How Tax Deductions Work

Businessman discussing paperwork with couple Businessman discussing paperwork with couple
Talk to a tax professional to find out how you can maximize your deductions. Jupiterimages, Creatas Images/Thinkstock

"You can deduct that." "You can write that off." "Deductible expenses."

You've probably heard these phrases a hundred times. But what do they mean? What are tax deductions and how do they work? And why are tax deductions so important?

The purpose of tax deductions is to decrease your taxable income, thus decreasing the amount of tax you owe to the federal government. There are hundreds of ways to use deductions to reduce your taxable income, but many people don't know about them or know how to take advantage of them. The IRS is currently holding more than $1 billion of unclaimed tax refunds. [source: Bell].

To find out how you can maximize your deductions, it's best to talk to a tax professional, such as a tax preparer or lawyer. It's their job to know about tax deductions, and they can guide you to use deductions efficiently and legally. The earlier in the year you learn about possible deductions, the easier it will be to take advantage of them. This article will teach you the basics so that you'll have a good understanding of the deductions that may apply to you.

A lot of people think that deductions are just for the rich and famous. That's not so. A wealth of tax deductions and credits are available to middle- and lower-income taxpayers. The biggest dividing line in the world of deductions is itemizing. Whether or not you can itemize plays an enormous role in the world of deductions.

In this article, we'll find out what itemizing is, exactly. We'll also discuss how to claim deductions on your federal income tax return, even if you don't itemize. Finally, we'll go through a number of examples of deductions to help you save on your taxes every year.