Identifying what taxes are deductible or non-deductible in the US

When dealing with the world of taxation, it’s important to know the intricate details so you can avoid fees and penalties. In this blog, AAB Payroll Inc. will focus on identifying what taxes are deductible or non-deductible in the US.

What are tax deductions?

A tax deduction is a reduction in the income that can be taxed, essentially lowering the amount of taxes paid.

Identifying whether a certain tax expense qualifies as a tax deduction or not can be difficult at times. If you deduct an expense that doesn’t qualify, it could cause you to face a tax notice or audit. If you miss deducting an expense that you could have, you will end up paying more in taxes than you should.

While deductible expenses reduce your tax liability, non-deductible expenses don’t impact your tax bill whatsoever. Some expenses are always deductible, others never are, and there are those that are only to be deducted under specific circumstances. Knowing what taxes are deductible and which ones aren’t will ensure your tax liability at the end of the year is accurate.

What taxes are deductible on expenses IN THE US?

Some expenses that are always deductible include investment losses and charitable contributions. So long as you have some amount of income for the year, you can deduct these sorts of expenses from your taxable income base. Keep in mind that the tax code carries numerous intricacies that limit the number of deductible expenses you can claim.

For example, if you experience an investment loss, you can only deduct $3,000 of these losses from your ordinary income each year (though you can carry the remaining loss into the next year). As for charitable contributions, they are typically limited to 50% of your gross income.

Ensuring that you deduct these expenses from your year to date (YTD) income will allow you to reduce your taxable wages, thus resulting in a lower amount owed for taxes. While it is easy to overlook these items, it is vital to claim these expenses in order to ensure you pay the appropriate amount in taxes each year.

What taxes are not deductible on expenses?

Generally speaking, the majority of your personal spending is non-deductible. Money spent on entertainment and living expenses cannot be subtracted from your taxable income base. These are considered natural expenditures rather than a reduction in the amount of money you have at your disposal, according to the tax authority. The investment loss and charitable contribution examples described above actually reduce the amount of income you receive, which is why those examples result in a lower tax base.

You want to be sure that any expenses that you intend to claim are truly non-deductible. It is important to remember that the majority of your day-to-day expenses will be considered non-deductible in the eyes of the IRS, and claiming an expense that does not qualify can result in issues down the road.

Context specific tax deductible expenses

Occasionally, you may come across expenses that are only deductible under specific circumstances, which can make it harder to identify what taxes are deductible. Money spent on gasoline can be deductible if it is deemed a business expense, and even then, only up to a certain limit. The same can be said for healthcare, provided it exceeds 7.5% of your adjusted gross income. If you’re an artist, you can deduct the expenses of purchasing your art supplies so long as you can prove that you’re treating your art form as a method of making money, and not as a hobby.

These are just a few examples of context specific deductions to look out for over the course of the year. It is important to look over each expense carefully and consider if it truly meets the criteria to be considered a deductible expense by the IRS. Be sure to read the relevant section of the tax code or consult a professional before deciding if a particular expense is deductible. Check out the IRS credits and deductions for individuals guidance for more information on what taxes are deductible.

Help with IDENTIFYING WHAT TAXES ARE DEDUCTIBLE IN THE US

If you still have questions about what taxes are deductible and what ones aren’t, or have any questions, our expert US payroll team based in Grand Rapids, Michigan can help.