What is a tax deduction?
I have been a tax accountant for 27 years. First of all, a tax DEDUCTION is not what it sounds like. From the sound of the term it would seem that a tax deduction is an amount you deduct from any taxes for which you are liable. This is not the case at all. A tax deduction is an item of cost or expense defined as an allowable deduction under the tax code. The deduction reduces not your tax in a direct way, but instead reduces your taxable income. Assume the deduction is $1,000. Taxable income before the deduction was $20,000. So, after the deduction is taken taxable income is reduced to $19,000. The tax is then computed on that reduced figure. Because incomes are taxed at graduated rates, a deduction is said to have a value equal to the “marginal” tax rate multiplied by the amount of the deduction. However, a person whose total income would be taxed at the rate of 25% in reality is taxed at various graduating rates as incomes go higher, the combined “effective” rate of which is 25 perce
A tax deduction is a reduction of a taxpayer’s total income that decreases the amount of money used in calculating the tax due. Essentially, a tax deduction is a break granted by the government. It reduces taxes by a percentage that is dependent upon the income bracket of the taxpayer. A tax deduction is different from a tax credit. For example, if an individual takes advantage of a $1,000 tax deduction on $50,000 worth of taxable income, his or her taxable income is reduced to $49,000. The amount of money saved in this scenario would be a small portion of the $1,000 deduction. On the other hand, a tax credit of the same amount would reduce the amount of taxes owed by $1,000. The actual savings realized would be the entire $1,000 of the tax credit. Tax credits reduce taxes on a dollar-for-dollar basis, while tax deductions do not. In the United States, the amount of taxes due is directly related to an individual’s income bracket. Individuals with lower incomes are generally taxed at a
A tax deduction is the amount subtracted from the taxable income, thus resulting in a lower tax liability. The larger the tax deduction, the smaller the tax liability. A tax deduction comes in two forms- standard and itemized. Taxpayers utilize the larger of the two deductions to reduce their taxable income. What is a standard deduction? A standard deduction is the fixed amount that taxpayers may deduct from their adjusted gross income (AGI) to compute taxable income. With this method, taxpayers need not record each potential tax-deductible expense throughout the year. The amount of the standard deduction depends on the taxpayer’s filing status and the number of dependents he or she has. Most taxpayers use this type of tax deduction, which can be claimed on one of three individual tax returns- 1040, 1040A or 1040EZ. For 2007, individuals filing a single tax return took a standard tax deduction of $5,350. Married persons filing a joint return, or a qualifying widow or widower with a dep
