You’ve probably heard the terms, “You can write that off,” or “You can deduct that,” but many people aren’t sure exactly what that means, what tax deductions are and how they work. When it comes to your finances, they’re incredibly important as they can save you a significant amount of money so it’s a must to understand the ins and outs.
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What is a Tax Deduction?
A tax deduction is a dollar amount that you’re allowed by the IRS to subtract from your adjusted gross income (AGI) that reduces your taxable income. The lower that amount, the less you’ll have to pay the tax man. An article in the USA Today reported that the most common tax deduction is student interest, followed by tuition and fees, but there are hundreds of ways to use deductions to lower your tax income and a lot of people don’t understand how to take advantage of them.
Claiming Tax Deductions
There are generally two ways to claim tax deductions, either itemizing them or taking the standard deduction, but you can’t claim both. The standard deduction is a flat rate, with the amount qualified for depending on the filing status. If you itemize, you can take any of the hundreds of tax deductions available out there that you’re qualified to take. The more you can deduct, the less your tax bill will be.
To understand what you should do, you’ll want to determine if the standard deduction is less than the sum of what your deductions would be if you itemize. If the standard deduction is more, it’s generally better to take that deduction and it will be much quicker to do your taxes. If you do itemize it will probably take a significant amount of time and you’ll have to be sure that you have proof that shows you’re entitled to all those deductions.
How to Know What to Deduct
Because there are so many deductions, it’s best to talk to an accountant or other tax professional as they have the expertise to guide you as to which you can legally use. The sooner you understand which are available to you, the easier it will be to take advantage of them. Many people think that they’re only for the wealthy, but there are lots that are aimed toward lower- and middle-income taxpayers.
Itemized deductions, as mentioned, are deductions from your adjusted gross income, kind of like a receipt. They’re things you’ve paid for that have an impact on your tax status. While there are hundreds of possibilities, the most common are:
- Job expenses that your employer doesn’t reduce like uniforms or union dues
- Student loan interest that your parents pay if they don’t claim you as a dependent
- Self-owned business expenses like office equipment and anything that’s necessary for performing your business
- Donations to charity
- Personal property taxes
- Home mortgage interest
Of course, there are many others, such as the expenses on Nashville townhome, and it’s important to find out any of the restrictions and limitations around them by speaking with a professional. If you deduct something you weren’t entitled to, it could cost you big down the road.
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