Deductible

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What is a 'Deductible'

A deductible is the amount of money an individual pays for expenses before his insurance plan starts to pay.

The word "deductible" can also work as an adjective to describe the tax-deductible expenses that can deducted from someone's adjusted gross income to reduce his taxable income and his tax liability.

BREAKING DOWN 'Deductible'

To understand insurance deductibles, imagine your deductible is $300, and you incur medical expenses for $2,000. You pay the $300 deductible, also called the out-of-pocket cost, and your insurer pays the remaining $1,700. However, if your entire medical bill is $300, you would pay the entire amount and your insurer would pay nothing.

Insurance deductibles do not just apply to health insurance. Car insurance, homeowners insurance, renters insurance and other types of insurance policies also have deductibles. In the United Kingdom, Australia and some other parts of the world, an insurance deductible is referred to as an excess, but excesses and deductibles function in the same way.

Tax Deductible Expenses

The Internal Revenue Service (IRS) considers a number of expenses to be tax-deductible. To reduce their taxable income, tax filers may deduct eligible healthcare expenses, mortgage interest expenses and some investment-related expenses. However, for those with brokerage accounts, fees such as commissions paid for trades are not deductible.

The IRS divides tax deductible expenses or deductions into two major categories: individual and business.

Deductible Expenses for Individuals

Individuals may claim a standard deduction based on their marital status, filing status and number of children. Set by the IRS and reviewed annually, the standard deduction is subject to change, but as of 2016, it is $6,300 for an individual. If an individual reports $40,000 in taxable income, for example, he can then deduct $6,300 to lower his taxable income to $33,700.

In lieu of the standard deduction, tax filers may opt to itemize their deductions. This means they add together the value of a long list of deductions and then subtract that amount from their earnings to determine their taxable income. Examples of itemized deductions include charitable contributions, mortgage interest, and medical and dental expenses.

Business Deductions

Business deductions work slightly differently from individual deductions. If a small business owner, a self-employed individual, an independent contractor or a corporation is filing taxes, the tax filer reports all of the income the business receives during the tax year. Then, he deducts business expenses from that amount. The difference is the business's taxable income. Deductible business expenses include operating expenses such as payroll, utilities, rent, leases and other costs of running the business. Capital expenses such as buying equipment or real estate for the business are also deductible.

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