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
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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