Dec 05, 2020

What Does Tax Deductible Mean?

Deductions are important to understand because they lower your tax bill from the Internal Revenue Service. Howeverlike most things involving the United States tax codethe topic can be confusing due to the tax system’s complexity and recent legislation.

What Does Tax Deductible Mean?

According to the IRS, “deductions reduce the amount of your taxable income.”

People also commonly call deductions “write-offs” or simply “business expenses.”

There are 2 main types of deductions. There are “above-the-line” deductions, such as business expenses and interest paid on student loans. These lower your taxable income, called your adjusted gross income (AGI). “Below-the-line” deductions are taken out after your AGI is calculated.

In the latter case, you’ll either opt for a standardized deduction or itemize your deductions.

What Expenses Can I Write Off?

As a small business owner, you can deduct a massive list of expenses, including office rent, vehicle mileage, utility costs, and marketing. When considering your above-the-line deductions, think about what business expenses came out of your company’s income. Always keep detailed records and receipts. It’s best practice to research everything you want to deduct—or even better, hire a tax professional or accountant.

The Tax Cut and Jobs Act, passed in 2017, overhauled the tax system and deeply altered how taxpayers can take below-the-line deductions. The standardized deduction is now very high for most Americansit’s likely higher for you than itemizing all your deductions. Check if your deductions qualify before making a decision.   

What Are Itemized Deductions?

Itemized deductions are qualified expenses that you can deduct from your AGI, such as certain medical expenses and charitable donations. Use IRS form Schedule A to calculate these deductions and then enter their total on your Form 1040. Itemized deductions are taken out of your total income in calculating your tax bill.

The standard deduction for single filers is $12,400 as of 2020, but the figure depends on your income, filing status, and other factors. If you find that your qualifying deductions are higher than the standardized amount, you should opt for itemized deductions.

The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.

About the author

Barry Eitel
Barry Eitel
Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

Comments

  1. Hello! I am looking in the service of par‘nesis about how to lower my monthly payment. Currently, I contain about $75,000 in swot responsible and I utilize CommonBond. I be aware that the larger the advance, the bigger the monthly payment, but it has been obstructive to store up with a $1,000 a month payment. Is there any recommendation to get this payment lower? I have planned already refinanced four years ago but there has to be something different I can do. Any hint of intelligence settle upon stop me pass‚ a bunch.

Bookkeeping for your small business.

Simplify your bookkeeping and save money