This is tax fundamentals. Where we take the mystery out of some taxing tax terms.
On this episode, we're talking about deductions. What is a deduction?
A tax deduction may reduce your total income that is subject to tax.
So it isn't reducing your taxes, but it may reduce the amount of income being taxed.
Which means you could pay less in taxes. When you pay income taxes, a percentage
of your total income is paid to state and federal taxes. Your tax bracket determines this percentage.
So, let's say you're single. With a job as a lion tamer. You live alone, have no dependents,
and your yearly income is 88,000 dollars. This means your taxable income is 88,000 dollars
but this is before deductions. Business expenses are a common itemized deduction.
As a lion tamer, you're going to need lion food. If you pay for it, that could be a business expense
and you may be able to deduct it. Let's say the food cost 5,000 dollars.
Better keep those receipts. If you made 88,000 dollars, your taxable income could be reduced to 83,000 dollars
To keep it simple, we're not factoring in things like pre-tax adjustments
but that deduction may drop you down a tax bracket, and save you money. That's good news!
You have two choices when it comes to deductions:
you can itemize your deductions, or take the standard deduction.
The lion food is an example of an itemized deduction.
You can claim multiple itemized deductions, but there are limits for each tax bracket and rules around each deduction.
The standard deduction is a fixed amount associated with your filing status and tax bracket.
If you don't want to add up all your expenses, the IRS allows you to just take the standard deduction.
If your itemized deductions don't add up to a lot, taking the standard deduction instead
can often save you more money on your taxes.
Still have questions about deductions? Visit TurboTax.com to learn more about this and other tax topics.
Thanks for watching tax fundamentals!