Explain tax deductions to me like I'm 5? ?

So I am a new 1099 worker in VA. I am trying to figure out how tax deductions work but no matter how much I google it, I don't get it. Explain it to me like I'm 5 please. So let's say I spend $500 on a new shear set for work, and claim that on my taxes, do I owe $500 less when it's time to pay or what? 

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  • 4 weeks ago

    Deductions reduce your INCOME, not your tax.  

  • Shay
    Lv 7
    4 weeks ago

    Tax deductions reduce your taxable income.

    If your total income for the year is $75,000 but you have allowable deductions that total $40,000 for the year - then your taxable income is only $35,000 for the year.

    So - you do not owe $40,000 less in taxes - you are just not taxed for that $40,000.  

    When you are starting a new business or working as a 1099 contract worker - it might be a good idea to have a professional do your taxes for the first one or two years while you learn a little more about how it all works.

    Or find a web based tax service that has easy to understand instructions to help you do your own taxes.

    Good luck.  

  • RICK
    Lv 7
    4 weeks ago

    No, your taxable income is reduced by the amount of depreciation you are allowed to deduct.  Let's say your $500 shear set has a usful life expectancy of 5 years, you would be able to deduct $100 for 5 years in a row. So if you made $12,000 that one item would reduce your taxable income to $11,900

  • Amy
    Lv 7
    4 weeks ago

    You count $500 less income from your business.

     

    For example, if you got paid $700 but your expenses were $500, then your business income is only $200. You only owe tax on that $200.

     

    Tax rates vary based on your total income. A $500 deduction probably reduces the tax you owe by $50 or $60, but it could be more.

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  • 4 weeks ago

    No.

    First, if you buy something that is expected to last more than a year, then it is extremely to claim it all at one time.  You must claim only a small part each year.  Since I am explaining like you are 5, I'm going to say you would go to jail if you tried to claim it all at once.  (If I was explaining it like you were an adult, I would say that you probably won't go to jail, but you would be fined a lot of money.)

    Second, if you claim $500, you do not owe $500 less.  You owe tax on $500 less of income.  For example, if you made $9000 and claim $500, then the tax you owe is what you would have owed if you made $8500.

  • If you count as self-employed, you're taxed on your profits, not your income.  Profits are what you get paid, less expenses and less overheads.  Tools count as expenses.  Let's suppose you get paid $35,000 and you have expenses and overheads of $1,000, you get taxed on $34,000.  Book a session with an accountant.  His advice on what you can claim as expenses and overheads should save you more tax than his fee.

  • 4 weeks ago

    Deductions are used when calculating the difference between your GROSS income and your TAXABLE income.

    So, if you had, say, a total income of $50,000, and you deducted that set, then that would reduce your TAXABLE income by $500.

    You USED to have a starting deduction of $4,000, but the GOP made that go away, which is one way they actually INCREASED taxes on working people.

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