A tax deduction is a reduction in the taxable income you’re required to report and pay taxes on. It lowers your taxable income, which in turn reduces the amount of tax you owe to the government. Tax deductions come in many shapes and sizes. They can exist in the form of expenses, such as home mortgage interest or medical expenses, which you can subtract from your gross income when calculating your tax bill. Hence, tax deductions can lead to significant savings on your tax liability, enabling you to keep more of your earnings.
1. How does a tax deduction differ from a tax credit?
A tax deduction reduces your taxable income, while a tax credit reduces the actual amount of tax you pay. Think of it this way: deductions are subtracted from your income before the tax is calculated, while credits are subtracted from the tax you owe after the tax amount has been determined.
2. Who can claim tax deductions?
Want More Financial Tips?
Individuals, businesses, and other entities who pay taxes in the United States can claim tax deductions, provided that the expenses meet certain IRS (Internal Revenue Service) guidelines.
3. What is the Standard Deduction?
The standard deduction is a specific dollar amount that reduces the income you’re taxed on. Your standard deduction varies based on your filing status. For the 2021 tax year, the standard deduction for single filers or married individuals filing separately is $12,550, and for married couples filing jointly it is $25,100.
4. What are itemized deductions?
Itemized deductions allow you to list out specific expenses you’ve incurred throughout the tax year, which can then reduce your taxable income. These can include medical expenses, state and local taxes, mortgage interest, and charitable donations, among others.
5. Can I claim both standard and itemized deductions?
No, you cannot claim both the standard deduction and itemized deductions in the same tax year. You’ll have to choose the one that provides the greatest tax benefit for your situation.