what is a tax deduction?

Question

tax deduction for investment property owners

Answer 1

I have been a tax accountant for 27 years. First of all, a tax DEDUCTION is not what it sounds like. From the sound of the term it would seem that a tax deduction is an amount you deduct from any taxes for which you are liable. This is not the case at all. A tax deduction is an item of cost or expense defined as an allowable deduction under the tax code. The deduction reduces not your tax in a direct way, but instead reduces your taxable income.

Assume the deduction is $1,000. Taxable income before the deduction was $20,000. So, after the deduction is taken taxable income is reduced to $19,000. The tax is then computed on that reduced figure. Because incomes are taxed at graduated rates, a deduction is said to have a value equal to the "marginal" tax rate multiplied by the amount of the deduction. However, a person whose total income would be taxed at the rate of 25% in reality is taxed at various graduating rates as incomes go higher, the combined "effective" rate of which is 25 percent.

I make this point (which only seems trivial) because many people (accountants included) are inclined to make the mistake in logic of valuing a deduction at the highest "marginal" tax rate applicable to the person's income. This is clearly flawed logic, since other deductions may reduce the income and as a result reduce the rate of tax.

Therefore, the most accurate way to calculate the value of a given tax deduction is to mulitiply the amount of the deduction by the person's effective tax rate (that is, the ratio of all combined tax rates applicable to that level of income) prior to taking the deduction. Thus, if the effective tax rate would be 25%, a $1000 deduction would represent a $250 tax savings.

A tax CREDIT is something else entitely: a tax CREDIT is a dollar-for-dollar reduction NOT merely in taxable income, but in the actual amount of tax. A $1000 tax credit reduces taxes by $1000.

Typical tax deductions affecting investment property which is used in the production of income and not merely held as capital asset might include real estate taxes, insurance, mortgage interest, other kinds of interest, ultility bills, management fees, and depreciation (an allowance for part of the cost of the productive investment property itself).

Answer 2

You can donate the property to http://www.realestatedonation.org/ and take a deduction equal to the appraised value.

Answer 3

Tax deductions are the way by which an assesse can reduce its taxable income .
The only difference between deductions, exemption and credit is that deductions and exemptions both reduce taxable income, while credits reduce tax.

Answer 4

A tax deduction is something that can be deducted (subtracted) from your income BEFORE calculating the taxes. For example, property tax.

Something subtracted from your taxes directly is called a tax credit.

Answer 5

A tax deduction is when all or part of an allowable expense (such as medical expenses or expenses you had to pay for your job) gets deducted from the total amount that you owe in taxes.

Answer 6

depreciation
capital improvements (expensable)
taxes
insurance
maintenance
collection agency fees
accountant