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 Credits
Tax 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.
Let’s look at Timmy Taxpayer again. Timmy Taxpayer made $1,000 in taxable income and had to pay $100 in taxes. However, Timmy Taxpayer realizes he’s eligible for a tax credit of $50. This tax credit is directly subtracted from the $100 he owes. That takes his tax liability down to only $50.
If the $50 was a tax deduction, on the other hand, it would have to be deducted from Timmy’s taxable income. That would take his taxable income down to $950, leaving his 10% tax liability at $95.
The really unique thing about tax credits is that a person can claim some tax credits that are larger than their tax liability. For instance, if Timmy was eligible for a $500 tax credit but only had a $100 tax liability, then the IRS would have to pay Timmy the difference, leaving him a tax return of $400. This type of tax credit is known as a refundable tax credit.
Tax deductions, on the other hand, can never increase your tax refund. They can simply decrease your taxable income, and lower your tax payment as a result.
How to Claim Tax Deductions
On your personal tax return, there is a designated section for claiming your tax deductions. When it comes to claiming your tax deduction
In 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
Opting to take the standard deduction is the simplest option. You don’t need to provide receipts, do any calculations, or prove any expenses. You’ll simply choose the standard deduction and claim the corresponding amount.
If you’ve incurred more than your corresponding standard deduction, it can be worth the time to claim each deduction individually. This is what’s known as itemizing deductions.
Itemized deductions are much more complex than the standard deduction. In order to itemize your deductions, you’ll need to write each deduction out line by line, and be prepared to show receipts for all claims. However, if you’re a taxpayer who incurs a lot of expenses throughout the year, such as someone who is self employed or makes considerable charitable donations, itemized deductions can certainly be worth your time.
Note that there is a threshold for many deductions set by the IRS, so be sure your claims fall within that limit.
27 Tax Deductions You Should Know
Wondering what you can write off on taxes? Here is a comprehensive tax deductions list of 27 common tax deductions that you should know.
Tuition and Fees Deduction
You can deduct up to $4,000 in tuition for qualifying higher education you paid for yourself, your spouse, or a dependent in 2016.
IRS-approved cash donations to charities can be deducted for up to 50% of their adjusted gross income.
If you itemize your list, you can claim the fair market value of household items and clothing you donated.
Donating Time and Expertise
You can deduct the cost of gas and oil from trips to and from your volunteer locations.
Job Search Expenses
If you itemize your list, expenses incurred from your job search can be deducted such as transportation, printing, and mailing.
Relocating for a Job
If you meet the IRS distance and time tests after moving for a new job, you can utilize the moving expense deduction. This includes the costs of moving belongings and traveling to your new home and the cost of lodging for household members.
Tax Prep Fees
Whether you paid someone to do your taxes or you completed them on your own, you can include those fees in your miscellaneous tax deductions list if the fees total more than 2% of your adjusted gross income.
Home Renovation Deduction
Typically, expenditures for home improvement are not deductible. However, if the improvements made are for medical purposes, you can deduct those renovations as medical expenses.
Home Business Expenses
Expenses incurred while using your home as the primary location for your business can be deducted.
Business Travel Expenses
You may be able to deduct expenses incurred during business travel that were not reimbursed by your employer.
Up to $2,500 can be deducted for students who attended post-secondary education for four years under the American Opportunity Tax Credit.
If you suffered a net loss from a hobby, it may be deductible.
Safety Deposit Box
Safety-deposit box fees for storing documents related to tax investments are deductible.
Losses from gambling may be deductible up to the amount of gambling income you reported.
Theft and Disaster
Household items and vehicles that are not covered by insurance are deductible.
Self-Employment Health Insurance Expenses
Premiums paid for medical and dental insurance are deductible for self-employed taxpayers.
Personal Exemptions and Dependents
Up to $4,050 can be deducted for personal exemptions and dependents.
State Return Taxes
Additional taxes for a prior year’s tax return paid in the 2016 year makes you eligible for a deduction.
The money you contribute to your 401k from income you claimed on your federal returns in deductible.
You are able to deduct union dues and initiation fees from taxable income.
Clothing such as costumes and uniforms that are not suitable for everyday use can be deducted.
Senior Tax Deduction
If you and your spouse were 65 or older in 2016, you are eligible for a higher standard deduction.
Car Registration Expenses
Vehicle registration fees may be eligible for deduction.
If you gave your jury duty payment to your employer because he continued to pay you, you can deduct jury pay from your taxable income.
Earned Income Tax Credit
EITC is a refundable tax credit intended to supplement income, ranging from $510 – $6,318.
Deduction for Bad Debt
You may be qualified for a tax rebate if money was lent that you never were reimbursed for.
Taxpayers can choose to deduct either state and local income taxes or state and local general sales taxes.
Get Help from Community Tax
If you’re interested in going the DIY route and itemizing your deductions, it’s important to do so with the help of a tax professional. Our experts at Community Tax have the experience and knowledge to ensure that your taxes are completed correctly, to help you stay on the IRS’s good side.
If you’ve fallen into hot water with the IRS, due to false tax deductions or anything else, we’re here to help. We provide both federal tax relief and local tax debt relief to American taxpayers from all walks of life. Whether you’re seeking tax resolution through the fresh start initiative, through the IRS tax hardship program, or any other method, we’ve got the know-how to help you out. Contact us today.