How Is My Tax Deducted? - What You Need To Know

You can reduce the amount of your income that is subject to tax through tax deductions. They are based on a range of factors, some fixed by the government and others referring to expenses you have paid during the tax year. 

If you have ever asked yourself ‘how is my tax deducted?’ we’re going to tell you what you need to know. 

Tax Brackets & Rates

At the federal level there are seven tax rates. These are 10%, 12%, 22%, 24%, 32%, 35% and 37%. These rates correspond to income levels for three different categories of filers. 

The income thresholds for single filers range from $0 to $539,900. For married couples filing jointly the thresholds are $0 to $647,850 and for heads of household they are $0 to $539,900. Depending on the income level, the corresponding tax rate will apply. 

Also read: A Full Guide on How to Calculate Income Tax On A Pay Check

Standard Deductions

The standard deduction is the part of income that tax is not levied against. There are a range of standard deductions available for five different filing statuses. 

A single filer has a standard deduction of $12,950 which is the same for a married person filing separately. 

Heads of household have a standard deduction of $19,400. Married couples filing jointly and surviving spouses both have a $25,900 standard deduction. 

You can either take the standard deduction or submit itemized deductions on Form 1040 Schedule A. 

Also read: How Much Is Social Security tax?

Itemized Deductions

Although it is simpler to take the standard deduction, if your itemized deductions are greater than the standard deduction, it’s in your best interest to use this process. 

You can make a combined deduction of real estate taxes, property tax, as well as state and local taxes up to a maximum of $10,000. Mortgage interest on debt of up to $750,000 is deductible. The maximum debt is $1 million if you bought the property before Dec 16th 2017.

For charitable donations, there is a cash limit of 60% of your adjusted gross income. If you have had medical expenses that exceed 7.5% of your adjusted gross income these can be deducted. 

Also read: Payroll Tax Vs Income Tax - The Ultimate Guide

Above The Line Deductions

Above the line deductions are separate from itemized deductions which are included on Form 1040 Schedule A and also different from the standard deduction. 

The amount of above the line deductions should be reported on Form 1040, line 10c. These deductions are subtracted from gross income and this will give you an adjusted gross income. 

Gross income is arrived at by adding up all sources of income for the year. This can include dividends, compensation, capital gains or any other type of monetary income. All above the line deductions are added up and subtracted from the gross income. 

The adjusted gross income or AGI is then subjected to the standard deduction or itemized deductions which is subtracted. The resulting figure is the amount of taxable income for the year. 

Also read: What Is FUTA Tax - All You Need To Know

Tax Deductions You May Not Know About

There are some deductions that you may not have realized that you can include in your tax return. The following are some deductions that you shouldn’t forget about. 

State & Sales Taxes

If you live in a state where income taxes are levied this can be deducted from your federal income tax. But did you know that if you live in a state that doesn’t levy income taxes you can deduct state and local general sales taxes. 

Or instead of deducting state or local income taxes you can choose to deduct sales taxes. This can work in your favor if you have made a large purchase such as a car or an engagement ring. However you cannot deduct both state and local taxes and sales tax. 

Health Insurance Premiums

Your medical expenses have to exceed 7.5% of your adjusted gross income to be claimed as an itemized deduction. However, you may be able to deduct 100% of your insurance premium costs if you are self-employed and cover your own health insurance costs. 

It will be taken off your AGI and not as an itemized deduction. 

Tax Savings For Teachers

Most teachers at some point end up paying for materials for their classroom out of their own pocket. The IRS allows teachers to deduct up to $300 for supplies, and it is subtracted from income rather than having to be itemized. 

Also read: Are GoFundMe Donations Tax Deductible?

Charitable Gifts

Taxpayers can deduct charitable contributions of up to 60% of their adjusted gross income, but any out-of-pocket expenses for charitable work can also be deducted. If you bake something for a charity fundraiser you can deduct the amount that the ingredients cost. 

Paying The Babysitter

If you have a babysitter for times when you are at work, looking for work or studying full time you may be eligible for a tax credit. You will need to provide the name of the person or organization as well as their tax ID number and the address where the care is provided. 

This can be better than a deduction as you don’t need to itemize anything to receive the credit. You can then lower your tax liability as well as taking the standard deduction. 

Lifetime Learning

The Lifetime Learning credit gives you up to $2,000 per year for education after high school. So for the first $10,000 you spend to increase your education you will save 20%. This credit is not age restricted but is phased out at high income levels. 

Self-employed Social Security

Self employed people have to pay 15.3% of their income for Social Security, the employee and employer portions. However, they can deduct the 7.65% that would normally be paid by an employer off their income taxes. 

Final Thoughts

Knowing how tax is deducted and the best way to file your taxes will save you money in the long term and reduce your tax liability. 

We hope that this guide has helped you to understand how tax deductions work and what can be included on your tax return. 

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