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Video:What Are Tax Deductions?

with Jen D'Amore

Tax deductions can range from charitable donations to business expenses, and can save you a lot of money if you know how to find them. Learn all about tax deductions in this how-to video from About.com.See Transcript

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Transcript:What Are Tax Deductions?

Hi, I'm Jen D'Amore for About.com and this video is all about tax deductions.

What are Tax Deductions

Tax deductions are expenses incurred that are eligible to be subtracted from your income, thereby lowering your taxable income. They are usually related to money that is spent to produce additional income. But there are also personal tax deductions that just give you a break for other reasons.

Initially, there is a standard deduction that everyone takes - this is listed on your tax form and varies depending on marital status and number of dependents.  

Itemized Tax Deductions

There are also itemized deductions. You need to choose between taking the standard deduction and itemized deductions, so it's only worth taking the itemized deductions if they add up to a greater amount than the standard deduction.

Itemized deductions include things like:

  • excessive medical expenses
  • property taxes
  • and charitable donations

Charitable donations need to be made to a qualified tax-exempt organization. Most will have a non-profit 501( c )(3) status unless they are a church or religious organization. The organization can tell you if they are in fact tax-exempt. You'll want to make sure you have a receipt from them stating the donation amount, and the date of the donation.

More on Tax Deductions

Many employers offer FSA's or flexible spending accounts, or Health savings accounts (HSA). These are designed as payroll deductions. They essentially dedicate some of your income towards medical costs using pre-tax money.  

When it comes to real estate, there are several deductions to consider including home improvement costs, points on a home mortgage, property tax, seller-paid points on the purchase of a home, losses incurred by the sale of a property and mortgage prepayment penalties and late fees.  

There are also business deductions, including the cost of goods sold, and business  expenses.

Receipts need to be kept for any deductions, and it's helpful to keep notes on anything you may feel is questionable.  

Whether it's a personal deduction or a business expense, deductions lower your taxable income, and save you money, so it's worth it to know what deductions you are eligible to take.

Tax laws are always changing, and your personal circumstances may qualify you for more deductions than you realize, so of course you can always let a professional accountant prepare your taxes for you, and even their fee is completely deductible.

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