What are deductions in income tax terms, and what types of things can I deduct?

Business Deductions

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.

The IRS has issued guidance outlining the rules for charitable contributions.

Additional Deductions

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. That said, the Tax Cuts and Jobs Act of 2017 curtailed/eliminated several of these popular itemized deductions, starting in the 2018 tax year through 2025. (For example, the deduction of interest on home equity loans is disallowed as well as moving expenses due to a job change and alimony payments.) What this means is that anyone who took itemized deductions on previously filed returns may find it more beneficial tax-wise to claim the standard deduction going forward in future years.

If you need assistance maximizing your deductions and getting the most back for your annual spending, consult with a tax specialist or accountant. Because of the noticeable changes made by the 2017 Tax Act and the new redesigned format of the basic Form 1040, that may be a prudent move during the transition years.

Case Studies on Income Tax Deductions

Case Study 1: Business Deductions

John is a sole proprietor who runs a small graphic design business from his home office. He incurs various business expenses such as advertising, software subscriptions, and office supplies. By keeping track of his invoices and receipts, John is able to deduct these expenses from his gross income, reducing his taxable income and ultimately lowering his tax liability.

Case Study 2: Charitable Deductions

Sarah is a generous individual who regularly donates to charitable organizations. She donates used clothing and household items to Goodwill and keeps a detailed list of the donated items for her records. By claiming the fair market value of the donated items as deductions, Sarah is able to reduce her taxable income while supporting causes she cares about.

Case Study 3: Additional Deductions

Mark, a recent college graduate, has student loan debt and pays interest on his student loans each year. He also incurs medical expenses due to a chronic condition. Both the student loan interest and the qualified medical expenses can be deducted from Mark’s taxable income. By taking advantage of these deductions, Mark can lower his overall tax burden and potentially receive a higher tax refund.