Introduction to Tax Deductions
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Introduction to Tax Deductions

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In this video I now want to cover
one of the other most misunderstood ideas
when people think about taxes.
and that's the idea of deductions.
So one of the most common tax deductions is
the deduction you get on interest on your mortgage.
So let's say that this year on my mortgage,
of the part of my mortgage that is interest.
Let's say it's $10,000 interest on my mortgage.
And you'll either already know,
or someone might tell you,
that this is tax deductable!
And the misconception
that I've seen many, many times is that
people think that since this is a tax deduction
that this $10,000 should be deducted from their taxes.
So in the previous example we showed this scenario
where this person making $100,000
would have to pay $21,720 in taxes.
And based on that misconception they would say
"Ok I get a $10,000 tax deduction now
I would pay $11,720."
And that is wrong!
The deduction doesn't happen from the taxes you pay.
The deduction happens from your stated income.
So if this person right here had a $10,000 tax deduction,
instead of saying they made $100,000 that year
they would say that they made $90,000.
So once again,
the deduction does not come directly from the taxes.
That would be a tax credit.
The deduction comes from the reported income.
So what would be the actual effect on the taxes?
Well we just have to look at this $90,000
that still kind of shows up in the top bracket.
So the real difference
is just going to be this $10,000 difference
before he was paying 28% on this $10,000.
Now he won't have to pay 28%
on that incremental $10,000,
on this incremental $10,000.
Another way to think about it,
instead of this being $17,750 times 28%,
it would now be $7,750,
because the reported income is now only $90,000.
So the actual number,
we can get our calculator out and just calculate it.
There's two ways you could do it.
You could just say if my income is deducted by $10,000
and I'm going to save 28% on that $10,000.
You can just subtract $2,800 from this.
But just to show you how it'll all work,
that it all works out to the same thing.
Let's just go through the same calculation again.
We have $7,750 times 0.28
plus $48,300 times 0.25
plus $25,600 times 0.15 plus $835
and that's $18,920.
So now the taxes will be $18,920.
And as you can see
the difference between the old and the new is exactly $2,800
because that's essentially what the amount
that we would be taxed on the $10,000
if we had made that much money.
Anyway hopefully that doesn't confuse you too much.

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