When dealing with the world of taxation, it’s important to know the intricate details so you can avoid fees and penalties. In this blog, I want to specifically cover deductible taxes versus non-deductible taxes. A tax deduction is a reduction in the income that is able to be taxed, essentially lowering the amount of taxes paid. The line between whether a certain tax expense qualifies as a tax deduction or not can be somewhat convoluted at times. If you deduct an expense that doesn’t qualify, it could cause you to face a tax notice or audit. While deductible expenses reduce your tax liability, non-deductible expenses don’t impact your tax bill whatsoever. Some expenses are always deductible, others can never be deducted, and others still are only deductible under specific circumstances.
Some expenses that are always deductible include investment losses and charitable contributions. So long as you have some amount of income for the year, you can deduct these sort of expenses from your taxable income base. Keep in mind that the tax code carries numerous intricacies that limit the number of deductible expenses you can claim. For example, if you experience an investment loss, you can only deduct $3,000 of these losses from your ordinary income each year (though you can carry the remaining loss into the next year). As for charitable contributions, they are typically limited to 50% of your gross income.
Generally speaking, the majority of your personal spending is non-deductible. Money spent on entertainment and living expenses cannot be subtracted from your taxable income base. These are considered natural expenditures rather than a reduction in the amount of money you have at your disposal, according to the tax authority. The investment loss and charitable contribution examples described above actually reduce the amount of income you receive, which is why those examples result in a lower tax base.
Context Specific Deductions
Occasionally you’ll come across expenses that are only deductible under specific circumstances. Money spent on gasoline can be deductible if it is deemed a business expense, and even then only up to a certain limit. Same can be said for healthcare, provided it exceeds 7.5% of your adjusted gross income. If you’re an artist, you can deduct the expenses of purchasing your art supplies so long as you can prove that you’re treating your art form as a method of making money, and not as a hobby. There are many examples like these of expenses that are deductible under certain circumstances. Be sure to read the relevant section of the tax code or consult a professional before deciding if a particular expense is deductible. More information on what is considered deductible and not can be found here.