What Does a Tax Deduction Save You?

What Does a Tax Deduction Save You?

Taxpayers frequently ask what benefit is derived from a tax deduction.  Unfortunately, there is no straightforward answer.  The reason the benefit cannot be determined simply is because some deductions are above-the-line, others must be itemized, some must exceed a threshold amount before being deductible, and certain ones are not deductible for alternative minimum tax purposes, while business deductions can offset both income and self-employment tax.  In other words, there are many factors to consider, and the tax benefits differ for each individual, depending on his or her particular situation.

For most non-business deductions, the savings are based upon your tax bracket.  For example, if you are in the 24% tax bracket, a $1,000 deduction would save you $240 in taxes.  However, if taxable income is close to transitioning into the next-lower tax bracket, the benefit will be less.  You also need to consider whether the particular deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings.

Some deductions, such as IRA and self-employed retirement plan contributions, alimony, student loan interest, etc., are adjustments to income or what we call above-the-line deductions.  These deductions, to the extent permitted by law, provide a dollar deduction for every dollar claimed.  Deductions that fall into the itemized category must exceed the standard deduction for your filing status before any benefit is derived.  In addition, the medical deductions are reduced by 10% of your AGI (income). Under the rules of the 2017 tax reform, the state and local taxes deduction is limited to $10,000, no deduction is allowed for home equity interest, and deductions such as employee business expenses and investment expenses aren’t deductible at all in years 2018 through 2025. Taxpayers subject to the alternative minimum tax are not able to deduct any taxes.

The most beneficial deductions, business deductions, fall into two categories: employee business expenses, which are treated as miscellaneous itemized deductions but aren’t deductible in years 2018-2025, and self-employed business expenses that offset both income tax and, depending upon the circumstances, self-employment tax.  For 2019, the self-employment tax rate is 12.4% of the first $132,900 of income subject to SE tax plus 2.9% for the Medicare tax with no cap.  In addition, for high-income taxpayers, an additional 0.9% Medicare tax may apply.  For self-employed businesses with less than $132,900 of net income, the SE tax rate is 15.3%.  Thus, for small businesses with profits of less than $132,900, the benefit derived from deductions generally will include the taxpayer’s tax bracket plus 15.3%.  For example, for a taxpayer in the 24% tax bracket, the benefit could be as much as 39.3% (24% + 15.3%) of the deduction.  If the deduction were $2,000, the tax savings could be as much as $786 and more when the taxpayer’s state income tax bracket is included.

If you are planning an expenditure and expect the tax deduction to help cover the cost, please give us a call in advance to ensure that the tax benefit is what you anticipate.


Isler Northwest LLC is a firm of certified public accountants and business advisors based in Portland, Oregon. Our local, regional, and global resources, our expertise, and our emphasis on innovative solutions and continuity create value for our clients. Our service goals at Isler Northwest is to earn our clients trust as their primary business and financial advisors.

Isler Northwest

(503) 224-5321

1300 SW 5th Avenue
Suite 2900
Portland, Oregon 97201

Congress Green-Lights Some Alternative Vehicle Credits

Congress Green-Lights Some Alternative Vehicle Credits

To encourage U.S. taxpayers to move away from gasoline-powered motor vehicles, over the years, Congress has provided various tax credits for purchasing electric or alternative fuel vehicles.

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Mortgage Insurance Premium Deduction Retroactively Extended

Mortgage Insurance Premium Deduction Retroactively Extended

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

For tax years 2007 through 2017, when taxpayers itemized deductions, they could deduct the cost of premiums for mortgage insurance on a qualified personal residence as home mortgage interest.

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Congress Allowing Higher Medical Deductions for 2019 and 2020

Congress Allowing Higher Medical Deductions for 2019 and 2020

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

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Year-End Tips for Charitable Contributions

Year-End Tips for Charitable Contributions

As the end of the year and the holiday season approach, we will all see an uptick in the number of charitable solicitations arriving in our mailboxes and by email. Since some charities sell their contributor lists to other charities, frequent contributors may find themselves besieged by requests from all sorts of charities with which they are not familiar.

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Deducting the Costs of Modifications for Senior-Proofing a Home

Deducting the Costs of Modifications for Senior-Proofing a Home

While Americans may argue about any number of hot-button political topics, there’s no disagreement on one issue: the country’s population is aging…fast. According to the Social Security Administration, 10,000 baby boomers a day are reaching the age of 65. Many individuals, for either themselves or an older family member, are senior-proofing their homes – adding grab bars in showers, modifying stairways, widening hallways to accommodate a wheelchair, and other projects to make the home safer and more accessible for older occupants. If you are planning to make such home improvements, you may be wondering whether any of the costs will be tax-deductible.

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Disaster-Related Tax Losses May Be Less Than Expected

Disaster-Related Tax Losses May Be Less Than Expected

The late-2017 tax-reform package changed the rules for personal casualty losses, which now are only deductible if they occur in a federally declared disaster area. As a result, if a home is destroyed in a forest fire or other disaster within a declared disaster zone, the homeowner can claim a casualty loss on that year’s tax return.

However, if a home is destroyed as a result of a normal accident – or is destroyed in a natural disaster but lies outside of a disaster zone – the homeowner cannot claim a casualty loss. These rules may not be fair, but there is nothing that can be done about them (other than calling congressional representatives to indicate your displeasure). Currently, the rules are only in effect for the years 2018 through 2025. Because of these rules, you should also make sure that your home insurance coverage is adequate.

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How to Write Off Worthless Stock

How to Write Off Worthless Stock

If you are like most investors, you occasionally will pick a loser that declines in value. Sometimes, a security can even become worthless when the issuing company goes out of business.

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How Does Combining a Vacation with a Foreign Business Trip Affect the Tax Deduction for Travel Expenses of a Self-Employed Individual?

How Does Combining a Vacation with a Foreign Business Trip Affect the Tax Deduction for Travel Expenses of a Self-Employed Individual?

Note: effective for years 2018 through 2025, the Tax Cuts and Jobs Act of 2017 suspended the deduction of miscellaneous itemized expenses that must be reduced by 2% of the taxpayer’s adjusted gross income. Employee business expenses, including travel expenses, fall into this category. Therefore, this discussion only applies to self-employed individuals for years 2018-2025.

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Eldercare Can Be a Medical Deduction

Eldercare Can Be a Medical Deduction

Because people are living longer now than ever before, many individuals are serving as care providers for loved ones (such as parents or spouses) who cannot live independently. Such individuals often have questions regarding the tax ramifications associated with the cost of such care. For these individuals, the cost of such care may be deductible as a medical expense.

Incapable of Self-Care – For the cost of caring for another person to qualify as a deductible medical expense, the person being cared for must be incapable of self-care. A person is considered incapable of self-care if, as a result of a physical or mental defect, that person is incapable of fulfilling his or her own hygiene or nutritional needs or if that person requires full-time care to ensure his or her own safety or the safety of others.

Assisted-Living Facilities – Generally, the entire cost of care at a nursing home, home for the aged, or assisted-living facility is deductible as a medical expense, provided that the person who lives at the facility is primarily there for medical care or is incapable of self-care.

This includes the entire cost of meals and lodging at the facility. On the other hand, if the person is living at the facility primarily for personal reasons, then only the expenses that are
directly related to medical care are deductible; the cost of meals and lodging is not a deductible medical expense.

Home Care – A common alternative to nursing homes is in-home care, in which day helpers or live-in caregivers provide care within the home. The services that these caregivers provide must be allocated into (nondeductible) household chores and (deductible) nursing services. These nursing services need not actually be provided by a nurse; they simply must be the same services that a nurse would normally provide (e.g., administering medication, bathing, feeding, and dressing). If the caregivers also provide general housekeeping services, then the portion of their pay that is attributable to household chores is not deductible.

The emotional and financial aspects of caring for a loved one can be overwhelming, and as a result, caregivers often overlook their burdensome tax and labor-law obligations. Sadly, these laws provide for no special relief from these tasks. Is the Caregiver an Employee? – Because of the way that labor laws are written, it is important to determine if an in-home caregiver is an employee. The answer to this question can be very subjective. Caregivers’ services can be obtained in a number of ways:

• Agency-provided caregivers are employees of the agency, which handles all the responsibilities of an employer. Thus, loved ones do not have any employment-tax or payroll-reporting responsibilities; however, such caregivers generally come at a substantially higher cost than others.

• Self-employed caregivers pay all their expenses, are responsible for their own income reporting and taxes, and are not considered employees under federal or state law. The IRS lists 20 factors that it uses to determine whether an individual is an employee; the main factors are financial control, behavioral control, and the relationship between the parties. The household workers are typically classified as employees.

• Household employees are subject to Social Security and Medicare taxes. The employer is thus responsible for withholding the employee’s share of these taxes and paying the employer’s share of payroll taxes. Fortunately for these employers, the special rules for household employees greatly simplify the payroll-withholding and income-reporting requirements. Any resulting federal payroll taxes are paid annually in conjunction with the employer’s individual 1040 tax return. Federal income-tax withholding is not required unless both the employer and the employee agree to do so. However, the employer is still required to issue a W-2 to the employee and to file that form with the federal government. The employer also must obtain federal and state employer ID numbers for reporting purposes. Some states have special provisions for the annual reporting and payment of state payroll taxes; these may be similar to the federal requirements.

The employer’s portion of all employment taxes (Social Security, Medicare, and both federal and state unemployment taxes) related to deductible medical expenses are also deductible as a medical expense.

You may be thinking, “Wait a minute – the household employers I know pay in cash and do not pay payroll taxes or issue W-2s to their household employees.” This observation may be
accurate, but such behavior is illegal, and it is not right to ignore the law. Think about what could happen if one of your household employees is injured on your property or if you dismiss such an employee under less-than-amicable circumstances. In such circumstances, the household employee will often be eager to report you to the state labor board or to file for unemployment compensation.

Note, however, that gardeners, pool cleaners, and repair people generally work on their own schedules, invest in their own equipment, have special skills, manage their own businesses, and bear the responsibility for any profit or loss. Such workers are not considered household employees.

Here are some additional issues to consider:
Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in a given week. However, live-in employees are an exception to this rule in most states. Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried.

Separate Payrolls – Business owners may be tempted to include their household employees on their companies’ payrolls. However, any payments to household employees are personal expenses and thus are not allowable as business deductions.

Thus, business owners must maintain separate payrolls for household employees; in other words, personal funds (not business funds) must be used to pay household workers.

Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When a household employee is hired to work on a regular basis, the employer and employee each must complete Form I-9 (Employment Eligibility Verification). The employer must carefully examine the employee’s documents to establish his or her identity and employment eligibility.

If you have questions related to eldercare or about how your state deals with related employment issues – or if you would like assistance in setting up a household payroll system – please contact this office.


Isler Northwest LLC is a firm of certified public accountants and business advisors based in Portland, Oregon. Our local, regional, and global resources, our expertise, and our emphasis on innovative solutions and continuity create value for our clients. Our service goals at Isler Northwest is to earn our clients trust as their primary business and financial advisors.

Isler Northwest

(503) 224-5321

1300 SW 5th Avenue
Suite 2900
Portland, Oregon 97201