Tax Reduction

Tax Reduction
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Tax reduction is reducing the taxable income or income due to be taxed by deductions, tax credits, tax reliefs and allowances and offsetting tax overpaid. Personal allowances also known as personal reliefs are given to low-earning individuals with incomes that do not exceed certain amounts. Family reliefs are given to households depending on the number of children.

Tax credits reduce the tax to be paid. There are credits for the disabled and the elderly, mortgage interest credits, retirement savings credits all of which are deducted from the tax due. Deductions reduce the taxable income before it is taxed. Items that are deductable for individuals include educational expense, medical, interest on home-owners mortgages and equity loans, taxes, money and property donated to charitable organizations as gifts and contributions to retirement and health savings plans. The deductions are subject to certain limitations and conditions. 

For businesses, tax systems allow deduction of certain expenses which were incurred to produce income to lower the income to be taxed. Cost of goods sold is deducted from sales or revenue to determine the gross income. All the necessary expenses that were paid and those that have been incurred in carrying on trade or business are deducted from that taxable year subject to limitations. The trade and business must be carried out to make profit. The expenses must be appropriate to the nature of that business. Expenses incurred in producing income are deductible as well as expenses incurred in promoting the business i.e. advertisement and promotional costs.
The cost of capital items is recovered as a tax deduction from future incomes over a number of years. Capital items include tangible assets and intangible assets. The tangible assets include plant and equipment, motor vehicles and other fixed assets. Plant and equipment include buildings, machinery, tools and others. The allowable tax deduction is known as depreciation. Depreciation is deducted over the useful life of the asset and different classes of assets have different useful lives set out by the government depending on the use of the asset and the nature of that particular business. Intangible assets include development of patented inventions which may be new items, plants, ideas and designs. Amortization of these intangible assets is deducted over the expected life of the asset or a number of years specified by the government.

Tax credits are deducted from the tax the individual or business owe to the state. Tax credits reduce tax payable directly.
- Incentives that are authorized to encourage the private sector to provide a benefit to the public are allowed to reduce tax liability by the cost of investment.
- Credits for preservation and rehabilitation of historical buildings.
- developers of renewable energy which includes solar, geothermal, wind energy
- producers of electricity from solar, geothermal, hydro renewable energy
- developers and equity providers who build low income housing.
- employing groups facing high unemployment rates i.e. the youth, veterans.
- using renewable energy, purchase of non-gasoline powered vehicles, production of non-gasoline fuels

Last modified onTuesday, 02 April 2013 15:46
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