to 60%, up from 50%.

Pre-2018 law: These are itemized deductions that you may use in place of your standard deduction.  They are considered to be below the line deductions because they do not reduce your AGI (Adjusted Gross Income) and therefore are not as valuable as above the line deductions, which do reduce AGI.  Many state tax calculations begin with your AGI, therefore these deductions also do not help with your state taxes in many states.

Most common pre-2018 deductions are:

a) State and local income taxes (or sales taxes)
b) Real estate and personal property taxes
c) Home mortgage interest and points
d) Mortgage insurance premiums
e) Investment interest
f) Charitable donations and miles that are less than 50% of your AGI
g) Casualty and theft losses that exceed 10% of your AGI
h) Job expenses and miscellaneous deductions that exceed 2% of your AGI
i) Medical and dental expenses that exceed 7.5% of your AGI

Standard deduction

An “average deduction” is available to all taxpayers who either cannot or choose not to itemize deductions. Called the standard deduction, it is a flat amount–adjusted each year for inflation–and varies based on filing status. The 2017 Tax Cuts and Jobs Act almost doubled the standard deduction for all filers starting 2018 and ending 2025.

Download IRS Pub. 501 for more information.

Case Studies: Types of Deductions on Personal Income Tax Returns

Case Study 1: Business Deductions

John is a self-employed graphic designer. He operates his design business from a home office and incurs various expenses related to his business operations, such as software subscriptions, office supplies, and advertising costs. At the end of the year, John consults with his tax advisor and identifies the eligible business deductions he can claim on his personal income tax return. By accurately tracking his business expenses and maintaining proper documentation, John is able to deduct these expenses as business deductions on Schedule C of his Form 1040.

Case Study 2: Above the Line Deductions

Sarah, a performing artist, incurs several expenses related to her profession, including travel expenses and the cost of maintaining her equipment. She also pays premiums for a health savings account (HSA) to cover her medical expenses. Sarah consults with her tax advisor to determine the above-the-line deductions she can claim on her tax return. By utilizing above-the-line deductions, Sarah can deduct her qualified business expenses and the contributions to her HSA, reducing her adjusted gross income (AGI).

Case Study 3: Itemized Deductions

Michael and Lisa own a home and pay mortgage interest, real estate taxes, and state income taxes. They also make substantial charitable donations throughout the year. When it comes time to file their tax return, Michael and Lisa decide to itemize their deductions to maximize their tax benefits. By itemizing their deductions on Schedule A of their Form 1040, Michael and Lisa can deduct the mortgage interest, property taxes, state income taxes, and charitable contributions they made during the tax year.

Case Study 4: Standard Deduction

Emily, a single taxpayer, does not have significant deductible expenses and does not own a home. She decides to take the standard deduction instead of itemizing her deductions. Emily consults with a tax professional to determine the appropriate standard deduction for her filing status. By choosing the standard deduction, Emily can claim a fixed deduction amount, which is determined based on her filing status. This simplifies her tax filing process and ensures she receives a deduction without the need for itemizing specific expenses.