Deductions – Level 1

Kicking things off in a series of posts about taxes is the topic of deductions, also referred to as write-offs. Understanding what deductions are and how to leverage them can go a long way in ensuring you aren’t overpaying your favorite uncle, Sam. So, let’s explore what a deduction is, focus on some of the most common types, and then understand how to make the most of them.

As described in the clip above, a write-off is an expense the IRS allows you to subtract from your total income, thus reducing your taxable income. Since we are reducing the overall taxable income (the amount of income on which you pay taxes), we are reducing your overall tax bill. Write-offs are a legal way to keep more of your money in your pocket and give less of it to Uncle Sam.

For people that don’t own a business, the most common deductions are charitable gifts, mortgage interest deduction, and state and local taxes (SALT). These are all calculated on Schedule A of the tax return and are called itemized deductions. In states that have a state income tax, this last deduction can be sizable, which is, of course, why the IRS has capped it at $10,000. In a later post we will discuss the workaround to this cap in the form of the Pass-Through Entity Tax (PTET), restricted to business owners, but for today’s discussion we’ll assume the cap is in place. Quick example:

• Total income: $250,000
• Charitable giving: $10,000
• Mortgage interest: $6,500
• SALT: $20,000

In the example, the total itemized deductions for this family add up to $36,500. This would be great, except for that pesky SALT cap of $10,000. This means that only $10,000 of the state and local taxes this family paid can count toward reducing the amount they owe the federal government. After the adjustment, this family has a total itemized deduction of $26,500. In 2024, the standard deduction for a married couple filing jointly is $29,200. This means the family has a choice, itemize or take the standard deduction. In this case, the standard deduction is higher, so they should take that. Now the calculation looks like this:

• Total income: $250,000
• Standard deduction: $29,200
• Taxable Income: $220,800

If they contributed another $30,000 between them to their 401k, that taxable income reduces by another $30k (although the argument could be made they would be better off making Roth 401k contributions if that option is available, given their income level – but I digress). Nerd tip: this wouldn’t show up on the tax return as a deduction, however, since it is a payroll transaction and is taken out before it hits their paycheck. In that case, it would look like this:

• Total income: $220,000 ($30,000 was withheld for contributions to their 401k)
• Standard deduction: $29,200
• Taxable income: $190,800

Since the Tax Cuts and Jobs Act (TCJA) of 2018 made the standard deduction so high, most families no longer itemize their deductions. There just aren’t enough to add up to the high standard deduction unless you own a business. However, on December 31, 2025, the TCJA is set to expire, barring any Congressional intervention. This could mean that it might make sense for families to once again start itemizing their deductions.

A key takeaway from this incredibly well written article is that, while not as common as they used to be with most people, write-offs are still a valuable tax planning strategy. In the coming years, they will likely become increasingly more so as the tax environment reverts to what it was prior to 2018. And since you now know definitively what a write-off is, you can avoid conversations like the one that took place between Jerry and Kramer.