Describes an expense, cost, or contribution that cannot be subtracted from taxable income to reduce one's tax liability. The amount paid or spent is not eligible for a tax deduction, meaning it won't lower the overall tax burden. This often applies to personal expenses, certain types of charitable donations, or items specifically excluded by tax regulations. Whether an expense is deductible or non-deductible significantly impacts an individual's or business's tax strategy and overall financial planning.
Non-deductible meaning with examples
- Medical expenses, if they do not exceed a specific percentage of your adjusted gross income, are generally non-deductible. This means you can't subtract the full amount spent from your taxable income, and you must meet a threshold. Always consult a tax professional to understand the limits. Failing to understand this may lead to overpaying in taxes.
- While contributions to traditional 401(k)s and IRAs are often tax-deductible, contributions to Roth accounts are usually non-deductible. The benefit with Roth accounts is that qualified withdrawals in retirement are tax-free. Knowing whether to use a deduction or get it later in retirement is important for financial planning.
- Certain personal expenses, such as commuting costs to and from work, are generally non-deductible. There are exceptions if the travel is related to your business duties. Therefore, be cautious with those claims. Always keep record for substantiation.
- If you make charitable contributions to organizations that are not IRS-approved, or if the contributions exceed certain limits, these donations may be considered non-deductible. Always check IRS guidelines to ensure your gift qualifies for a tax benefit. There are guidelines for different types of contributions.