Tax Deductions refer to the allowable deductions as outlined by the IRS that permit taxpayers to assess against their ultimate adjusted gross income ("AGI") in order to get to their tax liability. There are a wide array of available tax deductions that are outside the scope of this guide, but we've provided information on the most common types and how they work.
A deduction tax is an expense that ultimately lowers the taxable income of an individual. Tax deductions are taken "off-the-top" from the gross income of a taxpayer. Once all of the applicable deductions have been subtracted from the gross income, this resulting amount is the adjusted gross income ("AGI") of the taxpayer. The AGI determines the tax liability of the taxpayer, so deductions taken from the gross income will have a direct effect of the ultimate tax liability.
Tax credits represent a dollar-for-dollar reduction that is subtracted from the tax liability of a taxpayer. While tax credits can be more valuable than tax deductions, they can also be harder to qualify for. Where tax deduction allows only a percentage of an amount paid, with caps on the amount of the deduction, tax credits allow a taxpayer to get a dollar-for-dollar reduction.
There are two possible choices for taxpayers, and each taxpayer may choose whichever option best suits them (usually the option that yields the greater amount of deductions):
Taxpayers may utilize the standard deduction (as determined by the IRS every year). This is the most common way tax payers will figure out deductions.
Taxpayers may choose to use itemized deductions if they have deductions that exceed the standard deduction that is provided by the IRS. Often time, this can yield a greater return, but is much more complicated.
Taxpayers may choose to use itemized deductions if they have deductions that exceed the standard deduction that is provided by the IRS. Itemized deductions include, but are not limited to, things like:
Donations made to charity are considered tax deductible expenses and can reduce the taxable income of eligible taxpayers. While taxpayers may choose to use the standard deduction or the itemized deduction, the taxpayer will only be able to deduct charitable contributions if they choose to itemize their deductions.
Donations must be made to a 501(c)(3) qualified tax-exempt charity in order to claim a deduction for a charitable donation. The exception to the qualified tax-exempt status is for donations made to religious institutions like churches or temples.
The IRS provides a complete list of all available business tax deductions, the rules for which can be very lengthy and involved. Following are a sample of the commonly utilized business deductions: