I hear on TV people talking about deductibles when filing taxes. What does that mean? I think on the Simpsons they said having Maggie is a deductible. Deducting what from what? I’m not American, so I don’t follow that system.
Follow-up: I think I understand it a lot more now. The government will set out criteria which will entitle you to pay less tax. It’s your job to notify the tax man at the start/end? of the tax year, so that you pay what’s deemed correct.
In: 8
I think you are confusing the terms “deduction” and “deductible”.
In the context of taxes, certain actions may result in the tax filers being able to claim an exemption of part of their income from income taxes. This is called a tax deduction.
Having a dependent is one common deduction that many apply to some filers.
You take your total gross income, subtract anything the government allows you to “deduct from your gross income” to get your taxable income and pay taxes on that lower number
A deduction is an amount of money that you can subtract from your income before paying taxes. It reduces the amount of money you owe taxes on.
If my income for the year was $50,000 and I had a $1,000 deduction, I would only have to pay income tax on $49,000.
The list of things that you can claim as a deduction is practically endless.
The amound of a tax deduction is removed from your taxable income when figuring out what taxes you owe. If I make a $1,000 donation to a charity and I made $65,000 that year, when figuring out my taxes my taxable income is reduced to $64,000.
It’s important to note that it reduced your taxable income by $1,000 and not your owed taxes by that amount. In the above example, the owed (federal) taxes would be reduced by $220.
In the American tax system, a deduction is something that lowers how much money you are taxed on.
Say you made $70,000 last year. The government might want to encourage or subsidize certain behaviors, like donating to charity, having children, or running a business. So they allow you to deduct some of the money you spent doing those things from your income before they decide how much you owe in taxes. It might look something like this:
$70,000 in actual income – $2000 donated to charity – $3000 for having a dependent child – $1000 for qualifying business expenses = $64,000.
The $64k is called your Adjusted Gross Income, and that’s the number that determines how much you owe in taxes. The lower the lower your AGI number, the less you owe.
In the us system you have your gross income of whatever you make per year
You can then use deductibles to basically remove a portion of your income from taxes.
The standard deduction in the us is around $10,000 so if you made $50,000 per year you do taxes as if you made $40,000 that year. This obviously means you pay less in taxes.
You can forgo the standard deduction and deduct a bunch of other stuff spelled out by the IRS. The common example is charitable donations
Unfortunately it’s a bit complex.
However worth mentioning taxes usually come out each paycheck based on your income and a few other things and then you basically compare your end of year “how much taxes did I pay” and “how much taxes was I supposed to pay” and if you did it right you would have paid more than you were supposed to, and get a refund check.
Tldr deductibles or deductions are things Americans can claim to basically delete income from tax assessments. Every American should also claim at least 1 deduction..most claim the standard deduction but some people will itemize a list and claim them instead.
Pretty sure you’re thinking of a deduction.
So the way income taxes work is that you pay the government a certain percentage of your *taxable* income. Your taxable income is your income (wages from jobs, income from other sources such as side business, rental income, etc), minus certain **deductions** of which there are many thousands. Some examples include medical expenses over a certain (high) threshold, having a dependent (typically a child), mortgage interest, charitable donations, making energy-efficient improvements to your house, etc.
Basically, it’s a way for the government to incentivize certain behavior by excluding that from your taxable income. Most filers however take the *Standard Deduction* which is a way to simplify your taxes so you don’t need to *Itemize* all of your potential deductions. This amount is $12,950 for single filers and $25,900 for married filers as of 2022. So if you’re single and you have less than $12,950 worth of deductions, you’d take the standard deduction. However some deductions can stack on top of the standard deduction as well.
In the American system, once you have added up all of your sources of income for the year (ex. salary, sale of stocks, etc) you are allowed to take “deductions” for certain things (ex. a dependent like a child, interest on certain loans, etc.) in order to lower the total amount of income you have to consider for taxable purposes. The more you can lower your taxable income (total income minus deductions) the less you will owe the government.
A deductible is an insurance payment.
You’re referring to a tax deduction. We get child tax credits for each child to offset the additional cost of another family member to care for. It reduces the amount of income taxes owed. Technically, Maggie is a tax credit and not a deduction. A credit is a straight reduction in tax owed, a deduction reduces taxable income so it drops your taxes owed by rate of your marginal tax bracket. A $3000 credit drops taxes by $3000, a $3000 deduction at 22% tax bracket would save $660.
Other people have covered it, but just so you know:
There is something called the “standard deduction”. *Everyone* pretty much can take it, regardless of any other factors. It’s more or less a flat number for everyone. (Right now, it’s $12,550 for singles, $25,100 filing with a spouse.)
Basically, you can add up all the things you can deduct, and see if it’s higher or lower than the standard. You can take whichever one is more beneficial to you.
Some people also do it because even though they *could* itemize their deductions, it’s a lot of work and the difference just isn’t worth it. (You often have to “prove” the deductions with receipts, so you have to keep careful records all year long.)
Finally, keep in mind that a deduction isn’t the amount you are reducing your *taxes* by, but your *taxable income*. This is a common mistake with a lot of people. If your income is $50,000 and your taxes are 10%, you pay $5000 in taxes. A $1000 deduction doesn’t mean your taxes are reduced to $4000, it means you pay 10% on $49,000 (so $4900). Since there are different % rates at different incomes, that $1000 deduction could mean different amounts for different people.
There is something called a tax credit that straight-up reduces your tax (or increases your refund) by a specific amount–a $1000 tax credit reduces your tax amount by the full $1000. These are–as you can imagine–significantly rarer.
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