Calculating tax deductions
You may qualify for a lot of tax deductions, but that doesn’t mean it’s in your best interest to claim them all. Get a better understanding of how deductions work and which ones are right for you.
Standard and Itemized Tax Deductions
Person A here made $100,000 in the year that we care about. And he’s getting ready to pay his taxes. And he’s got some deductions. He made a $2,000 donation to charity and a $5,000 donation to state taxes—or not a donation; he paid $5,000 in state taxes.
So his total deductions right over here, and we would call these his itemized deductions because he is literally putting out all of the items that he’s deducting. So his itemized deductions are going to be $7,000.
Now before he just decides to subtract that $7,000 from his income to get his new taxable income, he should compare that against the standard deduction. No matter what you do here, the IRS will give you just a freebee deduction. And if you’re a single person, and this is obviously depending on what year you’re filing in, but at the time of this video the standard deduction is $6,100 for a single person.
So in this person’s situation, his itemized deductions were larger than his standard deductions, so this is what he is going to take. He can’t take both of these. He can’t deduct $13,100, he would want to pick the larger of these two things.
So his taxable income will be $100,000 minus $7,000. So his taxable income is going to be $93,000—this is what he’s going to pay taxes on.
Now let’s think about Couple B right over here.
They, as a couple, made $100,000. They’re married. They’re filing jointly. And they made a $4,000 donation to charity. They’ve paid $5,000 in state taxes and they’ve paid $3,000 in mortgage interest. And all of these are tax deductions.
So what are their total itemized deductions? Itemized deductions, let’s see four plus five is nine plus three is $12,000 in itemized deductions.
You might say, “Oh this is great, they can deduct $12,000 from their $100,000.” But once again, we want to compare it against the standard deduction. And it’s not going to be the same standard deduction as what we saw for a single person. Now they’re married filing jointly, it’s actually twice as large. Their standard deduction is going to be $12,200.
So even though they made all these donations or they paid all of these taxes and they paid this mortgage interest, it still didn’t become larger than their standard deduction. So it’s still in their best interest to just go ahead with their standard deduction. So it really didn’t matter from a tax point of view whether they made these donations, because they still didn’t get past this threshold right here.
Once again, you have to pick the larger of these two. You don’t get both of these. So Couple B’s taxable income in this scenario is going to be $100,000 minus $12,200. Which is what? $100,000 minus $12,000 would be $88,000 minus another $200 would be $87,800 of taxable income. Person A here made $100,000 in the year that we care about. And he’s getting ready to pay his taxes. And he’s got some deductions. He made a $2,000 donation to charity and a $5,000 donation to state taxes—or not a donation; he paid $5,000 in state taxes.
So his total deductions right over here, and we would call these his itemized deductions because he is literally putting out all of the items that he’s deducting. So his itemized deductions are going to be $7,000.
Now before he just decides to subtract that $7,000 from his income to get his new taxable income, he should compare that against the standard deduction. No matter what you do here, the IRS will give you just a freebee deduction. And if you’re a single person, and this is obviously depending on what year you’re filing in, but at the time of this video the standard deduction is $6,100 for a single person.
So in this person’s situation, his itemized deductions were larger than his standard deductions, so this is what he is going to take. He can’t take both of these. He can’t deduct $13,100, he would want to pick the larger of these two things.
So his taxable income will be $100,000 minus $7,000. So his taxable income is going to be $93,000—this is what he’s going to pay taxes on.
Now let’s think about Couple B right over here.
They, as a couple, made $100,000. They’re married. They’re filing jointly. And they made a $4,000 donation to charity. They’ve paid $5,000 in state taxes and they’ve paid $3,000 in mortgage interest. And all of these are tax deductions.
So what are their total itemized deductions? Itemized deductions, let’s see four plus five is nine plus three is $12,000 in itemized deductions.
You might say, “Oh this is great, they can deduct $12,000 from their $100,000.” But once again, we want to compare it against the standard deduction. And it’s not going to be the same standard deduction as what we saw for a single person. Now they’re married filing jointly, it’s actually twice as large. Their standard deduction is going to be $12,200.
So even though they made all these donations or they paid all of these taxes and they paid this mortgage interest, it still didn’t become larger than their standard deduction. So it’s still in their best interest to just go ahead with their standard deduction. So it really didn’t matter from a tax point of view whether they made these donations, because they still didn’t get past this threshold right here.
Once again, you have to pick the larger of these two. You don’t get both of these. So Couple B’s taxable income in this scenario is going to be $100,000 minus $12,200. Which is what? $100,000 minus $12,000 would be $88,000 minus another $200 would be $87,800 of taxable income.
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