If you haven’t filed your taxes yet, don’t panic — but act fast.
Tax deduction is a financial term you need to know. Bankrate explains.
What is a tax deduction?
A tax deduction reduces the amount of income that is subject to taxation by federal and state governments. All federal income taxpayers have the right to chose either the standard deduction or to itemize a range of deductions, thereby lowering their taxable income.
Tax deductions are related to but distinct from tax exemptions. A tax deduction is a portion of taxable income that may be excluded from taxation when certain conditions are satisfied, while tax exemption constitutes income that is not subject to taxation in the first place. Meanwhile, a tax credit is applied to reduce the amount of tax owed, independent of taxable income.
Both the standard deduction and itemized deductions will lower adjusted gross income (AGI) and reduce taxes owed, but choosing which one to use depends on a taxpayer’s specific circumstances.
The standard deduction is a single, fixed deduction, whereas itemized deductions comprise a variety of expenses that may add up to a greater amount than the standard deduction. For single people and married people filing separately, the standard deduction is $6,350 for the 2017 tax year. For married people filing jointly, the standard deduction is $12,700. Your standard deduction increases if you are 65 or older or blind.
State and local taxes (SALT) — including income, property, and sales taxes — can be itemized for deduction. About one-third of taxpayers itemize deductions on their federal tax returns, and nearly all itemizers claim a deduction for local and state taxes paid.
Itemizing deductions is a good option if a taxpayer faces large uninsured or unreimbursed medical or dental expenses. For tax year 2017, medical expenses must exceed 10 percent of AGI before they may be itemized for deduction, and even then only the amount exceeding the 10 percent threshold may be deducted from income.
Other major itemized deductions include unreimbursed business expenses; significant charitable donations; large property or sales taxes; and uninsured casualty or theft losses. Like medical costs, unreimbursed losses must exceed 10 percent of your AGI in order to qualify for the deduction. A host of other expenses and miscellaneous deductions are available to be itemized, subject to eligibility.
Do you know which deductions you can claim? Use Bankrate’s tax calculators to see if it makes sense to itemize deductions.
Gordon makes quite a bit of money as a criminal defense attorney, so the standard deduction is too small compared to a long list of potential itemized deductions available to him. Since he owns his own small law firm, he has a long list of unreimbursed business expenses. In addition, a hurricane ripped the roof off his Florida vacation home, and insurance will only compensate some of the replacement costs. Furthermore, he pays an ocean of alimony to three ex-wives, much of which can be deducted.
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