Need Professional Help? Talk to a Tax Attorney.
Guide to Tax Law
- Introduction to Tax Law
- What is the IRS?
- Filing Your Tax Return
- Rights of Tax Payers
- Tax Free Income
- What is a Tax Credit?
- Tax Implications of Differed Income
- Recucing Your Taxes with Investments
- Tax Benefits for Homeowners
- Shifting Income withing a Household
- Your Status as a Tax Payer
- Small Business Owners and the IRS
- Minimize Taxes on Your Estate
- Tax Fraud and other Crimes
- Red Flag: IRS Audits
- Taking Your Case to Tax Court
- What if Your Owe the IRS?
- When to Hire a Tax Attorney
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.
Tax Deductions vs. Tax Credits
Tax Deductions
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
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.
Types of Tax Deductions
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):
Standard Deduction
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.
Itemized 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.
Itemizing Your Deductions
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:
- medical expenses
- charitable contributions
- mortgage interest and home mortgage points
- local and state taxes
- education expenses
- casualty and theft loss
- certain miscellaneous expenses
Charitable Contributions
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.
Business Deductions
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:
- vehicle expenses for cars, trucks, and other vehicles used in connection with the business of a taxpayer
- specific "start-up" expenses a taxpayer incurs before a new business gets running and becomes profitable
- capital expenditures, which must be distinguished from business expenses that are deductible in the current tax period
- business travel expenses incurred while the taxpayer was traveling for work or business purposes
- meals and entertainment and business gift expenses that the taxpayer incurred while entertaining clients for business purposes
- compensation and benefits for small business owners and their employees
- where applicable, a deduction for a home office for taxpayers with a home-based business
- deductions for casualty losses for taxpayers who incurred a substantial loss of business assets