What are Deductibles and How Do They Impact Your Taxes?
Understanding deductibles and how they impact your taxes can be a daunting task. Deductibles refer to the expenses that you can deduct from your taxable income, thus reducing the amount of taxes owed. Knowing which costs are tax deductible and how they affect your tax liability is essential for getting the most out of your tax return. This article will explain the basics of deductible expenses, including what makes an expense deductible, common types of deductions, and how to maximize their impact on your taxes.
9 Types of Tax Deductions to Use for Lowering Your Tax Bill
Imagine that you are an employee and make $50k per year living in New York City. If you could lower your taxes each month would you do it? Of course, you would!
First, let`s look at the most common taxes each New York City employee has to pay:
City, state, and federal taxes
Social security tax
Medicare
State disability insurance tax
State unemployment tax
State family leave insurance tax
State workers' compensation tax
There are a lot of taxes that we pay each month. However, you have 9 available deductions that can help you lower those taxes:
Medical insurance
Dental coverage
Vision insurance
Long-term disability insurance
Life insurance
Commuter plan
FSA
Let's say that your medical insurance is $280 and the commuter plan is $127 each month. Now put those numbers into the Smart Asset Paycheck Calculator to estimate your take-home pay after taxes and deductions (see Figure 1) and take-home pay without deductions (see Figure 2).
Figure 1. Take-home pay with deductions, Smart Asset
Now, look at what happens if you do not add the 2 deductions, such as medical insurance and the commuter plan. Your take-home pay becomes larger. Yes, but here is the catch - these 2 expenses are your fixed costs, meaning you would have to pay them no matter what. Your take-home pay is $2,977 without deductions, and if you add $280 for medical insurance and $127 for the commuter plan, you are left with $2,570 in the end. That is a $151 loss each month. You can save $1812 yearly if you add only these 2 deductions each month. Imagine if you added your 401k, HSA, and other available deductions!
Figure 2. Take-home pay without deductions, Smart Asset
Conclusion: Making the Most out of Deductible Expenses to Lower Your Tax Bill
Everyone wants to maximize their savings when it comes to filing taxes and minimizing the amount of money paid to the IRS, especially if you live in the most expensive city in the world, where you have to pay local, state, and federal taxes.
Remember, the IRS provides all of the information needed on tax deductions, tax withholding, and your tax return. The IRS's Volunteer Income Tax Assistance (VITA) offers qualified individuals free tax advice. You can call them directly: 888-227-7669.
If you are a small business owner, consider saving all of your receipts for eligible deductions so you can add them to your next tax return.
Don't pay unnecessary taxes if you don't have to!