djchuang asked:
When they say donations and home equity loans are tax deductible, what does this mean? Does a $1000 donation mean $1000 less federal income tax? Does $1000 paid in interest on a home equity loan mean $1000 less federal income tax?
Clyde
When they say donations and home equity loans are tax deductible, what does this mean? Does a $1000 donation mean $1000 less federal income tax? Does $1000 paid in interest on a home equity loan mean $1000 less federal income tax?
Clyde
Melanie
The deductible is to the amount the tax percentage is applied to. So if you make $50,000, you can deduct $1,000 to make your base $49,000. And then 15% is applied to the new base.
This is a very basic explanation – a lot more goes into it. But this should give you an idea.
Comment by LifesAMystery — January 13, 2010 @ 6:24 am
Peter
No.
A deductable expense reduces your taxable income which is used to calculate the tax.
For example: If you are in the 25% bracket, a $1000 donation (or home loan interest) would save you $250 in taxes ($1000 x 25%).
Comment by Wayne Z — January 15, 2010 @ 11:28 am
Jesse
No, these become part of your Itemized Deductions if you plan to itemize. The Itemized Deductions reduce your taxable income, which in turn decreases the amount of tax you would owe.
For example (all hypothetical numbers), if your gross income 20,000 and your itemized deductions are 6,000, then your taxable income becomes 14,000. And the tax is calculated off 14,000. (Of course there is still an exemption to account for, but that’s not what we are talking about).
Tax credits reduce your amount of tax directly. Deductions reduce your income. I hope this all makes sense.
Comment by Kristy — January 16, 2010 @ 11:51 am