Tax deductions are effective tools for reducing your liability, potentially slashing thousands of dollars off what you owe the government each year. While most income is subject to income tax, the law allows you to deduct money you spend on certain items from the taxable total, essentially making those transactions tax-free. However, these benefits aren’t automatic, so it’s important to understand how deductions work before filing your returns.
How Do Deductions Work?
Deductions work by reducing the total amount of your income that is subject to taxation. Claiming these benefits can have major implications for your finances, especially if they qualify you for a lower tax bracket. For instance, workers earning $50,000 per year are subject to a 22% tax rate. However, if you’re able to deduct $11,000, only $39,000 will be taxable, and you’ll only pay a marginal tax of 12%.
Contributions to 401(k)s and IRAS are tax-deferred, making these deductions common. Interest paid on a mortgage is also usually deductible, along with the cost of some home improvements.
Self-employed workers and small business owners may also be able to write off their travel costs, inventory, and other necessary commercial purchases.
Understanding the Standard Deduction
The law allows every taxpayer to deduct a certain amount of income, regardless of whether they had deductible expenses. For 2019, the standard deduction is $12,200 for individuals or $24,400 for married couples filing together.
However, if you take the standard deduction, you can’t write off other expenses on your returns. For most taxpayers, claiming the standard deduction is the best choice, but an accountant can help identify the right option for your situation.
With over 20 years of experience guiding taxpayers through the complexities of the system, Donna Sellers CPA is committed to providing every client with the best service possible. This CPA takes the confusion out of filing your taxes and has built an excellent reputation throughout Terry County, TX. Visit the website to learn more about their services or call (806) 637-8556 to make an appointment.