Deductible Expenses

• The IRS defines many different expenses as deductible expenses, both with personal and business income tax returns. Examples of personal deductible expenses are traditional IRA contributions, as well as mortgage interest and state income taxes if a taxpayer itemizes her deductions. If a taxpayer chooses not to itemize deductions, she may take a specified amount as a deduction called the standard deduction. A business will deduct many of its operating expenses from income and report the difference as a profit to the IRS.
  
  

Impact Of Deductible Expenses

• The IRS calculates taxes due based on a taxpayer's taxable income. Since deductible expenses directly reduce taxable income, deductible expenses also reduce the amount of income tax that either a business or individual is liable for. The amount of tax reduction is based on the taxpayers top, or marginal tax rate. For example, if a taxpayer is in the 25 percent tax bracket, and deducts a $1,000 expense, she would save $250 in taxes.
  
  

Tax-Free

• Tax-free is a term generally associated with income that is not subject to income taxes. One example of tax-free income is Roth IRA distributions when the account owner is older than 59 1/2 years old. Another example is contributions that carpoolers make to a person to offset her transportation expenses. Often, tax-free income must be shown on a tax form for declaration purposes, but the IRS does not calculate income tax on this amount.
  
  

Conclusions

• The end result of a deductible expense and tax-free income is the same. A taxpayer can use either one that she qualifies for to reduce her overall tax liability. A taxpayer must take responsibility for learning all that she can about tax deductions which can reduce her taxable income, as well as income that she might earn that is tax free.