Tax deductions help individuals and businesses lower their tax burden. Individuals can do this by deducting what they have paid that tax year towards interest on their mortgage, a deduction for dependents in the household, and a deduction for paid union dues. Businesses can use tax deductions so that they will only have to pay taxes on their profit, not on losses or expenses that where incurred.
Who Can Benefit From Tax Deductions?
Tax deductions can be a relief for two main groups of people: parents with several dependents (who would also make too much to get a full refund of the taxes they have paid) and sole proprietors with small or home businesses. These two groups of people stand to have the smallest amount of income left after regular expenses and not receiving these tax breaks would potentially place them in a dire financial situation.
What Qualifies As A Deduction?
There are many deductions available in the US. If you are a taxpayer, then it is likely that you qualify for some type of tax deduction. The problem most people face is they are not aware of the deductions that may be available to them. The following are a sample of tax deductions that are available:
- Dependent children
- Out-of-pocket business expenses
- Interest paid on a mortgage
- A portion of donations and money given to charity
- Union dues
- Some medical expenses
Check with your tax advisor to ensure that you qualify before claiming these deductions and to see if there are additional deductions that you may qualify for. If you get a good tax preparation software, it may also be able to alert you of any tax deductions that you may have missed. It is estimated that millions in tax deductions are not taken by those who qualify for them. It is important to know that you have taken all of your deductions, so that you do not have to pay more money in taxes than you are legally required to.
The Difference Between Individuals & Businesses
While all qualifying business expenses can be written off without income limitations, individuals can not claim deductions if they make over a certain amount. While this amount is sizable (around $150,000 for married filing jointly), it will still exclude some who would otherwise qualify for these deductions. It is important to know these regulations before you file your taxes, so that you do not claim something you do not qualify for and risk trouble with the IRS.
The Difference Between Tax Deductions & Tax Credits
It is important to know the difference between tax deductions and tax credits. With some credits you will receive a refund from the government for the amount if you have no additional taxes to pay at the end of the year. This is not true with deductions. With a tax deduction, you will not receive any money back just because you have deductions available but owe no taxes. Deductions will only apply towards reducing the taxes that you owe.