Business, Legal & Accounting Glossary
A tax deduction is a provision in the U.S. tax code that allows individuals and businesses to subtract certain expenses from their taxable income, thus reducing their tax liability. State and federal tax law allow taxpayers to claim a tax deduction for a variety of reasons. Perhaps the most common tax deduction is the personal exemption. Family members (i.e. spouse, dependents such as children or relatives, head of a household, etc.) also have an associated tax deduction. Mortgage and equity loan expenses can be claimed as a tax deduction. Education expenses, some moving expenses, some job search expenses, contributions to charity, and capital losses can be claimed as a tax deduction. For businesses, start-up expenses, some office expenses, depreciation of business assets, and business-related travel expenses can be claimed as a tax deduction. Taxpayers who qualify for multiple deductions and claim every tax deduction available to them might move themselves into a lower tax bracket, which lowers the percentage of income they pay in taxes. A tax deduction is distinct from a tax credit, which directly reduces the tax amount itself rather than taxable income.
A tax deduction or a tax-deductible expense affects a taxpayer’s income tax. A tax deduction represents an expense incurred by a taxpayer. It is subtracted from gross income when the taxpayer computes his or her income taxes. As a result, the tax deduction will lower overall taxable income and the amount of tax paid. The exact amount of tax savings is dependent on the tax rate and can be complicated to determine.
A tax credit is a similar concept, but is different in that it reduces the tax paid dollar-for-dollar. This amount of tax savings is not dependent on the rate the taxpayer pays.
The United States’ tax system has many different types of deductions. At a high level, there are “above the line” and “below the line” deductions. “The line” that these two terms refer to is a literal line on US tax forms. After calculating Total Income, the taxpayer subtracts above the line deductions to determine Adjusted Gross Income. After this, there is a solid line (and the end of the page). Below the line, each taxpayer chooses between a standard deduction or itemized deductions, whichever is larger. This is subtracted from the adjusted gross income (after being subjected to a possible phase-out), to determine the taxpayer’s taxable income.
Below are some examples of tax deductions. Each deduction has its own particular requirements and may depend on the taxpayer’s filing status, income, and other factors. They may have separately calculated income limits where they are available or become unavailable. They may have particular rules involving prior-year tax returns. The list below is not exhaustive. Most deductions can be found in, , and – .
Many tax deductions allowed by federal law are also allowed under the tax laws of various states. Each state government may allow additional types of expenditures to be tax-deductible, such as rent in lieu of mortgage.
Tax deductions start to “phase out” for married individuals, filing jointly, with an income of about $145,000 or higher (2005); beyond that point, the full amount of the expenses cannot be deducted.
While broadly similar, tax-deductibility in Australia differs from the United States in a number of key areas:
In the UK, Her Majesty’s Revenue and Customs allow certain expenses to be deductible as necessary to complete the work from which the income was derived.
Examples of allowable expenses include:
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This glossary post was last updated: 25th April, 2020 | 1 Views.