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- Calculating tax deductions video
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Calculating tax deductions
There are a lot of things that qualify as tax deductions. But is it in your best interest to take them all? Watch and get a better understanding of how deductions work, and what might be right for you.
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 are 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 freebie 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. So 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’ve 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 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 or not they made these donations, because they still didn’t get past this threshold right over here. Once again, you have to pick the larger of these two. You don’t get both of these. So their taxable income– 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.
Remember, this video is for information purposes only, and is not tax advice. Bank of America doesn’t provide tax advice. Contact a tax advisor to understand how the information in this video may apply to your circumstances. Any information included in this video is not intended or written to be used, and cannot be used, by any recipient to avoid any penalties that may be imposed upon such recipient by the Internal Revenue Service.
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