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A tax deduction is an amount of money you are entitled to subtract from your gross income to determine your taxable income The more deductions you have, the less tax you will have to pay.
Types of Tax Deductions There are three basic types of tax deductions: personal deductions, investment deductions, and business deductions. Personal Deductions For the most part, your personal, living, and family expenses are not tax deductible. For example, you can’t deduct the food that you buy for yourself and your family. There are, however, special categories of personal expenses that may be deducted, subject to strict limitations. These include items such as home mortgage interest, state and local taxes, charitable contributions, medical expenses above a threshold amount, interest on education loans, and alimony. Investment Deductions Many professionals try to make money by investing money. For example, they might invest in real estate or play the stock market. They incur all kinds of expenses, such as fees paid to money managers or financial planners, legal and accounting fees, and interest on money borrowed to buy investment property. These and other investment expenses (also called expenses for the production of income) are tax deductible, subject to strict limitations. Business Deductions Because a professional practice is a profit-making enterprise, it is a business for tax purposes. People in business usually must spend money on their business—for example, for office space, supplies, and equipment. Most business expenses are deductible, sooner or later, one way or another. |
Income Tax Guide