what “tax deductible” actually means, practically speaking


I just don’t get it.

In: 3

In other words “if you choose to file for it, the money spent on that expense can be claimed as exempt from income taxation”

Typically, it means you don’t pay taxes on the income that was used to generate that money. Like, if your income is $10,000 and you donate to $1,000 to charity, for tax purposes your income was $9,000.

Let’s say you earn $50,000 per year.

With no deductions, the IRS will tax you based on earning $50k.

Let’s now say that you earn $50,000 per year and you also donate $3,000 to charity, which is tax deductible.

Now the IRS will only tax you as if you earned $47,000 because that $3,000 was tax deductible.

So tax deductions make it so your income looks smaller come tax time. Which means you pay less taxes.

It means that you can subtract it from your income. Depending on what you do for a living or what investments you make there are ways you can deduct things from your income. A simple example is an Uber driver. They are allowed to deduct car expenses from their income. So let’s say you make 45,000 a year. Now let’s say you spent 5,000 on gas and oil changes. If you kept your receipts you can put this in your taxes and only have to report an income of 40,000. Thus reducing the amount of taxes you are paying.

In general you pay taxes on your income. For every dollar you make a certain percentage is paid in taxes, how big of a percentage depends on how much income you have already made. Tax deductible expenses though can be withdrawn from your income before tax. So for example if you make a dollar and spend it on a candy bar then you might have to pay a nickel in taxes. But if you make a dollar and donate it to a charitable organization then you do not have to pay any taxes.

You buy a thing, that involves paying sales tax, but in some cases you can get money back. For example if you own a bakery a new oven would be something tax deductable, it’s there to make businesses easier to run to stimulate the economy I think.

When you pay tax, it’s calculated based on an amount money. This could be the value of an item you sold, or a service provided, or the salary you earn. Assuming it’s all taxable and you’ve no deductibles then you pay tax on that full amount.

In concrete terms, if you make $100 and it’s taxable at 10% then you owe the government $10… but if you make $100 and I’m doing so you incur $20 in expenses (and assuming all of that expense is deductible) then you only pay tax on the $80, so you only owe the government $8

In general, you get paid, the government takes out income tax on that, and you get to spend what’s left.

For tax-deductible items, you get paid, you spend it on the tax-deductible item, and the government takes out income tax on what’s left. So you pay less tax.

If you itemize your deductions, it reduces your taxable income by the amount that went to that deductible activity. Say you put $1000 into your IRA (a tax deductible retirement account). The taxable income you’d pay taxes on goes down by $1000, so your taxes would go down by $150-200 or so depending on your marginal tax bracket.

All the answers so far seem good, but keep in mind that lowering your tax liability is not 1:1, you reduce INCOME not tax payment.

If you are taxed on 50k and you donate 5k you don’t pay 5k less in taxes, so the main reason for that giving would be to support a cause you believe in, not avoid paying taxes.

At 50k a year you’d have an effective rate of about 20%, so youd pay about 10k in taxes without any deductions. Giving 5k away puts you at 45k reported income , which would only save you about $1000 on your taxes, not 5k. You’re down 4000 over what you’d otherwise have.

For certain high net worth individuals/families charitable giving can be used as part of an overall tax strategy to reduce their liability to a lower bracket which can and some marginal cases and save considerably more, but the math still favors the government (like a casino, The House always wins).

More than anything else charitable giving is a way to support causes you believe in and/or climb social ladders.