Let’s talk about Deductions!
Each year when you do your taxes, you are interested in applying all of the tax deductions you can apply. After all, no one wants to pay more taxes than they have to. This week we will be exploring common deductions that are available to the average American. Let’s get started.
What is a tax deduction?
It is an amount allowed by the government to decrease the amount of money used in calculating the tax you will have to pay. An example of this is if you have a tax deduction of $2,000 and you have income of $5,000. The result would be that you would pay tax on: $5,000 – $2,000 = $3,000 taxable income. This should not be confused with a tax credit which we will discuss next week.
What tax deductions are commonly used?
Standard Deductions can be thought of as a coupon that is given by the government to both individuals and married couples just for filing. In 2017, the standard deductions are:
- Single – $6,350
- Married – $12,700
- Married filing separately – $6,350
- Head of Household – $9350
To illustrate what this means if you earn $20,000 and are a filing single you would pay tax on ($20,000 – $6,350 = $13,650) only $13,650 if you have no other deductions.
Itemized deductions are discounts to your income which come from a variety of monies that you have spent in a year. To itemize, you would need to have records of having spent more than 10% of your Adjusted Gross Income (the money you made this year) on deductions that the government allows. Examples would include:
- Medical Expenses
- Deductible Taxes
- Home Mortgage Points
- Interest Expense
- Charitable Contributions
- Business Expenses
- Casualty, Disaster and Theft Losses
Itemizing your deductions can be complicated with what is and is not allowed as well as the Pease limitations. It is best to have a tax professional complete your tax documents if you think you will have itemized deductions.
A Personal Exemption Amount is an amount allowed by the IRS for individuals in your household. This year the amount allowed is $4,050. This can also be thought of as another coupon given by the IRS to reduce your taxable income.
Kiddie Tax only applies to households who have claimed children under the age of 19 (not in college) and extends to the age of 24 (for college students). Why is this important? It is important because this is the amount of income that your child 16 – limitation can make in a year and you will not be taxed on it. If your claimed child makes more than the IRS limits then you will have to pay tax on that money and it will be taxed at the same rate as the money that you made this year.