Income Tax: Tax Liability & Deductions

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  • 0:05 Income Taxes
  • 1:07 Common Deductions
  • 2:14 Itemized Deductions
  • 3:09 Standard Deduction
  • 3:40 Tax Liability
  • 4:06 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll discuss allowable deductions that reduce taxable income. You'll learn about each deduction and its limitations. We'll also explore how to calculate tax liability after subtracting deductions.

Income Taxes

April 15th of every year is tax day. Many Americans dread this day because all income taxes owed to the federal government are due by midnight or heavy penalties can apply. Income tax is a percentage of a person's income and earnings owed to the federal government. The Internal Revenue Service, or IRS, is the entity that collects and enforces taxes.

Let's say you earned $100,000 of taxable income last year. Fortunately, the IRS won't tax the exact amount of $100,000. It will allow you to reduce your income by subtracting deductions.

In this lesson, we'll explore some deductions allowed by the IRS and learn how tax liability is calculated after the allowable deductions. There are many deductions that can reduce your taxable income. We'll discuss the more popular deductions. However, the tax code changes regularly, and it's important you seek the advice of a professional tax consultant to ensure you minimize the amount of taxes you owe.

Common Deductions

If you're paying back student loans, you can deduct a certain dollar amount of interest you paid over the last year. If you're still in school, you might be able to deduct some or all of your tuition and fees.

Home-based entrepreneurs have some relief too. If you own a home-based business, you can deduct your office space, travel, meals, and entertainment up to a certain dollar amount.

Do you invest in stocks or bonds? If you've made money, you will pay taxes on the gains. However, if you've lost money, you can deduct those losses up to a certain dollar amount. So if you are apprehensive about investing, go ahead and live a little with the comfort of knowing if you lose money, you can deduct it from your total income.

Some other deductions include business losses and certain retirement plans up to a specific amount. Once you subtract these deductions from your total income, you get your adjusted gross income, or AGI.

Itemized Deductions

If you own a home, the IRS allows you to deduct the annual interest and property taxes that you pay to the mortgage company. At the end of the year, your mortgage company will send you a form that notes the total annual interest and property taxes paid. You simply enter these amounts on your tax form.

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