Common Tax Deductions
What can I deduct on my taxes
Oftentimes, people encounter common terms that seem to be easy but tend to be complicated once they delve deeper into them. Tax law, tax code, government tax credits, federal tax etc. are just some of the important terms that have to be understood in order to comply with the rules and regulations implemented.
Tax credits and tax deductions oftentimes confuse people. This is because they are not enlightened by the distinctions of these terms. Tax deductions have been an issue for the past years, and there are still other relevant issues connected to it. Today, you will learn these terms and concepts along with the corresponding explanation. Find out how tax deduction works in the government and society.
What is Tax Deduction?
Tax deduction is defined as the deduction coming from gross income arising because of different kinds of expenses which are incurred by the taxpayers. It is removed from the adjusted gross income (taxable income) and lowers the general tax expense liability.
Various regions have a specific tax code allowing a wide variety of expenses to be subtracted from the taxable income. Tax deduction is usually utilized to entire different taxpayers to join in programs that have corresponding societal benefits. For instance, charitable donations and expenses incurred to have an environmentally friendly home may be at times deducted from your taxable income.
Difference between Tax Deductions and Tax Credits
Government tax credits and tax deductions may reduce the income tax liability of an individual. However, they perform it in various ways. Tax deduction reduces taxable income. For this reason, their value will depend on the marginal tax rates of the taxpayers which increase with income. Tax deduction does not reduce your taxable income below 0 (zero). Thus, their value will be limited to the tax liability of the filer before they apply the deduction.
In contrary, tax credits straightforwardly reduce the tax liability of a person. Aside from that, other credits will be refundable and are not bounded by the tax liability of the person. As a general rule, tax deduction makes sense for items representing reductions to pay tax like casualty losses. Tax credits are suitable for subsidies that are given through tax systems.
The following list of information clarifies significant issues and concerns about tax deductions and tax credits.
- Individual tax filers have the options of getting the itemizing deductible expenses or standard deduction for items like local and state paid taxed, charitable contributions and mortgage interest.
- The tax code and tax law implemented such as Job Creation Act of 2010, Unemployment Insurance Reauthorization and Tax Relief are allowing all of the taxpayers to get full itemized deduction values in 2011 as well as 2012.
- Other itemized deduction and standard deduction have been disallowed under AMT or Alternative Minimum Tax. AMT only reduces other deductions but not actually eliminate them.
- A tax filer can claim other deductions to the itemized deductions and standard deduction. They include deductions to Individual Retirement Accounts contributions, moving expenses, student loans interest, alimony payments and more.
- Government tax credit will be subtracted directly from the tax liability of a person.
- Many government tax credits belong to non-refundable credits. They can never reduce the tax liability of a person below 0 (zero). As an outcome, the tax filers with low income usually do not receive maximum credit benefits where they are qualified.
Standard Tax Deduction
Tax deductions are allowing companies and individuals to deduct some expenses from the taxable income reducing the entire tax bill. The system of taxation provides an option of adding all the deductible expenses. At the same time, it provides evidence of the expenses to IRS upon requesting or just subtracts the flat amount, which refers to “the standard deduction”.
Standard deduction ensures that the taxpayers will have at least an income not subjected to federal tax. It generally increases every year because of inflation. Its amount depends on the status of filing you qualified for. The federal tax raises the taxpayer standard deduction for ages 65 years and older, blind or even both. IRS allows people’s blindness adjustments who are partially or even blind. Tax code consider ‘partly blind’ for people who have less 20 degrees or with corrected vision that is not better than 20/200.
You will need an eye doctor’s certified statement that supports your claim. Most states are also offering the same adjustments for blindness and age. Other taxpayers do not take the federal tax standard deduction. It is also simpler to get your standard deduction rather than itemizing. However, it may require extra cash amount.
People have to follow the tax law and understand every tax code to be able to comply with these rules and regulations. Tax credits and tax deductions are two principal concepts that must be understood. There are more reliable and useful sources that will define every term with the exact representation it showcases.