Can I deduct that? With tax season here, chances are you’ve heard those words or you have asked that question yourself.
What is a tax deduction?
A tax deduction, or tax write-off, is used to decrease taxable income, thereby decreasing the amount of tax owed. There are different types of tax deductions available. In addition to tax deductions there are tax credits. Tax credits are subtracted not from taxable income but directly from a person’s tax liability; thus they reduce taxes dollar for dollar. They could be refundable or non-refundable.
Types of Tax Deductions
Adjustments to Income, Standard Deduction, and Itemized Deductions.
Adjustments to Income: are generally more advantageous to the taxpayer as they directly affect taxable income. Examples are, educator expenses, health savings account deduction, IRA deduction, and self-employed health insurance deduction.
Standard Deduction: is a set amount that ensures all taxpayers have at least some income that is not subject to federal tax (i.e., tax-free). In general, the standard deduction is adjusted each year for inflation and varies according to your filing status. You can only take the standard deduction if you do not itemize deductions. For 2023 tax returns that are due to be filed in 2024, the standard reductions are: $13,850 for single taxpayers or married filing separately; $27,700 for married filing jointly or qualifying surviving spouse; $20,800 for head of household. There is an additional standard deduction for the elderly or blind taxpayers.
Itemized Deductions: are items deemed by Congress that help to reduce your income, but are subject to limitations. These are claimed on Schedule A and include items such as medical expenses, state, local and property taxes, home mortgage interest, and gifts made to charity. If all these items add up, to an amount greater than your standard deduction, you will report your itemized deductions.
Some items that taxpayers may think are tax deductible that are not, include: political donations; volunteer time; donations to charities that don’t qualify; pledges – the IRS allows deductions for money you actually gave not money that you promised to give; undocumented cash donations; entertainment and commuting costs.
As you prepare to file your tax returns, be aware of certain tax provisions that will expire soon. This is part of your tax planning.
Consult your Tax Professional to make sure you are taking advantage of all the tax deductions and credits that are available to you, and you are also in compliance with all filing agencies to avoid penalties and interest.
When you fail to plan, you plan to fail.
Esther Phahla is a Certified Public Accountant and Certified Tax Strategist in Temecula. She is the Author of tax planning books: “Why Didn’t My CPA Tell Me That” and “10 Most Expensive Tax Mistakes That Cost Business Owners THOUSANDS”. She also holds a Master’s of Science in Taxation. She can be reached at (951) 514-2652 or visit www.estherphahlacpa.com
