Rather than simply taxing your gross income, the Internal Revenue Service collects taxes based on a net taxable income calculated as your income after you have subtracted a surprisingly large variety of exemptions and deductions. The benefits to taking advantage of deductions are twofold: first, they reduce the amount of income on which you are taxed and second, your deductions may result in your ending up in a lower tax bracket, reducing your tax rate (the percentage of your income that you pay in taxes).
In practical terms, this means that if you were a single person with a gross income (wages, tips, interest income, etc.) of $100,000, and you used no deductions or exemptions at all, you would be in the 25 percent tax bracket and pay $25,000 in federal income tax. If, on the other hand, you took advantage of your personal exemption and listed deductions for medical expenses, mortgage interest, charitable contributions, state taxes, and business expenses, amounting to $35,000, your taxable income (after exemptions and deductions) would by $65,000, putting you in the 15% tax bracket, and you would pay only $9,750 in taxes, a savings of $15,250. (more…)
