What Does a Tax Deduction Save You?
Article Highlights:
- Non-business deductions
- AMT
- Tax bracket
- Above-the-line deductions
- Business deductions
For most non-business deductions, the savings are based upon your tax bracket. For example, if you are in the 24% tax bracket, a $1,000 deduction would save you $240 in taxes. However, if taxable income is close to transitioning into the next-lower tax bracket, the benefit will be less. You also need to consider whether the particular deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings.
Some deductions, such as IRA and self-employed retirement plan contributions, alimony, student loan interest, etc., are adjustments to income or what we call above-the-line deductions. These deductions, to the extent permitted by law, provide a dollar deduction for every dollar claimed. Deductions that fall into the itemized category must exceed the standard deduction for your filing status before any benefit is derived. In addition, the medical deductions are reduced by 10% of your AGI (income). Under the rules of the 2017 tax reform, the state and local taxes deduction is limited to $10,000, no deduction is allowed for home equity interest, and deductions such as employee business expenses and investment expenses aren’t deductible at all in years 2018 through 2025. Taxpayers subject to the alternative minimum tax are not able to deduct any taxes.
The most beneficial deductions, business deductions, fall into two categories: employee business expenses, which are treated as miscellaneous itemized deductions but aren’t deductible in years 2018-2025, and self-employed business expenses that offset both income tax and, depending upon the circumstances, self-employment tax. For 2019, the self-employment tax rate is 12.4% of the first $132,900 of income subject to SE tax plus 2.9% for the Medicare tax with no cap. In addition, for high-income taxpayers, an additional 0.9% Medicare tax may apply. For self-employed businesses with less than $132,900 of net income, the SE tax rate is 15.3%. Thus, for small businesses with profits of less than $132,900, the benefit derived from deductions generally will include the taxpayer’s tax bracket plus 15.3%. For example, for a taxpayer in the 24% tax bracket, the benefit could be as much as 39.3% (24% + 15.3%) of the deduction. If the deduction were $2,000, the tax savings could be as much as $786 and more when the taxpayer’s state income tax bracket is included.
If you are planning an expenditure and expect the tax deduction to help cover the cost, please give us a call in advance to ensure that the tax benefit is what you anticipate.
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“Bernard and his team at BR tax group are top notch. This is my first year using them after switching from a different local CPA and I didn't realize how much tax info I've been missing. His communication is great. The additional information he provides to maximize tax savings is something I didn't get from my previous CPA. Thanks Bernard”
Frequently Asked Questions
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You can prepare your taxes yourself, especially if your business is simple.
But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.
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Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.
That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.
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Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.
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Possibly, if it was truly for your business and you have proof.
Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.
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Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.
The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.
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