Tax deductions and credits | Summary and Q&A

TL;DR

Tax deductions are not a direct reduction from taxes; they lower your taxable income, resulting in a reduced tax liability.

Key Insights

• 🚕 Tax deductions reduce taxable income, resulting in a lower tax liability.
• 🙈 Deductions should be seen as deductions from income for tax purposes, not as direct reductions from taxes.
• 👻 Tax credits, unlike deductions, directly decrease the amount of taxes owed.
• 🚕 Deductions can potentially lower a person's tax bracket and decrease their overall tax rate.
• 🎯 Some deductions target specific behaviors or support specific industries.
• ❓ Deductions are subject to certain eligibility criteria and limitations.
• 🚕 Deductions can vary across countries and tax systems.

Transcript

now that we know the basics of tax brackets let's think a little bit about what tax deductions are tax deductions you will often hear that in the u.s at least your mortgage interest is tax deductible or you might get a tax deduction for doing something that the government wants you to do or who knows what it might be but what i want to do in this v... Read More

Questions & Answers

Q: How does a tax deduction impact your taxes?

A tax deduction lowers your taxable income by the amount of the deduction. This reduces the income on which your taxes are calculated, resulting in a lower tax liability.

Q: Can a tax deduction eliminate your tax liability entirely?

Yes, if your deductions bring your taxable income below the tax brackets' thresholds, you may not owe any taxes. However, deductions cannot create a negative tax liability.

Q: What is the difference between tax deductions and tax credits?

Tax deductions lower your taxable income, while tax credits directly reduce the amount of taxes owed. Deductions indirectly lower your tax liability, while credits have a direct impact on the final tax amount.

Q: Are all expenses eligible for tax deductions?

No, not all expenses are eligible for tax deductions. The government determines specific deductions based on factors like promoting specific behaviors or supporting certain industries.

Summary & Key Takeaways

• Tax deductions, such as mortgage interest, can lower your taxable income.

• Deductions are subtracted from your income before calculating taxes, reducing your tax liability.

• Tax credits, unlike deductions, directly reduce the amount of taxes owed.