By Kaye A. Thomas
Current as of December 26, 2020

Deductions are subtracted from income to determine how much of your income is taxable.

Deductions fall into several categories:

  • Costs associated with an income-producing activity may be allowed as deductions in figuring the amount of income you report from that activity. Examples are depreciation claimed against rental income, or inventory and equipment costs claimed against a retail business.
  • Certain items, such as contributions to traditional IRAs, are allowed even if you choose not to itemize your deductions. These may be called adjustments or above the line deductions. The amount of income left after subtracting these deductions is called adjusted gross income (“AGI”).
  • Personal exemptions are deductions you claim for yourself and certain dependents.
  • Itemized deductions include medical expenses, state and local taxes, mortgage interest, and charitable contributions, among others. You’re allowed to claim a standard deduction instead of itemized deductions. Most people find that the standard deduction is more favorable, at least until they become homeowners. At that point, the deductions for mortgage interest and property tax may make it advantageous to itemize.