Determining Tax Deductible Expenses

Deductible expenses are expenses which can be deducted from the taxable income.

In terms of principles of accountancy, these are expenses which are incurred by you for a purpose that is in a way related to earning your “INCOME”. Note that the tax is on ‘income’ not ‘receipts’, so all expenses that a businessman or trader or professional incurs for the purpose of running his business, trade or profession is an ‘expense’ that must be deducted from the receipts to arrive at the ‘income’ which is then taxed. That is the normal computation of income which is then subjected to tax.

For the computation of income, the expenses which have been incurred solely for the purpose of earning that income will be deductible. So, for a person who is a professional like an architect or consultant, if he maintains an office and pays rent and electricity charges, they will be deductible. Similarly, if he uses some equipments, then the expenses related to their maintenance and upkeep will also be deductible. If he employs any assistants, their wages and other costs will also be deductible while arriving at the profit he is making from his profession. Other similarly deductible expenses that fall in this category include expenses for running and maintaining a vehicle that is used only for the profession.

For an entrepreneur, all expenses related with the enterprise will be deducted except those that are specifically prohibited by the tax code. These expenses however, should not be of a capital nature – meaning thereby that the benefit accruing from them should be limited to the current year.

In addition to the business expenses, certain other ‘tax deductible expenses’ are also there which include:

1. Education expenses (tuition, books, stationary etc) up to 2% of adjusted gross income limit provided they are incurred for the purpose of earning a better income in your current job. If the expenses relate to a study that leads to qualifications not related with your current job, then it is not allowable.
2. Interest on student loans (including interest paid for a dependent child) up to $2500, provided the ‘modified adjusted gross income’ (MAG) is less than $ 100,000 for married and $ 50,000 for single.
3. Contributions to qualified charity organizations, up to 50% (or in some cases 20-30%) of MAG.
4. Alimony and maintenance amount paid to your spouse or ex-spouse.
5. Allowable medical expenses of your own self, spouse and dependents, to the extent they exceed 7.5% of your MAG. The deductible amount is ‘medical expenses’ minus 7.5% of MAG.
6. Home mortgaged interest, up to 100% of interest, depending on certain conditions.
7. Investment income and expenses.
8. Interest expense
9. Real estate duty or property taxes

All these expenses are allowed to be deducted from the taxable income of the individual.