It’s that time of year again. Time to dive into the mystery of tax preparation, and find out how much – or how little – you legally have to pay. Tax deductions have a lot to do with the amount of income tax you actually end up paying at the end of the year, so let’s demystify the tax deduction for you.
What Is A Tax Deduction?
A tax deduction is an amount that you can subtract from your total income from the year. This indirectly reduces the amount of tax that you have to pay.
Your tax is calculated based on your taxable income, which is not the same as the total amount of money you earned during the year.
Tax deductions are subtracted from your total income, leaving you with taxable income.
The amount of tax you pay is then calculated based on your taxable income.
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Tax deductions do not directly reduce the amount of tax you owe, but they do allow you to be taxed on less money.
Common Tax Deductions
While US tax law allows for fewer tax deductions now than before the 2015 Tax Cuts and Jobs Act, there are still common deductions available to many taxpayers.
Most of them are designed to reward certain financial choices, like saving for retirement. Others give tax breaks to groups of people who need it most, like first-time homebuyers and college students.
Retirement account contributions
One of the most common tax deductions is contributions to a retirement account, like a 401(k) or IRA account. If you have retirement contributions deducted from your paycheck every month, this money will not be included in your taxable income.
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If you qualify as low income (less than $21,750 for single filers or $43,500 married joint filers), you may be eligible for an additional “saver’s” tax credit of up to half your retirement account contributions for the year.
Mortgage interest deduction
If you own a home, you can deduct the interest on a mortgage worth up to $750,000. (Sorry, not the mortgage itself – only the interest. Bummer).
You can also deduct up to $5,000 (or $10,000 if filing jointly) of property taxes paid on the house. This tax deduction clearly benefits homeowners over renters, as there is no corresponding tax break for those who rent instead of own.
This tax credit is only available if you choose to itemize your tax deductions.
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