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
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.
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