Whats a Tax Deduction Worth?

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A tax deduction is the cost or value of something that you can subtract from your gross income (all the money you earn) to determine your taxable income (the amount on which you have to pay tax). When you bought this product, did you save the receipt or any other proof of purchase? Good! Assuming you are starting or have an eBay business, you can deduct this expense from your income.

Few of us stop and consider what a great deal the government is offering when it comes to tax deductions. By letting you deduct your expenses, the government is essentially offering to pick up part of the tab for your venture. The offer is on the table; it’s up to you to take advantage of it by claiming every tax deduction to which you’re entitled.

A tax deduction is not a dollar-for-dollar proposition: You don’t save in taxes the entire amount you paid for deductible goods and services. But because you don’t have to pay tax on the amount of income you spent on a deductible item, a deduction can save you almost half of what you spend. The exact amount you’ll save by taking a deduction depends on your tax bracket — the tax rate that applies to your income. The higher your bracket, the more every deduction is worth.

To illustrate how valuable a tax deduction can be, consider this hypothetical case: Simon has an eBay business selling taxidermy equipment. He spends $2,000 on a computer for his business. He’s in the 25% federal income tax bracket. By deducting the cost of the computer, he doesn’t have to pay tax on $2,000 of his income. That saves him 25% of $2,000, or $500. But that’s not all. The state where Simon does business imposes a 6% income tax, so Simon saves an additional $120 there. And Simon doesn’t have to pay self-employment taxes — the amount self-employed people have to chip in to fund their Social Security and Medicare — on this money, either. The self-employment tax rate works out to about 12%, for an additional $240 savings. Simon ends up saving $860 in taxes, almost half of what he paid for his computer.

by: , Attorney

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