What is a Tax Deduction?
Deductible: something that can reduce the amount of taxes you have to pay.
A tax deduction reduces your taxable income, which reduces the amount of taxes you owe.
Deductible Items Include:
- Business expenses
- Medical expenses
- Retirement items
- Educational items (like student loan interest)
- Charitable donations, and many more
Podcast: Tax Returns
Tax deductible therefore means that if you spend your money on an item, it will reduce the amount of your gross income that is taxable by the government (not how much you pay for taxes).
For example, if you donate a private jet to charity (assuming they agree this is a tax deductible expense) they will lower your taxable income by the dollar amount of the expense.
What This Means for How Much You Pay in Taxes
With A Deduction
Your Gross Income is $50,000
Tax Deduction is $5,000
So your taxable income is $50,000 – $5,000 = $45,000
Your tax bracket is 20%, so you have to pay in taxes: $45,000 x 20% = $9,000
Without A Deduction
Your Gross Income is $50,000,
Tax Deduction is $0
So your taxable income is $50,000
Your tax bracket is 20%, so you have to pay in taxes: $50,000 x 20% = $10,000
So, you only saved $1,000 in taxes (with a $5,000 deduction)
Tax Benefits for a College Student
One of the advantages of being a college student can be found in the tax breaks category. According to the IRS, there are two education categories for which a student can qualify which will earn you a tax credit:
- The American Opportunity Tax Credit
- The Lifetime Learning Credit
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Education credits like these could help reduce your education costs. You could even reduce the amount owed beyond zero and earn a tax refund.
In addition to the tax credit programs, here are some categories that if qualified for, you can claim as a deduction. Those deduction categories are:
- Student Loan Interest Deduction
- Student Loan Cancellations and Repayment Assistance
- Tuition and Fees Deduction
Who Can I Claim As A Dependent?
There are two important questions to ask before looking into the legitimacy of claiming a dependent:
1. Are they filing elsewhere? If someone is filing personal exemptions or is claimed by another person then you cannot claim them as a dependent.
2. Are you related to them? If not, it is unlikely you will be able to claim dependency.
You cannot claim your dog as a deduction (it’s actually been attempted before!).
If you want to ask the IRS specifically, here is a questionnaire.
Overlooked Tax Deductions
- Job Hunting Charges – looking for a job, traveling to find that job, lodging, and the fees from an agency can all be applied for deduction.
- Tax Prep. Fees – if you paid taxes and used a credit or debit card to do so, you can also deduct convenience fees. Just keep in mind this only applies to fees you paid in the year you’re deducting them.
- Hobbies – while your hobby may not actually qualify you for small business tax deductions, you can deduct some of its expenses. However, you can only deduct as much as you generated in income from your hobby
- Personal Legal Bills – you can deduct your legal fees as long as the lawyer is claiming taxable income for you, or is working on a determination, collection, or refund of any tax. You can deduct legal fees as long as you paid them the year you are deducing from.
- Charitable Mileage – you can deduct 14 cents per mile plus parking and tolls. You can also deduct the fees you pay to use public transportation to go to and from the volunteer location.
- Educators Give and Get – if you educate other people or children then you could be entitled to more of your own money.
- Health Insurance – investing in your health is a write off.
- Retirement – if you are thinking about retirement and working toward it, you can deduct.
- Credits = Money – if you take a class to help you with work or better your life, you can deduct.
- Breastfeeding Equipment and Pumps – new mothers can use pregnancy as a tax deduction.
- Mom and Dad, Thanks for College – if you stay as a dependent your parents can deduct the fact they pay for your college. You get an education, they get deductions.
- In South Carolina, you can get a $50 deduction if you donate a dead deer to the poor.
- Hawaii gives a $3,000 tax deduction to those who grow state-approved trees.
- A hair stylist successfully deducted the entire cost of her wardrobe that she wore while working with her clients as a business expense.
- The United Kingdom gives tax breaks to video game companies that create “culturally British” games.
- In the Netherlands, those who study and practice witchcraft can claim a tax break.
- In Maryland, oyster farmers get a tax break, but those who farm other types of shellfish don’t.
There are about 3,700,000 words in the federal tax code …compare this to the roughly 170,000 words in the Oxford English dictionary or roughly 1,000,000 in the entire Harry Potter Books
- Bella, Laura La. How Taxation Works. New York: Rosen Pub., 2011. Print.
- “Credits & Deductions for Individuals.” Credits & Deductions for Individuals. IRS, 2 Jan. 2015. Web. 06 Feb. 2015.
- “8 of the Craziest Illegal Tax Deductions Ever Claimed.” – TurboTax Tax Tips & Videos. TurboTax, 2015. Web. 12 Feb. 2015.
- “Forms and Pubs.” Internal Revenue Service. Internal Revenue Service, n.d. Web. 11 Feb. 2015.
- O’ Bannon, Mark. “Word Count and Story Length | Better Storytelling.” Word Count and Story Length. Better Story Telling, 2010. Web. 06 Feb. 2015.
- “Rules for Claiming a Dependent on Your Tax Return.” TurboTax Tax Tips & Videos. TurboTax, 1 Jan. 2015. Web. 09 Feb. 2015.
- Weisenthal, Joe. “Tax Facts That Will Make Your Head Explode.” Business Insider. Business Insider, Inc, 13 Apr. 2010. Web. 06 Feb. 2015.