Tax deductions can reduce your taxable income and lower your tax bill. They can lead to significant savings, and you can claim all the tax breaks—deductions and credits—for which you qualify each year. So, make sure you're not missing any and paying more income taxes than necessary.
Basic Types of Tax Deductions
There are three main types of tax deductions in the U.S.:
- The standard deduction: This is a flat-rate deduction available to most taxpayers, the amount of which depends on your filing status (e.g., single, head of household or married filing jointly). It simplifies the tax process and doesn't require tracking individual expenses.
- Itemized deductions: These are specific expenses you can deduct individually, such as medical expenses or charitable donations.
- Above-the-line deductions (also known as adjustments to income): These deductions reduce your taxable income and can be claimed regardless of whether you take the standard or itemized deduction. Examples include contributions to traditional IRAs and student loan interest.
When you file your tax return, you can usually choose the higher of your standard or itemized deductions. Most tax software or tax preparers will do the calculations and suggest the best option. But you also want to be aware of less-common tax deductions because you'll need to share the relevant information to claim these write-offs.
READ MORE: 11 Best Tax Credits and Deductions To Help You Save Money
8 Surprising Tax Deductions
This isn't a complete list, but here are eight tax deductions that people sometimes overlook or misunderstand.
1. Local and state sales tax instead of income tax
You may be able to deduct either the amount you paid for local, state and foreign income taxes or the amount you paid in local and state sales taxes as an itemized deduction. Here's how to figure out your deduction:
- Calculate income taxes paid: Review your W-2s, brokerage statements and estimated tax payments to calculate the total local, state and foreign income taxes you paid.
- Calculate sales taxes paid: If you keep all your receipts, you can add up the exact amount of sales tax you paid. If not, you can use the IRS Sales Tax Deduction Calculator to estimate your sales taxes.
You can choose whichever deduction—income tax or sales tax—leads to the most savings. However, there is a combined limit of $10,000 ($5,000 if married filing separately) on deductions for state and local taxes, including property taxes.
2. Nursing home expenses for family members
You might already know that you can deduct eligible medical expenses exceeding 7.5% of your adjusted gross income as an itemized deduction. However, you may be surprised to learn that this deduction can include unreimbursed nursing home costs for a qualifying relative.
A grandparent, parent, aunt, uncle or sibling could qualify as a relative for tax purposes, provided that you cover more than half of their financial support during the year. If they're primarily in the home for medical care, you may be able to deduct the entire cost. If they are in the home for other reasons, you might still be able to deduct medical care expenses, but not the costs for meals and lodging.
3. Unreported student loan interest payments
The student loan interest deduction is an above-the-line deduction that you may be able to claim even if you also take the standard deduction.
Typically, your student loan servicer will send you and the IRS a Form 1098-E to report the amount of student loan interest you paid over the year. However, the servicer is not required to send this form if you paid less than $600 in interest. If this applies to you, you can still claim the deduction by calculating your interest payments from your loan statements.
4. Investment interest expenses
Borrowing money to make investments can be risky, but you might be able to deduct the interest on your loan. For example, if you borrow money from a margin account to purchase stocks, the interest on the loan could qualify as an investment interest expense.
Generally, you can only deduct investment interest expenses if the borrowed money is used to purchase taxable investments. Additionally, you can only deduct the interest to offset your net investment income—the earnings from sources like certain dividends and short-term capital gains. The eligibility requirements and restrictions can be confusing, so review the IRS instructions in Publication 550 or consult a tax professional for guidance.
READ MORE: How Does Investing Money Affect Your Taxes?
5. Mortgage points
Many homeowners are aware that they can deduct mortgage interest payments, but some may not realize that mortgage points can also be deductible.
If you buy points when purchasing your primary home, you can generally deduct the full cost in the year you take out the loan, as long as you meet specific IRS requirements. However, if the points are part of a mortgage refinance or used for a second home, you may need to spread the deduction over the life of the loan.
Your mortgage servicer will usually include the cost of any points you paid on Form 1098, making it easier to account for them when filing your return. But knowing this ahead of time can help you decide whether and how much to pay in points when arranging your mortgage.
6. Interest on home equity loans and lines of credit
Homeowners may be able to deduct the interest paid on home equity loans and lines of credit. However, under current tax laws effective through 2025, the deduction is only allowed if:
- The loan is secured by your primary or secondary home.
- You use the loan proceeds to buy, build or substantially improve the property securing the loan.
For example, if you take out a home equity loan to build an addition, you may be able to deduct the interest. But you can't claim the deduction if you borrow against your home to pay for repairs, maintenance or non-home-related purposes like debt consolidation.
7. Gambling losses
You must include gambling winnings in your taxable income when you file your tax return. But if you're a casual gambler (i.e., you don't gamble as a profession or side gig), you may be able to claim gambling losses as an itemized deduction.
Your gambling losses can only be deducted to the extent of your gambling winnings for the year—you can't use losses to offset other types of income or roll over excess losses to future years. Additionally, you must keep detailed records of your gambling activities, including receipts, tickets and a log of your winnings and losses.
There are some other limitations, and the IRS has a tool you can use to see if you qualify and how much you can deduct.
8. Home office deductions
The home office deduction tends to be a well-known tax deduction, but many people are surprised to learn they can't claim the deduction even if they have a home office. For example, the home office expense is a business deduction, meaning you can't claim it unless you own or are a partner in a business.
There are some exceptions for storing inventory, if you run a day care or if you have a separate structure for your business. Otherwise, you must use the space exclusively and regularly:
- As your principal place of business
- To meet patients, clients or customers
For example, putting your desk in a guest room doesn't turn the entire guest room into your home office because you aren't using it exclusively for your business.
If you can claim the deduction, you may be able to deduct a proportional amount of your household expenses, including utilities, maintenance and property insurance. Or, you can use a simplified method to deduct $5 per square foot for your home office, up to a maximum of 300 square feet.
Other unique tax deductions
Small business owners—which could include gig workers, freelancers and contractors—may be able to claim other expenses as business deductions.
Some of these deductions are fairly common for business owners, such as the ability to deduct health insurance premiums or half of your self-employment taxes. Others depend on what's considered "ordinary and necessary" for a business. In this context, "ordinary" means the expense is common in your industry, and "necessary" means the expense is helpful and appropriate for your business.
The business expense deduction has led to some surprising situations, such as deductions for cat food to attract stray cats to a junkyard and body oil for a professional bodybuilder during competitions, as long as they can show these expenses are directly related to their business operations.
Learn More and Save More
Making sure you don't miss a tax deduction will help you save money come tax time. Contributing to tax-deductible accounts, such as an IRA CD, can also help you save. You can open and contribute to IRAs up until the tax filing deadline for the year.
Learning more about personal finance can also be important for managing your money. The Synchrony blog has lots of articles on a variety of interesting topics, including investing, paying off debt and saving money.
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