Most of the top personal tax deductions for individuals can only be taken if you itemize your personal deductions on your return instead of taking the standard deduction. Today, few taxpayers itemize—only about 11%—because the standard deduction was almost doubled starting in 2018. For 2022, the standard deduction is $12,950 for singles and $25,900 for marrieds filing jointly.
Also, several personal deductions for itemizers were reduced or eliminated. You should itemize only if your personal itemized deductions exceed your standard deduction.
Here are the top personal deductions for individuals.
If you itemize, you can deduct the mortgage interest (not the principal) that you pay on a loan secured by your primary residence or a second home. To claim the deduction, you must be obligated to pay the debt, and you must actually make the payments, which are reported to the IRS by your lender.
For first and second homes purchased before December 15, 2017, interest on home loan acquisition debt up to $1 million is deductible. For homes purchased after December 15, 2017, homeowners are allowed to deduct the interest on only up to $750,000 in acquisition debt for a first and second home. This 25% reduction in the mortgage interest deduction is scheduled to remain in effect during 2018 through 2025.
But the reduction doesn't apply to refinancings of homes purchased before December 15, 2017, as long as the new loan doesn't exceed the amount of the mortgage being refinanced.
If you itemize, you may deduct your state and local taxes, including (1) property taxes and (2) state income or sales taxes, whichever is greater. In the past, no limit applied to this deduction.
However, taxpayers may deduct a maximum of $10,000 in state and local taxes each year during 2018 through 2025. This $10,000 limit applies to both single and married taxpayers and is not indexed for inflation.
If you itemize, you can deduct any cash or noncash contributions you make to a qualified nonprofit organization. You're supposed to have documentation for any cash contribution, including contributions under $250.
For all noncash (property) contributions and cash contributions over $250, you must have a receipt or acknowledgment from the nonprofit organization. For noncash (property) contributions over $500, you have to file an extra form with your tax return, Form 8283, Noncash Charitable Contributions.
If you itemize, you can deduct the amount of your medical and dental expenses that exceed 7.5% of your adjusted gross income. So, if your AGI is $100,000, you can deduct your medical expenses only if, and to the extent, they exceed $7,500. For example, if you have $10,000 in medical expenses you can deduct only $2,500. Eligible medical expenses include both health insurance premiums and out-of-pocket expenses not covered by insurance for both you and your dependents.
If you have a qualified Health Savings Account (HSA), you can deduct your contributions to the account, and you don't have to pay tax on any interest you earn from the account. To establish an HSA account, you must have a high-deductible health plan that qualifies under the HSA rules. You can use money in your HSA account to pay almost any kind of health-related expense.
If your employer offers a 401(k), it pays to maximize your contributions, especially if your employer matches them. The maximum contribution is $20,500 for 2022. If you are 50 or older, you can contribute an extra $6,500 per year.
For IRAs, you can contribute $6,000 in 2022 and deduct that amount from your income—but this deduction is phased out if your income is over certain limits and you and your spouse have a workplace retirement plan. If you are 50 or older, you can contribute an extra $1,000.
You can deduct up to $2,500 in student loan interest payments per year for the lifetime of the loan (income limits apply). This is an "above the line" deduction that you can take without itemizing your personal deductions. So, all taxpayers who qualify may take it.
You can set up a Coverdell education savings account and contribute up to $2,000 per year (with phase-outs for higher-income people). These contribution amounts were made permanent in 2013. The amount you contribute isn't deductible, but distributions from the account for payment of tuition are tax-free.
You can also set up a state-sponsored college savings plan, known as a "Section 529 plan," which allows tax-free withdrawals for qualified college expenses.
In addition, up to $10,000 can be withdrawn from a 529 plan each year to pay for elementary, middle, and secondary school tuition—a boon to parents who send their children to private schools.