Tax Deductions IRS Tax Deductions Write offs Standard

Tax Deductions IRS Tax Deductions (Write offs) Standard Deduction Itemized Deduction

Internal revenue Service (IRS) The IRS is the government agency that collects taxes, investigates tax fraud, and prosecutes tax evaders. For every $1 spent in investigations, the IRS recovers about $14 in unpaid taxes The average recovery is over $50, 000

Tax Deductions (Write offs) Tax Deductions decrease your taxable income and lower your tax bill (They are good for you!!!) The government uses tax deductions to encourage certain behaviors that it sees as beneficial For example: The mortgage interest deduction encourages people to purchase a house rather than rent Because wealthy people have a higher marginal tax rate, tax deductions save wealthy people more than poor people

Tax Deductions (Continued) You do not save the full amount of the tax deduction. You only save the taxes that you would have paid. For example, let’s say you have a $10, 000 tax deduction. You don’t save $10, 000, you only get back the tax you paid on that $10, 000

Common Tax Deductions Medical and Dental Expenses Charitable Contributions Home Mortgage Interest Some Educational Expenses State and Local Income Taxes Some Personal Losses from a natural disaster Business expenses (home office, travel, etc)

Comprehension Check Margaret $47, 000 last year. She paid $7, 000 in mortgage interest and had $2, 000 in medical expenses. Taxes Before Deductions Taxable Income Bracket for Single People Amount of income in this bracket Tax Rate Taxes After Deductions Taxes owed for this bracket Taxable Income Bracket for Single People Amount of income in this bracket Tax Rate $0 to $10, 000 10% $10, 000 to $40, 000 12% $40, 000 to $90, 000 22% $90, 000 to $160, 000 24% $160, 000 to $200, 000 32% $200, 000 to $500, 000 35% $500, 000 or more 37% Total Tax Owed Taxes owed for this bracket

The Standard Deduction If everyone had to list every deduction they qualified for, tax returns would be really complicated and hard to process for the IRS For this reason, the Standard Deduction was created. Everyone can claim $12, 200 (Single) and $24, 400 (Married) without any proof

Itemized Deductions If your deductions are greater than the standard deduction, you can list (itemize) each deduction and show proof This is called Itemized Deductions About 90% of tax payers use the standard deduction rather than itemized deductions.

Comprehension Check Help Jack and Mia decide whether they should use the standard deduction or an itemized deduction. Jack Single, earned $56, 000 Paid $1, 500 in medical bills Contributed $800 to local charity Paid $1, 250 in property tax Paid $5, 600 in mortgage interest Paid $750 in sales tax when he purchased a new car Mia Single, Earned $72, 000 Paid $9, 600 in mortgage interest Paid $3, 400 in property tax Claimed $1, 200 in home office expenses Paid $1, 200 in state and local sales tax on a few large purchases

Earned Income Tax Credit (EITC) The EITC is a tax credit that is designed to help people who are struggling financially. It is based on the amount of income earned and the number of children in the household Unlike a tax deduction which lowers your taxable income, the EITC reduces your tax bill directly Varies from about $500 to $6, 500 If you owe less in taxes than your EITC, you will get a refund from government This is why some people have a negative tax

Comprehension Check Mark and Sarah earned $37, 000 last year and have three kids. They paid $750 in medical bills last year and donated $200 to their church. They also qualified for $4, 300 in Earn Income Tax Credits How much tax do they owe?