1. You start your own company and get a business credit card
2. You start buying things you need for work
3. Like an iPhone a car meals with clients
4. You also buy a house and get a mortgage on it
5. You think about all you’ve bought this year, saved for retirement and given to charity
6. You talk to a professional
7. Who gives you the idea that you can subtract expenses from your AGI
8. Soon this will lower your taxes
9. Your mind is blown
10. You feel blessed #moneyface
11. This all equals a tax deduction
Let us piece this together
You start your own company, congrats! Now you get a business credit card and start buying items that you need for work, such as an iPhone, a car and of course all those dinners you go to entertaining clients. Now you pause and think about all the money you have spent like the interest you paid on your mortgage so you consult with a tax professional to understand what you can do about it. She explains that you can subtract all qualifying expenses against you Annual Gross Income (How much you made) and this will lower the amount you owe in taxes, your mind is blown and you feel blessed with all the money you are saving! This all equals a tax deduction
Tax Deduction 101
A tax deduction is when you can take qualified purchases/deductions and subtract those from your Annual Gross Income, therefore, lowering the amount you owe in taxes.
Now a common misunderstanding is you don’t pay for any of those purchases, you do, and you do not get money back from the government for deducting, which is what a tax break is.
Now a deduction allows you to subtract all those expenses from your income, so the best way to think about it is that you are getting a “discount” on the items you do buy that you will see on your tax return.
Example: You buy a brand new iPhone X for $1,000, you pay all $1,000 upfront but say you are in the 30% tax bracket, so when you deduct this you essentially saving that difference of $300. This is how a tax deduction works. Yes, it depends on your tax bracket so if you are in the 20% tax bracket than you will only save $200 for the same purchase. Welcome to the American tax system.
Tax Deduction V.S Tax Break
Tax Break: A credit you get for the full amount no matter what tax break you are in, such as the $7,500 you get for buying a Tesla, or any electric car, for now.
Tax Deductions: A deduction you receive off of your annual gross income, therefore, lowering the amount of taxes you owe, but not a credit you receive back. Like mortgage interest rates
Common deductions
• Office Supplies
• Automobile
• Retirement accounts
• Standard Deduction
• Dependent Deduction
• Marketing
• Raw Materials
• Office Furniture
• Business Travel
• Entertainment
• Interest on loans like mortgages
• Building and Land
• Professional Services
• Employee Deductions
It is key to understand this and advised that you work with a professional that will guide you on what you can and can not deduct, Orcas recommend looking at your taxes proactively and planning ahead not looking at it in April. Don’t be a seal and get caught be an Orca and plan!
