Tax Deduction Can Save Money for Inventors

Deductions can put money back in in an inventor's wallet

Most inventors, even those who are sophisticatedbusinesspeople, don’t fully appreciate just how much money they can save with tax deductions. Only part of any deduction ends up back in your pocket as money saved. Because a deduction represents income on which you don’t have to pay tax, the value of any deduction is the amount of tax you would have had to pay on that income had you not deducted it. So a deduction of $1,000 won’t save you $1,000—it will save you whatever you would otherwise have had to pay as tax on that $1,000 of income.

Federal and State Income Taxes

To determine how much income tax a deduction will save you, you must first figure out your income tax bracket. The United States has a progressive income tax system for individual taxpayers with six different tax rates (called tax brackets), ranging from 10% of taxable income to 35%. The higher your income, the higher your tax rate.

You move from one bracket to the next only when your taxable income exceeds the bracket amount.  The tax bracket in which the last dollar you earn for the year falls is called your “marginal tax bracket.” For example, if you have $70,000 in taxable income, your marginal tax bracket is 25%. To determine how much federal income tax a deduction will save you, multiply the amount of the deduction by your marginal tax bracket. For example, if your marginal tax bracket is 25%, you will save 25 ¢ in federal income taxes for every dollar you are able to claim as a deductible business expense (25%

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