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Encyclopedia > Tax deduction

A tax deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income. Image File history File links Gnome-globe. ... == Is the amount of a companys revenue after deducting cost of goods sold. ... Taxable income is the portion of income that is subject to taxation. ...


The United States income tax system is progressive; as taxable income rises, a higher percentage is charged on a tiered system. E.g., in 2006 for Single taxpayers, the first $7,550 of taxable income is charged 10 percent; however, if a person has more than $7,550 in taxable income, then he or she must pay a flat $755 (10 percent of the first $7,550), plus 15% of the amount over 7,550. The next progressive tier is reached at $30,650; the percentage that is charged goes up again (to 25%) for taxable incomes above $30,650.[1]


Because tax deductions reduce taxable income, and taxes owed are a percentage of taxable income, then tax deductions offer a fractional reduction in taxes owed. I.e., tax deductions do not reduce taxes owed on a dollar for dollar basis. Tax credits, however, do. This article or section should be merged with tax credit Tax credits are credits on tax payable given by the government for specific reasons. ...


As an example, if a person's highest portion of taxable income is taxed at 25% (progressive scale from 10 to 35 percent), then a $1,000 charitable contribution will result in a reduced tax bill of $250 (25% of the contribution). E.g., if a taxpayer would otherwise have owed the federal government $3,250 in income taxes; the new tax bill would be $3,000. As a second example, if a person was charged an early withdrawal penalty of $1000 for breaking a banking certificate of deposit (CD) before maturity, and that person's highest taxable income was in the 35% bracket, then the deduction would reduce the overall tax bill by $350. Charitable contribution deductions for United States Federal Income Tax purposes are defined in section 170(c) of the Internal Revenue Code as contributions to or for the use of certain listed nonprofit enterprises. ...

Contents

Tax deductions and tax credits

A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is an item which is treated as a payment already made towards taxes owed. ...


United States

In the United States there are many different types of deductions. One may choose between a standard deduction or itemized deductions. Individual taxpayers in the United States are faced with a choice when preparing their tax returns. ...


Some deductions are aimed at individuals; many are directed to businesses. The complicated maze of tax deductions that Congress has instituted over the past 70 years has contributed to the view that the tax code in the United States needs to be completely redone in a simpler fashion.


Opponents of the current tax code favor reducing or eliminating many existing tax deductions, particularly for corporations that have come to rely on the code as a welfare crutch. Reformers contend that the government should encourage spending on things like charities, home ownership, and education through means other than tax deductions.


Common examples of tax deductions for individuals follow. Each of these deductions may or may not be appropriate, given a taxpayer's filing status, income, and so forth, and may have separately calculated limits (dollars or percent of expense or percent of AGI, etc), or be carried from one year to the next.

  • An exemption amount for the taxpayer, the spouse, each child, and any other qualified dependents, and certain disabilities;
  • Mortgage interest paid on one's primary residence or other residence;
  • Equity loan or Line of Credit interest;
  • Charitable contributions to eligible entities;
  • Business deductions, such as mileage, related to an individual's expenses regarding their employment;
  • Business startup and operation, and farming expenses (including travel, meals, and the so-called three-martini lunch), not to exceed business income;
  • Removal of architectural barriers to the disabled and elderly;
  • Union and professional dues;
  • Medical expenses above a certain percentage of the individual's Adjusted Gross Income (AGI);
  • The cost of tax advice, software, and books;
  • Depreciation of business assets;
  • Work uniforms and clothing, including such items as safety goggles or steel-toed shoes;
  • Moving expenses, in some cases;
  • Job search expenses as one searches for work in the same industry;
  • Casualty (fire, theft) losses not covered by casualty insurance;
  • Educational expense (but only if it does not prepare one for a new career);
  • The oil-depletion allowance or similar for depletion of timber and other natural resources, and reforestation expenses;
  • State and local taxes (i.e., income tax or property tax or use taxes);) in 2004 and 2005, one could choose between deducting State Sales Tax or alternatively deducting State Income Tax. This deduction was extended for two additional years in December of 2006. [2]
  • Capital losses (to a limit), such as from the sale of stock that has lost value, that exceed an individual taxpayer's capital gains in that year;
  • Gambling losses (but not in excess of gambling winnings).

All tax deductions allowed by the federal government are also allowed by all the state governments which levy an income tax. Each state government may allow additional types of expenditures to be tax-deductible, such as rent in lieu of mortgage. A deduction for a Personal Exemption amount for the individual taxpayer, the taxpayers spouse, and the taxpayers child or other dependent for purposes of calculating a U.S. taxpayers federal income tax is provided in the Internal Revenue Code at 26 U.S.C. Â§ 151. ... Look up disability in Wiktionary, the free dictionary. ... Mortgage loan is the generic term for a loan secured by a mortgage on real property; the mortgage refers to the legal security, but the terms are often used interchangeably to refer to the mortgage loan. ... A persons primary residence is the dwelling where they usually live, typically a house or an apartment. ... An equity loan is a mortgage placed on real estate in exchange for cash to the borrower. ... Charitable contribution deductions for United States Federal Income Tax purposes are defined in section 170(c) of the Internal Revenue Code as contributions to or for the use of certain listed nonprofit enterprises. ... The Business Mileage Reimbursement Rate is an optional standard mileage rate used in the United States for purposes of computing the allowable business deduction, for Federal income tax purposes under the Internal Revenue Code, at 26 U.S.C. Â§ 162, for the business use of a vehicle. ... The three-martini lunch is a term used in the United States to describe a leisurely, indulgent lunch enjoyed by powerful businessmen or executives. ... Look up disability in Wiktionary, the free dictionary. ... Members of most trade unions pay a portion of their wages to their local to support the unions internal government, pay for any legal representation, and contribute to a strike fund. ... Adjusted gross income (AGI) is a financial term to describe the amount used in the calculation of an individuals income tax liability. ... Accountancy (profession) or accounting (methodology) is the measurement, disclosure or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations, and public agencies. ... Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years. ... Casualty insurance is a broad category of insurance that includes almost any coverage that is not related to life, health, or property. ... This article or section does not cite its references or sources. ... Resource depletion is an economic term referring to the exhaustion of raw materials within a region. ... Timber in storage for later processing at a sawmill Timber is a term used to describe wood, either standing or that has been processed for use—from the time trees are felled, to its end product as a material suitable for industrial use—as structural material for construction or wood... Biodiversity on a 15-year-old reforested plot of land. ... A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements). ... An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. ... Property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. ... A use tax is a type of excise tax levied in the United States. ... In [[finance]], a capital gain is profit that results from the appreciation of a capital asset from its purchase price. ... It has been suggested that this article or section be merged with rental agreement. ...


Tax deductions start to "phase out" for married individuals, filing jointly, with an income of about $145,000 or higher (2005); beyond that point, the full amount of the expenses cannot be deducted.


Corporations enjoy a wider range of possible tax deductions, as they are taxed on their income, and in order to calculate a corporation's income, the corporation simply subtracts its expenses from its revenues. Hence, all expenses of the business -- if the expenses can be demonstrated to have been made for business purposes -- are tax-deductible. Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ...


Australia

While broadly similar, tax deductiblity in Australia differs from the United States in a number of key areas:

  • There are no State and Local (G3) income taxes.
  • Personal and Corporate taxation regimes are significantly different.
  • There is a tax free threshold (income up to this level is not taxed).
  • Income tax is charged at a higher rate for those on very large incomes.
  • While there is a small allowance for a dependent spouse, children are not tax deductible.
  • Loan interest payments on a primary residence (where one actually lives) is not deductible.
  • Business lunches (and similar expenses) are not deductible (incur Fringe Benefits Tax), but expenses on investment properties are.
  • Travel to/from work is not deductible.
  • Job search expenses are not deductible
  • In general terms, expenses incurred directly in pursuit of future profits from personal investment/business are tax deductible. This includes interest payments on a loan to buy shares, for example.

United Kingdom

Her Majesty's Revenue and Customs allow certain expenses to be deductible as necessary to complete the work from which the income was derived. Her Majestys Revenue and Customs (HMRC) is a non-ministerial department of the British Government primarily responsible for the collection of taxes, some forms of state support, and import controls. ...


Examples of allowable expenses include:

  • Professional Subscriptions
  • Mileage or other expenses incurred as part of the work
  • A proportion of home expenses where part of the home is used for work purposes (e.g. a self-employed person who works on a computer in the spare bedroom)

See also

Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is an item which is treated as a payment already made towards taxes owed. ... Tax reform is the process of changing the way taxes are collected or managed by the government. ...

References

  • 26 US Code ยงยง 161 to 198 (Part VI Itemized Deductions)

External Links

  • Internal Revenue Service Official website
  • Australian Taxation Office Official website
  • 10 big deductions too many people miss by Jeff Schnepper
  • Personal Income Tax Deductions A-Z List of what is and what is not tax deductible for income tax

  Results from FactBites:
 
Tax deduction - Wikipedia, the free encyclopedia (940 words)
A tax deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income.
Tax deductions start to "phase out" for married individuals, filing jointly, with an income of about $145,000 or higher (2005); beyond that point, the full amount of the expenses cannot be deducted.
Corporations enjoy a wider range of possible tax deductions, as they are taxed on their income, and in order to calculate a corporation's income, the corporation simply subtracts its expenses from its revenues.
Restoration of the IRS Sales Tax Deduction (1802 words)
For the sales tax, individuals were allowed to deduct either the actual amount paid, or they could use an optional sales tax table that provided deductible amounts for each state (based on its rate and base) by income group and family size.
The deduction of state and local sales taxes was one of the last (and most contentious) items considered by the Senate, but the final efforts to restore at least some vestige of the deduction, led in part by Senator Phil Gramm, ultimately failed.
Although the sales tax deductions were eliminated in part for reasons of tax simplification, the proposed legislation before Congress would add only one more line to Schedule A, for those taxpayers electing to itemize on their Form 1040.
  More results at FactBites »

 
 

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