What is 'Tax Deduction'
A tax deduction is a reduction in tax obligation from a taxpayer's gross income. Tax deductions can be the result of a variety of events that the taxpayer experiences over the course of the year. Tax deductions are removed from taxable income, also known as the adjusted gross income, and thus lowers the taxpayer's overall tax liability.
BREAKING DOWN 'Tax Deduction'
Different regions have different tax codes that allow taxpayers to deduct a variety of expenses from taxable income. Tax codes vary at the federal and state level. Taxation authorities in both the federal and state governments set the tax code standards annually. Tax deductions set by government authorities are often used to entice taxpayers to participate in community service programs for the betterment of society. Taxpayers who are aware of eligible federal and state tax deductions can greatly benefit through both tax deduction and service-oriented activities annually. In the United States, tax deductions are available for federal and state taxes.
In the United States, a standard deduction is given on federal taxes for most individuals. The amount of the federal standard deduction varies by year and is based on the taxpayer's filing characteristics. Each state sets its own tax law on standard deductions, with most states also offering a standard deduction at the state tax level. Taxpayers have the option to take a standard deduction or to itemize deductions. If a taxpayer chooses to itemize deductions, then deductions are only taken for any amount above the standard deduction limit.
There are a number of common tax deductions and also many overlooked tax deductions at the federal and state tax level that taxpayers can utilize to lower their taxable income. Common tax deductions include property tax and charitable donations. Homeowners also enjoy some added advantages in regards to tax deductions.
Some uncommon tax deductions include sales tax on personal property purchases and annual tax on personal property, such as a vehicle. Many expenses incurred throughout the year for personal and business reasons may also be eligible for itemized deductions, such as networking expenses, travel expenses, health expenses and some transportation expenses.
Tax Loss Carryforward
One additional type of deduction not included in standard or itemized tax deductions is the deduction for capital losses. A tax loss carryforward is a legal means of rearranging earnings to the benefit of the taxpayer. Individual or business capital losses can be carried forward from previous years. Capital losses of $3,000 are allowed per year.