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Annual total tax revenue in the United States can be as high as $3 trillion.
If you’re paying income tax, you’ll be familiar with the concept of deductibles. But what does it mean when something is tax deductible?
There is a range of ways you can reduce your tax bill, and these are known as tax-deductible expenses. As you might have guessed, however, you need a very solid knowledge of tax laws and procedures to make full use of these deductibles.
Read on to learn more about tax deductions and ways in which you can lower your tax burden.
What Does It Mean When Something Is Tax Deductible?
If something is tax deductible, it means you can take the cost of it away from your taxable income. So, if your income is $40,000 and you have deductibles of $5,000, your taxable income is only $35,000.
The authorities designate certain things as being tax deductible to make taxation fairer and to encourage or discourage certain behaviors.
Examples of Tax Deductions
There are many examples of tax deductions. The government introduces new deductibles all the time, for various reasons.
Below are some of the most common examples of tax deductions.
Business Expenses
Any money that you spend on running your business operations is considered a taxable expense. This will only apply to self-employed people, or to the portion of income that comes from self-employment.
Charitable Donations
If you give money to charity, you’ll be happy to learn that you can take the amount you give away from your taxable income. Usually, you can deduct anything up to 60% of your taxable income; however, because of COVID-19, you can deduct 100% this year if you wish.
Mortgage Interest
You can deduct your mortgage interest repayments from your tax bill. However, this is limited to the interest on $750,000 of repayments.
Home Improvement
There are certain different home improvement tax breaks you can avail of. For instance, you can deduct tree removal on taxes if the removal is necessary for the maintenance of the property. Please consult tree removal specialists if need be.
How to Claim Tax Deductions
In order to benefit from tax deductions, you just need to list them on your tax return in the correct amounts. How exactly you do this will depend on how you are employed.
If you’re self-employed, you’ll have to return a Form 1099. However, if you work for an employer and receive your money in the form of a salary or wages, you’ll have to return a W-2 form.
Keeping Your Tax Bill to a Minimum
So, what does it mean when something is tax deductible? It simply means that you can remove the amount of money that the good or service costs from your taxable income. Having a good idea of what is and what is not tax deductible is a great way to save yourself some money at tax time.
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You may also like: 8 Money Saving Tax Tips for Small Business Owners
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