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Most of us understand the gist of income taxes. In order to fund the government, we pay taxes on our income. The more we make, the more we’re taxed. What’s not as well understood is the role of tax deductions. Tax deductions lower our taxable income and in turn, our tax bill. In other words, some of our income ends up being off limits to taxes. But how much is deducted? That’s actually up to us taxpayers to decide — sort of. Here’s how it all works and what could change in 2026.Tax Deductions 101
It’s safe to say most taxpayers want to get the biggest tax deduction they can. But every year you have to decide: Are you better off with the standard deduction amount? The answer is often yes. The standard deduction will likely be the higher amount for people who don’t have many tax deductible expenses. But before we explore the choices, let’s take a step back to review the purpose of deductions. The government uses tax deductions as incentives to save for retirement, buy a house, go to college or invest in the economy in other ways. Deductions are also a form of financial relief for people with certain types of expenses, like high medical costs or alimony payments. And not everyone thinks they’re a good idea: Some economists say deductions should be eliminated since income tax is such a big source of government revenue. Tax deductions have been a part of the U.S. tax code since the first income tax was passed to pay for the Civil War. Back then, you could only deduct other tax payments — like state and local taxes — but over time the number of deductible expenses has grown. (The IRS has a list posted here.) Claiming individual tax deductions involves adding them up, or “itemizing” them, on a separate form (Schedule A) of the 1040 tax return. You must make sure to meet any caps or restrictions for eligibility. The SALT deduction, as the deduction for state and local taxes is known today, is still one of the most frequently claimed, along with the deductions for mortgage interest and charitable contributions, according to the Peter G. Peterson Foundation, a non-profit think tank focused on fiscal policy.Itemizing Vs. Taking the Standard Deduction
If itemizing deductions sounds like work, it is. That’s why Congress gave people a shortcut in 1944 by introducing the standard deduction. It allowed everyone — even if they weren’t a tax whiz — to shave a set amount off their taxable income. The standard deduction is the same for almost everyone within the same tax filing status. For example, for the 2024 tax year, the standard deduction for a single filer is $14,600. So regardless of their situation, a single filer gets to subtract $14,600. (For married couples filing jointly, the 2024 standard deduction is $29,200 and for those filing as head of household, it’s $21,900.) So which option will reduce your taxable income more? While everyone’s circumstances are different, the standard deduction tends to be more valuable for most people, particularly since Congress nearly doubled the amount in 2018, according to the Peterson Foundation. These days, roughly 9 in 10 taxpayers take it, according to the IRS. (Note: While you can’t itemize and take the standard deduction amount, it’s not entirely one or the other: There are actually some types of deductions, like student loan interest, that can be claimed on top of the standard deduction. These are sometimes called “above-the-line deductions.”)The Tax Cuts and Jobs Act
Why did the standard deduction get so much bigger in 2018? The Tax Cuts and Jobs Act, passed in 2017, increased standard deduction amounts as part of a broad tax code overhaul that also limited several itemizable deductions. For single filers, for example, the standard deduction jumped from $6,350 to $12,000 in one year and has edged higher every year since to reflect an increase in the cost of living. It’s important to note that many of the provisions in the TCJA — including the higher standard deductions — are set to expire at the end of this year, so the dynamic could shift again. Before the law was enacted, roughly 30% of taxpayers chose to itemize, according to the Peterson Foundation. That said, lawmakers are expected to preserve the majority of TCJA provisions beyond this year now that Republicans are back in control in Washington, Bloomberg Government reported last month. The TCJA was originally passed by a Republican majority in Congress.Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
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