When something is tax deductible, it’s able to be legally subtracted from taxable income. The advantage of applying tax deductions is that they lower the amount of your taxable income, which, in turn, lessens the amount of tax you’ll have to pay the Internal Revenue Service that year. Keep reading to find out what can be used as a deduction on your tax return.
What Is Tax Deduction?
You can choose either a standard deduction or itemized deductions when filing your taxes — whichever option gives you the largest deduction. Common itemized tax deductions include state and local income taxes, mortgage interest, charitable contributions and medical expenses in excess of 7.5 percent of your adjusted gross income. For many people, choosing the standard deduction — $12,000 for single and married filing separately, $24,000 for married filing jointly and qualifying widow(er)s, and $18,000 for head of household –– is more beneficial than trying to itemize deductions.
How Do Tax Deductions Work?
When you file your income taxes on Form 1040, you’ll see in black and white how deductions work. After you calculate your adjusted gross income on Page 2, Line 7, you’ll subtract your deductions located on Page 2, Line 8, before you calculate your taxable income. The larger the amount of your deductions, the smaller your taxable income will be.
Although the IRS specifies a wide range of deductions, from student loan interest and various investment and healthcare expenses, not all taxpayers can utilize these deductions — you must qualify for each deduction to claim it.
Related: Every Tax-Filing Status Explained
Tax Deductions vs. Tax Credits
Tax credits can also lower the amount of tax you owe, but tax credits are different from tax deductions in that tax credits are applied to your return after your tax is calculated. Unlike tax deductions, which reduce the amount of your taxable income, tax credits reduce the amount of your actual tax, which works out better financially.
When you’re in the 24 percent tax bracket, for example, a $1,000 deduction will reduce your tax by $240. A $1,000 tax credit, on the other hand, will reduce your tax by $1,000, regardless of your tax bracket. Common tax credits include the earned income credit, the child tax credit and the premium tax credit associated with the Affordable Care Act.
Know Before You File: How the Child Tax Credit Can Cut Your Tax Bill Up to $2,000 Per Kid
Maximizing Tax Deductions
Tax filing can be complicated, and you might want to consult a tax advisor to be sure you don’t overlook any tax deductions. Although common deductions like the mortgage interest deduction are well-known, some deductions, like those casualty and theft losses, can be overlooked. High-earning taxpayers should also be aware that some deductions might be reduced; for tax year 2018, the phase-out level for the child tax credit begins at an AGI of $200,000 for single filers and $400,000 for joint filers.
Keep reading to learn more about which taxes have changed for divorced parents.
More on Taxes
- What Are Itemized Deductions and How Do They Work?
- Find Out If You Can Really Write Off That Holiday Donation
- 18 Medical Expenses You Can Deduct From Your Taxes
- Watch: Which Tax Receipts Should I Be Savings to File Taxes?
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