If you’ve ever completed a US tax return, then you’ve probably heard of a tax deduction. Tax deductions, also referred to as tax write-offs, are a way for US taxpayers to lower their tax liability (the amount of tax they must pay) by lowering their taxable income (the portion of their income that they must pay taxes on). There are many, many different costs and expenses that an American taxpayer commonly pays throughout the year. Many of these expenses are ones that the government considers community services or expenses that contribute to the betterment of the community. These are things like health insurance, childcare, charitable donations, business expenses, and more. In order to entice taxpayers to participate in these programs and incur these expenses, the government designates them as tax deductions. Each year during tax season, American taxpayers are able to deduct the cost of these expenses from their taxable income. Because taxes are paid based on a percentage of a taxpayer’s taxable income, each deduction lowers the cost of their taxes. Let’s look at an example. Timmy Taxpayer made $1,000 in taxable income this year. Based on his income and corresponding tax bracket, Timmy must pay 10% of his taxable income in taxes. Without any deductions, Timmy Taxpayer would have to pay $100 in taxes this year. However, let’s say Timmy Taxpayer donated $100 to a charitable organization this year. Timmy can claim a deduction on that donation, and deduct that $100 expense from his $1,000 taxable income. That lowers Timmy’s taxable income to $900. Because of this tax write off, Timmy only has to pay $90 in taxes this year. Timmy’s deduction saved him $10.
Tax Deductions vs Tax CreditsTax deductions are often referenced in tandem with tax credits, but the two are not the same.
- Tax deductions decrease your taxable income, which then lowers your tax payment.
- Tax credits are direct reductions to the amount of taxes you owe.
How to Claim Tax DeductionsOn your personal tax return, there is a designated section for claiming your tax deductions. When it comes to claiming your tax deduction
Standard DeductionIn order to simplify things for most US citizens, federal tax returns offer what is known as the “Standard Deduction”. This is a set amount of money that the federal government has determined is a standard amount of deductible expenses that most US citizens will incur during the year. Standard deduction amounts change based on filing status. The standard deduction as of 2020 is:
- Single: $12,400
- Married filing jointly: $24,800
- Married filing separately: $12,400
- Head of Household: $18,650