This is something that just drives me crazy. People often talk about how their purchases were complete steals because they are tax deductible.
Many people think that since something is ‘tax deductible’ that it’s essentially free.
What it means is that you are able to deduct the cost from your taxable income, NOT your tax bill. Essentially, you get a small tax break, but rarely does the purchase turn from a bad one into a good one.
Here’s a clear example:
Let’s say your taxable income is $50,000. You give $1,000 to charity. That contribution is tax deductible.
The only calculation needed is to subtract the tax-deductible amount from the taxable income.
So your taxable income becomes $49,000.
The mistake many people make is that they think that the $1,000 comes off the final tax bill.
THAT IS WRONG!
The savings you gain from tax-deductible purchases are your tax bracket multiplied by the purchase amount. So if you’re in the 25% tax bracket, a $1,000 contribution to charity only costs you $750.
So you save $250. It’s an incentive, but be careful about thinking that your new windows are a steal. They still cost $750.
If you need new windows, knock yourself out, and enjoy the savings!