What are deductions in income tax terms, and what types of things can I deduct?
Deductions are subtractable amounts for gross income. Unlike credits, deductions are only a percentage of the total dollar amount spent and are typically limited to a specific overall percentage of your gross income.
Whether you are a sole proprietor or owner of an LLC, the IRS realizes that many of your business expenses come directly out of your pocket. Keeping this in mind, they allow for multiple business deductions. First, any business expenses such as startup, advertising, supplies, and maintenance to business machinery can be directly deducted from your gross income. Keep all your business invoices and receipts to tack these expenses. Additionally, any losses including client debts, property, and inventory damages can be deducted. Finally, if you maximized your deduction amount last year and still have losses, you can carry over the additional losses from the previous year.
Charitable Deductions, Credits, and Donations to Schools
Whenever you give money or items to a charity, it is tax deductible. For items donated to charities such as Goodwill, the deduction amount is the fair market value for the item. If you are using a tax assisting program such as TurboTax, the fair market value deduction amounts will actually be listed. If you are donating a large amount of items, such as books, keep a list of the amount and types of books donated for your records.
Cash contributions to charities are also deductible.
Additionally, individuals (not businesses and trusts) can deduct some regularly occurring expenses from their taxes. These deductions include medical and dental expenses, IRA contributions, alimony payments, moving expenses, student loan interest, home loan interest, and property taxes. However, the Tax Cuts and Jobs Act of 2017 limited or eliminated a number of these deductions, beginning 2018 through 2025.
If you need assistance maximizing your deductions and getting the most back for your annual spending, consult with a tax specialist or accountant.