Tax deductions can help businesses and individuals save money by reducing your taxable income, thereby reducing your tax bill.
Let’s look at some of the most common deductions for both businesses and individuals. By thinking about these things now, you will thank yourself in the spring when tax season hits. Why?
First, you will save yourself from the feeling of overwhelm when it comes to gathering documentation in the new year. Also, by doing end of year tax planning, your CPA can also uncover specific areas that you can maximize before 12/31, minimizing your overall tax burden.
Business Deductions:
Business expenses: Most ordinary and necessary business expenses are deductible, including things like office supplies, travel expenses, and marketing costs.
Depreciation and amortization: Businesses can depreciate the value of their assets over time, and they can also amortize the cost of intangible assets. This allows businesses to deduct a portion of the cost of these assets each year, which can reduce their taxable income.
Interest expense: Businesses can deduct interest paid on business loans and other debt.
Employee expenses: Businesses can deduct salaries, wages, and benefits paid to their employees.
Research and development expenses: Businesses can deduct expenses incurred while developing new products or services.
Home office deduction: If a business owner uses their home for business purposes, they may be able to deduct a portion of their home expenses. There are guidelines for how this deduction is calculated at IRS.gov.
Charitable contributions: Businesses (and individuals) can deduct charitable contributions made to qualified organizations. But, what is a qualified organization, and what re the rules for what I can deduct? You can find detailed guidelines for charitable contribution deductions here.
Self-employed health insurance deduction: Self-employed individuals can deduct the cost of health insurance premiums paid for themselves and their families.
Qualified business income deduction: This deduction allows businesses to deduct up to 20% of their qualified business income from their taxable income.
Pass-through business deduction: This deduction allows owners of pass-through businesses, such as sole proprietorships, partnerships, and S corporations, to deduct up to 20% of their qualified business income from their taxable income.
Individual Deductions:
Standard deduction: The standard deduction is a lump-sum deduction that many taxpayers can take instead of itemizing their deductions.
Itemized deductions: Itemized deductions include things like medical expenses, state and local taxes, mortgage interest, and charitable contributions. When the amount of itemized deductions exceeds the amount of the standard deduction, it makes good fiscal sense to itemize.
Student loan interest deduction: Taxpayers can deduct up to $2,500 in student loan interest paid each year.
Educator expenses deduction: Educators can deduct up to $250 in qualified educator expenses each year.
Child and dependent care credit: Taxpayers can claim a credit for up to 35% of the cost of qualified child and dependent care expenses.
Earned income tax credit: The earned income tax credit is a refundable tax credit for low- and moderate-income working families.
Retirement account contributions: Taxpayers can deduct contributions made to qualified retirement accounts, such as 401(k) plans and individual retirement accounts (IRAs).
Medical expenses: Taxpayers can deduct medical expenses that exceed 7.5% of their adjusted gross income.
State and local taxes: Taxpayers can deduct state and local income taxes and property taxes paid.
Mortgage interest: Taxpayers can deduct interest paid on mortgages up to $750,000.
Here are some additional tips for taking advantage of tax deductions:
Keep good records of all of your deductible expenses. This will make it easier to file your taxes and claim all of the deductions that you are eligible for.
Consider itemizing your deductions instead of taking the standard deduction. This may be beneficial if you have a lot of deductible expenses.
Be aware of the different rules and limitations that apply to tax deductions. You can find more information on the IRS website- or by working with your CPA.
The tax code is complex, and there are many different rules and limitations that apply to tax deductions. It is always best to consult with a CPA who can help you with tax planning and strategy to ensure that you are taking all of the deductions that you are eligible for. Want to make sure you are maximizing everything you can for this tax year? Schedule a complimentary consultation with us today.
