Deductible

Quick Summary of Deductible

Purchases that are claimed as business expenses are described as deductible; they reduce business profits but reduce the amount of income tax owed.

1. An item or expense subtracted from adjusted gross income to reduce the amount of income subject to tax. Examples include mortgage interest, state and local taxes, unreimbursed business expenses, and charitable contributions. also called tax-deductible.
2. The amount of a loss that an insurance policyholder has to pay out-of-pocket before reimbursement begins in accordance with the coinsurance rate.

Something that is taken away or subtracted. Under an insurance policy, for example, the deductible is the maximum amount that an insured person must pay toward his own losses before he can recover from the insurer. For example, Julie’s car insurance policy has a $500 deductible. One day she forgets to set her parking brake and the car rolls backward into a telephone pole, sustaining $2,500 in damage. Julie’s insurance company deducts $500 from the total amount and issues a check to the auto body shop for $2,000.

(1) The deductible will be stated in your insurance policy. For example, a $500 deductible on your auto insurance policy means that if you’re in an accident and it costs $750 to repair your Jeep, you pay the first $500 and the insurance company picks up the remaining $250. That would apply to covered costs, of course.

A higher deductible might mean a lower premium, so you’d pay less in an annual fee to have the insurance policy, but more if something unexpected happens. Or you could pay a higher premium and have a lower deductible. The level of risk assigned to you can influence your deductible; if you’ve had lots of car accidents in the past, your deductible could be quite high (as well as your premium).

(2) Check with the IRS, a tax expert, or other sources to find out what expenses are deductible; qualifying expenses change from year to year. You might have to itemize the expenses on your income tax forms to take advantage of tax deductions. Examples of expenses that can be subtracted from the amount you pay taxes on include:

• Charitable donations.
• Work-related expenses such as mileage or equipment for a home office.
• Child-rearing costs.
• Moving expenses in relation to a new job.
• Contributions to a retirement fund such as a 401(k) or traditional IRA. Taxes, however, might need to be paid when money is withdrawn from the fund.

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