Loading the player...

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.

RELATED TERMS
  1. Itemized Deduction

    A deduction from a taxpayer's taxable adjusted gross income that ...
  2. Deduction

    Any item or expenditure subtracted from gross income to reduce ...
  3. Schedule A

    Schedule A is a U.S. income tax form that is used by taxpayers ...
  4. Interest Deduction

    A deduction for taxpayers who pay certain types of interest. ...
  5. IRS Publication 936

    A document published by the Internal Revenue Service (IRS) that ...
  6. Marital Deduction

    A tax deduction that allows an individual to transfer some assets ...
Related Articles
  1. Taxes

    Want A Bigger Tax Refund? Don't Itemize

    Six reasons why many taxpayers can save money and time by claiming the standard deduction.
  2. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  3. Taxes

    Don't Miss These Insurance-Related Tax Deductions

    Knowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
  4. Financial Advisor

    How to Deduct Medical Insurance Premiums

    An overview of tax breaks for those who pay medical insurance premiums.
  5. Taxes

    10 Tax Benefits for the Self-Employed

    Running your own business has both personal and financial perks.
  6. Taxes

    Top Tax Deductions For Brokers

    If you are paying out of pocket, you can make your business expenses work for you at tax time.
  7. Taxes

    Calculating the Mortgage Interest Tax Deduction

    The amount of money you save by paying your mortgage off quickly will far exceed any benefit from the mortgage interest tax deduction.
  8. Financial Advisor

    20 Medical Expenses You Didn't Know You Could Deduct

    To lower your tax bill, be sure not to miss out on these commonly overlooked medical tax deductions.
  9. Taxes

    How To Deduct Your Job Search Expenses

    With approximately 12 million Americans out of a job right now, many people are spending significant dollars to be noticed by potential employers. Fortunately, some of these job-search costs ...
  10. Taxes

    Top Tax Deductions Not to Overlook

    If you want to pay as little as possible in taxes, it's important to learn about all the different credits and deductions available. Here's a primer.
RELATED FAQS
  1. How is the deductible I paid for my insurance claim treated for tax purposes?

    Find out how your health insurance deductible is treated for tax purposes and under what conditions you may be able to deduct ... Read Answer >>
  2. What are the deductions taken to determine AGI (adjusted gross income)?

    Read more about the deductions taken to arrive at adjusted gross income, or AGI, including the differences between above ... Read Answer >>
  3. Is it more important to have a low deductible or a low premium?

    Explore the balancing act that exists between insurance deductibles and premiums, and learn the primary factors to consider ... Read Answer >>
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center