Understanding Tax Deductions

What You Can (and Can’t) Write Off

Tax deductions are one of the most effective ways to lower your taxable income and save money, but navigating the rules can be confusing. Whether you’re an individual or a business owner, knowing what you can (and can’t) write off is key to maximizing your tax return—and avoiding any red flags with the IRS.

The standard deduction is a fixed amount that reduces your taxable income, and it’s available to all taxpayers who do not itemize. The amount varies based on your filing status. Whether to take the standard deduction or itemize deductions depends on your specific financial situation.

Here’s a breakdown to help you decide.

Tax Deductions Defined

A tax deduction reduces your taxable income, which in turn lowers the amount of tax you owe. For example, if you earn $50,000 and claim $5,000 in deductions, your taxable income drops to $45,000. Deductions can come from a variety of sources, including personal expenses, business costs, and specific tax laws designed to encourage certain behaviors, like charitable giving.

Personal Tax Deductions

While the Tax Cuts and Jobs Act of 2017 simplified tax filing for many individuals, it also eliminated some common deductions. However, plenty of opportunities remain to reduce your taxable income. Here are some personal deductions to consider:

What You Can Write Off:

1. Charitable Donations:

• Donations to qualified organizations are deductible, including cash contributions and the fair market value of donated items like clothing or furniture. Be sure to keep receipts or confirmation letters.

2. Mortgage Interest:

• Homeowners can deduct interest paid on a mortgage of up to $750,000 (or $1 million if the mortgage was taken out before December 15, 2017).

3. State and Local Taxes (SALT):

• You can deduct up to $10,000 in combined state and local income, property, and sales taxes.

4. Medical and Dental Expenses:

• Expenses that exceed 7.5% of your adjusted gross income (AGI) are deductible. This includes surgeries, prescriptions, and even mileage to medical appointments.

5. Education Costs:

• The American Opportunity Credit and Lifetime Learning Credit are valuable options for eligible tuition and education expenses.

What You Can’t Write Off:

1. Personal Living Expenses:

   • Rent, groceries, and utility bills are not deductible.

2. Work-Related Expenses for W-2 Employees:

   • Most job-related costs, like commuting expenses and home office setups, are no longer deductible for employees.

3. Club Dues or Membership Fees:

   • Social clubs, gym memberships, and similar expenses are off-limits unless directly related to your business (and even then, restrictions apply).

Business Tax Deductions

If you’re self-employed, own a business, or operate as a freelancer, the list of deductible expenses grows significantly. The IRS allows you to deduct expenses that are "ordinary and necessary" for your trade or business.

What You Can Write Off:

1. Home Office Expenses:

• If you work from home, you can deduct a portion of your rent, utilities, and internet costs. To qualify, the space must be used exclusively for business.

2. Vehicle Expenses:

• You can either deduct the actual expenses (fuel, maintenance, insurance) or use the standard mileage rate (65.5 cents per mile for 2023). Keep a detailed log!

3. Office Supplies and Equipment:

• Paper, pens, computers, and other tools necessary for running your business are fully deductible.

4. Professional Services:

• Fees paid to accountants, bookkeepers, or legal professionals can be deducted as a business expense.

5. Marketing and Advertising:

• Costs for websites, business cards, social media ads, and promotional materials are deductible.

6. Travel and Meals:

• Business travel expenses like airfare and hotels, as well as 50% of meal costs while on business, are deductible. However, the trip must have a legitimate business purpose.

7. Employee Salaries and Benefits:

• If you’re an employer, wages, health insurance, and retirement contributions are deductible.

What You Can’t Write Off:

1. Entertainment Expenses:

   • Most entertainment expenses, like tickets to events or non-business-related outings, are not deductible.

2. Fines and Penalties:

   • Any penalties paid to government agencies for violations of the law are not deductible.

3. Personal Use of Business Assets:

   • If you use your car, phone, or home office for personal reasons, only the business-related portion is deductible.

How to Stay Compliant

The IRS loves a well-documented deduction. Here’s how to ensure you’re in the clear:

• Keep Receipts: Always save receipts, invoices, and bank statements that prove your expenses.

• Use Accounting Software: Tools like QuickBooks can help you track deductions throughout the year.

• Understand IRS Rules: Consult the IRS guidelines or work with a tax professional to avoid mistakes.

• Separate Personal and Business Finances: If you’re self-employed, use separate bank accounts for personal and business expenses.

Standard Deduction

2025 Standard Deduction Amounts (updated annually):

The IRS announced the inflation-adjusted 2025 standard deduction under Revenue Procedure 2024-40. However, as part of the One Big Beautiful Bill Act, the standard deduction amount increased to $31,500 for married couples filing jointly. For single taxpayers and married individuals filing separately, the standard deduction for 2025 is $15,750, and for heads of households, the standard deduction is $23,625.

Additionally, if you're 65 or older or blind, you can claim an extra standard deduction amount:

• For 2025, the additional standard deduction amount for the aged or the blind is $1,600. The additional standard deduction amount increases to $2,000 for unmarried taxpayers.

• For 2025, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,350 or the sum of $450 and the individual’s earned income (not to exceed the regular standard deduction amount).

For more detailed information, you can refer to the IRS announcement on tax inflation adjustments for tax year 2025. IRS

When to Choose the Standard Deduction

1. Your Itemized Deductions Total Less Than the Standard Deduction

• If your eligible expenses (like mortgage interest, medical costs, or charitable donations) don’t add up to more than the standard deduction, it’s better to take the standard deduction.

2. You Want Simplicity

• The standard deduction is easier to claim. You don’t need to keep detailed records or receipts, making tax preparation quicker.

3. You Don’t Have Many Deductible Expenses

• If you rent your home, have low medical bills, or don’t make significant charitable donations, the standard deduction often provides the best benefit.

Itemized Deductions

Itemizing allows you to deduct specific eligible expenses individually, such as:

1. Mortgage Interest

• Interest on up to $750,000 of mortgage debt can be deducted ($1 million if the loan was taken out before December 15, 2017).

2. State and Local Taxes (SALT)

• Deduct up to $10,000 in combined property taxes, state income taxes, or sales taxes.

3. Medical Expenses

• Deduct expenses that exceed 7.5% of your adjusted gross income (AGI).

4. Charitable Contributions

• Cash donations to qualifying charities, as well as the fair market value of donated goods, are deductible.

When to Itemize Deductions:

1. Your Itemized Deductions Exceed the Standard Deduction

• If your total eligible expenses are higher than the standard deduction, you’ll save more by itemizing.

2. You Have Significant Expenses in Specific Categories

• High mortgage interest, substantial medical expenses, or large charitable contributions can make itemizing worthwhile.

3. You’re in a High-Tax State

• States with high property and income taxes can make the SALT deduction a significant factor.

4. You Own a Home

• Homeowners with mortgages and property taxes often benefit from itemizing.

How to Decide

1. Calculate Your Deductions:

• Add up all your potential itemized deductions to see if they exceed the standard deduction for your filing status.

2. Consider Your Filing Status and Life Changes:

• Married couples, new homeowners, or individuals with large medical bills might find itemizing more advantageous.

3. Use Tax Software or a Professional:

• Tax software can quickly compare the two options, or you can consult a tax professional for tailored advice.

A tax professional can help you compare the options and ensure you make the most financially sound decision. Reach out if you have any questions.