Help me out with these accounting terms?

Question

This are the stupidest questions.

What are tax deductions? Are they good or bad? The higher the deduction is better or the lower?

What is depreciation? Is it good or bad?

Answer 1

I agree with Michael B's answer and would just like to add that a tax payer can benefit from tax deductions only if the sum of the tax deductions is greater than the standard deduction of his/her filing status. The standard deduction for single is $5150, Married filing jointly $10300, Head of household $7550 etc.

So if a single tax payer only has $3000 in itemized deductions, s/he is better off taking the $5150 standard deduction.

One item that helps tax payer exceeding standard deduction is home purchase. Most closing cost and mortgages are deductible. The tax payer can choose whether to amortize the closing costs over the life of the mortgage or take it in the first year. If the home is purchased toward the end of a year, taking the entire closing cost may not help the tax payer exceed his/her standard deduction. In this case, the tax payer is better off amortize the closing cost.

Best wishes.

Answer 2

Many people confuse tax deductions with tax credits. A deduction only reduces your taxable income, while a credit reduces you tax liability. For instance, if you are in the 28% tax braket, and you have a $1,000 deduction, the net result will be a reduction in the taxes that you owe by $280. However, if you have a $1,000 tax credit, the net result will be a reduction in the taxes that you owe by $1,000. So please don't equate a deduction with a dollar for dollar savings. Therefore, the higher the deduction, the better, but you would prefer a tax credit.

Depreciation on the other hand is the periodic recognition of an expense related to an asset that has a useful life typically greater than 3 years. The IRS determines the useful life of all major categories of assets. For instance, if a computer you purchase for $1,000 today is directly expensed, your taxable income is reduced by $1,000. However you may be required to depreciate the asset over 3 years, which would result in depreciation expense of $333 per year for the next 3 years. So each year you would only receive the taxable income reduction of $333. However, there is something called a section 179 deduction which allows you to take the entire $1,000 in the year of purchase. However, there are limits on the amount of section 179 deductions that you may take per year. The good or bad answer depends on which of the years you believe you will need the most expense to be taken.

Answer 3

tax deductions are expenses you can use to help reduce your tax liability, and therefore save money on taxes. tax deductions include expenses such as real estate taxes, mortgage interest, charitable contributions, etc. obviously the higher the deduction the better.

depreciation is the write-off of an asset over time. for example, if a company purchases equipment, in order for the financial statements to be fairly reported, the asset would be depreciated over its useful life. example: company buys equipment costing $50,000 and has a useful life of 5yrs. Using straight line depreciation, the company would record depreciation expense of $10,000 per year (50,000/5) for the next 5 years.

the journal entry to record depreciation would be:
dr. depreciation exp
cr. accumulated depreciation

this entry reduces net income, and also reduces the net value of the asset.

i wouldnt say its "good" or "bad". its beneficial for a company to record depreciation to lower its net income, and therefore lower its tax liability.

hope this helps.