In the US, which tax deductions are dollar for dollar and which deductions are calculated as a percentage of your tax rate?
SHORT ANSWER:As far as I know, NO deductions are actually calculated as a percentage of your tax rate.However, you might think of a tax deduction (deductions lower your taxable income) as a savings to you that is based on your marginal tax rate because your tax owed will be reduced by an amount that is based on your marginal tax rate. For example, your mortgage interest of $5,000 might reduce your taxable income by $5,000. If you are in the 25% marginal tax bracket, this will u201csaveu201d you as much as 5000*0.25 = 1250 dollars.In the same vein, a tax credit (credits reduce your tax owed) saves you a dollar for every dollar of the credit. Some credits are even refundable and can increase your tax refund.The longer discussion below provides a more detailed overview of deductions and credits.LONGER ANSWER:If you look at a Form 1040, you can see it is divided into sections (each section label is bolded in the discussion below). Each section includes deductions (reductions to taxable income), credits (reductions to tax), or payments (reductions to tax owed that can also increase your refund) with common characteristics.These first deductions reduce your AGI (ADJUSTED GROSS INCOME) dollar-for-dollar. They are sometimes called u201cabove-the-lineu201d deductions, because they are taken above line 37 where the AGI is calculated. This is a reduction of taxable income. Their value to you, as an individual taxpayer, increases as your marginal tax bracket increases.IncomeAll tax deductions here are associated with a specific type of income, e.g., rental property expenses can be deducted from rental income. They are usually detailed on another form (called a schedule) related to that income (e.g., business income and deductions on Schedule C transferred to the 1040 line 12); only the net amount shows on the 1040.Adjusted Gross IncomeDeductions here include the Health Savings Account (HSA) and traditional IRA deductions, alimony, and education-related expenses (student loan interest, the tuition and fees deduction), and some others.The next sections include deductions that reduce your TAXABLE INCOME but that may be limited by your AGI or a percentage of your AGI (these are sometimes called u201cbelow-the-lineu201d deductions), They are also a dollar-for-dollar reduction of taxable income. As in the first sections, the value to you, as an individual taxpayer, increases as your marginal tax bracket increases, but many items have income-related limits as well which may offset the value.Tax and CreditsHere is where you find the personal exemptions and the standard/itemized deductions. If you elect to use itemized deductions, there are some that are limited to amounts that exceed a percentage of your AGI: medical (amounts over 10% of income in 2023. as well as job and misc expenses (amounts over 2% of your income in 2017).Once a preliminary tax is calculated we get into the tax credits area - these items reduce your TAXES dollar-for-dollar (much more valuable that the reduction of taxable income). The non-refundable credits in this area can reduce your tax owed to zero (0), but not below. The value to you, the individual taxpayer, does not change with tax bracket, but your AGI may limit or eliminate a credit here.Non-refundable credits include some of the education credits, credit for child care expenses, a credit for retirement savings, the child tax credit, and credits for some energy-saving improvements made to your home.Other Taxes (there are no additional credits in this section)At the end of this section (line 63) we finally get to TAXES OWED.PaymentsThe Refundable Credits in this section are the most valuable, since not only do they reduce taxes still unpaid, but they will be REFUNDED to you if your remaining tax due is below zero. The value to you, the individual taxpayer, does not change with tax bracket, but your AGI may limit or eliminate a credit here.Refundable Credits in this section include the EIC (Earned Income Credit), the additional child tax credit, and the American opportunity credit.