A tax deduction or a tax-deductible
expense, is an item which is subtracted from gross income in order to arrive at
the taxable income.
Effectively, the taxpayer pays no income tax on the amount of money he spent on
tax-deductible expenses. For example, if an individual earns $50,000 in a year
and gives $5,000 to tax-deductible charities, he will end up paying income tax
as though he had earned only $45,000 that year. In this way governments
encourage certain types of spending such as charitable contributions, home
ownership, entrepreneurship, environmental protection, and education.
Some argue that the existence of the many deductions have severely bloated the
tax code and that many deductions are abused and are used in situations that
violate the spirit and intended purpose of these deductions. Since powerful
corporations and wealthy individuals have access to lawmakers, deductions that
favour these groups are common. This is a form of regulator capture. Many of
these opponents favour reducing or eliminating many existing tax deductions and
having the government encourage or subsidize spending on things like charities,
home ownership, and education through means other than tax deductions.
United States
In the United States there are many types of deductions. The number and
complexity of the amendments has often led to a call for tax reform, to simplify
the tax code, at the very least.
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.
an exemption amount for the taxpayer, their spouse, each child, and any other
qualified dependents;
Mortgage interest paid on one's primary residence;
Equity Loan or Line of Credit interest;
Charitable contributions;
Business expenses (including travel, meals, and the so-called three-martini
lunch; (meals and entertainment are generally only 50% deductible));
Union and professional dues;
Medical expenses above a certain percentage of the individual's total income;
The cost of tax advice, software, and books;
Depreciation;
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;
Educational expense (but only if it does not prepare one for a new career);
The oil-depletion allowance;
State and local taxes;
Capital losses, such as from the sale of stock that has lost value, that exceed
an individual taxpayer's capital gains in that year, up to $3,000;
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.
Tax deductions start to "phase out" for individuals with an income of about
$130,000 or higher; 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.
Comedian Al Franken once did a skit on Saturday Night Live in which he purported
to demonstrate the creative use of tax deductions. Among other things, Franken
held up a picture of himself on vacation in Hawaii. Since he used the photo in
the comedy routine in his professional capacity as a comedian, the entire cost
of his trip was (allegedly) deductible. Whether Franken actually took such a
deduction, or whether he got away with it, is unknown.
The source of this article is Wikipedia, the free encyclopedia. The text of this
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