5 Common Misconceptions About Tax Deductions

In all of our interactions with clients it is clear that the most commonly misunderstood aspect of filing one’s income taxes is the rules and other important information regarding tax deductions.

Tax deductions can be a vital aspect of your income tax filing. They can save you a great deal of money if you truly understand how they work, but they can also be a serious headache when improperly handled.

In this blog we have detailed five of the most common misconceptions and misunderstandings about income tax deductions. Check out the list below and be sure to call Desnoyers CPA if you have any further questions about your deductions this year.

Misconception #1 – Tax deductions = Lower tax liability

In a general sense, the idea that tax deductions lower your tax bill is true. However, many people misunderstand how tax deductions actually work. The common misconception is that a deduction directly reduces your tax liability, meaning if you would have owed the IRS $1000 but you deduct $100, then you will only owe $900. It is actually tax credits that directly reduce the tax bill. Deductions reduce your taxable income. Thus, if you made $50,000 last year and you deduct the standard amount for a single person in 2015 of $6,300, then you will only be taxed on $43,700 worth of income.

Misconception #2 – “I’m self-employed so all of my expenses are deductible.”

There is a notion that just because someone is self-employed, it means they can deduct practically every expense they have under the guise of claiming it as a business expense. Things such as meals, rent, and gas must be business related and/or prorated for business use. Excessive deductions can cause red flags especially when they generate a net loss in too many consecutive years.  

Misconception #3 – Itemizing your deductions means you will have a lower tax liability

Some people believe that if they keep good records and do the extra work required to itemize their deductions, it will result in a lower tax liability than a standard deduction. This is not always the case. The standard tax deduction—which can be taken by any taxpayer, and has no requirement for maintaining records—is $6,300 per person for the 2015 tax year ($9,250 if filing as Head of Household). You can choose to itemize expenses such as mortgage interest, qualifying medical expenses, qualifying charitable donations, and more, but if these itemized deductions do not exceed the standard deduction then you are likely wasting time and resources by itemizing these expenses. There are some rare situations where you may still want to itemize even if the itemized deductions are lower than the standard deduction, however, so you should consult with a tax professional for advice on your specific circumstances.

Misconception #4 – If you lose a lot in the stock market your capital losses can cancel out your tax liability

Another common misconception about deductions is that you can deduct all of your capital losses and use them to cancel out your entire tax bill if the losses were high enough. Thus, if you sold stock for a major loss, you could claim the losses as a deduction to cancel out your income. This is only true up to $3,000. Even if you sold stock at a loss of $100,000, you are limited to deducting $3,000 of that from your regular income for the year.

Misconception #5 – You only need to pay attention to maximum deduction limits

Many people only pay attention to the maximum amount they are allowed to deduct for a given itemized expense. They understand that they can only claim up to a certain amount of qualifying expenses, such as charitable expenses. However, many of these deductions also have minimum thresholds that must be met in order for you to be allowed to claim them as a deduction. For example, in order for you to be allowed to deduct medical expenses, those uninsured expenses must exceed 10% of your Adjusted Gross Income (AGI), while most miscellaneous expenses such as work-related expenses and investment expenses must exceed 2% of your AGI.

Deductions are an important, albeit potentially complex, aspect of any tax return. It is essential that you understand how they work and apply them appropriately for your unique circumstances. For assistance with your tax returns—and your deductions in particular—please contact Desnoyers CPA today.

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Written by Desnoyers CPA

Desnoyers CPA

Known for her friendly, outgoing nature and her rare talent for financial foresight, Lydia Desnoyers has been serving individuals and small businesses in Florida since 2010. After earning her Master’s Degree in Accounting from Nova Southeastern University and her Bachelor’s Degree in Accounting from Florida State University, she became a Certified Public Accountant and a Certified Fraud Examiner.