Loading the player...

What is a 'Deductible'

Deductibles are the tax-deductible expenses subtracted from adjusted gross income. Deductibles reduce taxable income and thereby reduce the tax liability. A deductible is also the amount paid out-of-pocket for covered expenses before an insurance company will pay the remaining costs. 

BREAKING DOWN 'Deductible'

The Internal Revenue Service (IRS) considers several expenses as tax-deductible. The IRS divides tax-deductible expenses or deductions into two major categories, those for individuals, and those for businesses. Both types reduce the taxable income.

Individuals may claim a standard deduction based on their marital status, filing status, and their number of dependents or they may itemize their expenses.

Established by the IRS, and reviewed annually, the standard deduction is subject to change. As of 2018, the standard deduction for single taxpayers and married persons filing separately is $6,500. For married persons filing jointly, the deduction is $13,000. And for Heads of Household filings, the deduction is $9,550. The deduction is subtracted directly from the adjusted gross income. As an example, if a single taxpayer reports $40,000 in taxable income, they may deduct $6,500 to lower their tax burden to $33,500.

Tax filers may opt to itemize their deductions if it provides a more substantial tax benefit. Taxpayers summarize and report eligible expenses on a tax return to reduce their taxable income.  Examples of itemized deductions include but are not limited to charitable contributions, mortgage interest, and non-reimbursed, out-of-pocket medical and dental expenses, and some investment-related expenses. Brokerage account fees, such as commissions and trade-related fees are not deductible.

Business Deductions

Business deductions work slightly different than individual deductions. Much like an individual, a business or self-employed individual must list all income. They may then deduct allowable expenses to arrive at the taxable income. Permissible deductions vary by the structure of the business. Limited Liability Companies (LLCs) and Corporations will have differences in the type and amount of deductions available to them.

Examples of ordinary deductible business expenses include operating expenses such as payroll, utilities, rent, leases, and other operational costs. Additional deductions include capital expenses, such as purchasing equipment or real estate.

As with all income tax items, the structure of allowable deductions changes frequently. What is permissible in one tax year, may not be deductible in the next.

Insurance Deductibles

Insurance deductibles are common to property, casualty, and health insurance products. Deductibles may be per occurrence or accumulate as an annual amount. Consider a health insurance claim where an insured person recently spent $2,000 in covered medical expenses and has a $300 annual deductible.The policyholder will pay $300, and the insurer will pay the remaining $1,700. Once meeting the annual deductible amount, the insurer covers the full costs for the rest of the year.  Exceptions, such as co-payments and co-insurance, may apply.

In the United Kingdom, Australia, and some other parts of the world, an insurance deductible is referred to as an excess; however, the function the same.

RELATED TERMS
  1. Schedule A

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

    A deduction is any item or expenditure subtracted from gross ...
  3. Above The Line Deduction

    An above the line deduction is an item that is subtracted from ...
  4. Aggregate Deductible

    Aggregate deductible is the limit deductible a policyholder would ...
  5. Property Tax Deduction

    Property tax deduction refers to state and local property taxes ...
  6. Educator Expenses Deduction

    The educator expenses deduction is an adjusted gross income deduction ...
Related Articles
  1. Taxes

    An Overview of Itemized Deductions

    Itemized deductions will mostly stay the same for 2017 tax year (medical deductions improve under the new tax bill). Big changes start in 2018.
  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. Tech

    Top Tax Tips to Deduct Investment Management Fees

    Investment expenses can be deducted by those who meet three main criteria. Here's what they are and how they work.
  4. Taxes

    Insurance-based Tax Deductions You May Be Missing

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

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  6. Taxes

    9 Ways the New Tax Law Affects Millennials

    The new tax bill, the Tax Cuts and Jobs Act, includes some important changes for Millennials.
  7. Taxes

    10 Tax Benefits for the Self-Employed

    Running your own business has both personal and financial perks.
  8. Personal Finance

    11 Tax Deductions You Can't Actually Write Off

    These are some of the most common tax write-offs that you can't really claim.
  9. Small Business

    Writing Off the Expenses of Starting Your Own Business

    Learn how to navigate the complicated rules for writing off the expenses of starting your own business. It could save you a lot of money.
  10. Taxes

    Who Loses Under the New Tax Provisions? Homeowners

    The tax code overhaul reduces the tax advantages of owning a home.
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center