How Does Depreciation Impact My Tax Refund?
Depreciation refers to the reduction in value of an asset over time, and it can significantly affect your tax refund. When you own a business or rental property, you can deduct the depreciation of the asset from your taxable income. This deduction lowers your taxable income, which can lead to a higher tax refund.
Types of Depreciation
There are various methods of calculating depreciation, such as:
- Straight-Line Depreciation: Equal deduction every year.
- Declining Balance Method: Higher deductions in the early years.
- Units of Production: Based on asset usage.
How It Affects Your Tax Refund
By claiming depreciation, you reduce your overall taxable income, which in turn can decrease your tax liability. A lower tax bill means a larger potential refund. If you’ve paid more in taxes throughout the year than you owe due to your reduced taxable income, you may receive a significant refund.
Example Scenario
If you own rental property valued at $200,000 and claim $10,000 in depreciation, your taxable income decreases by that amount. This could drop you into a lower tax bracket, maximizing your refund.
Consult a Professional
Since tax laws can be complex and vary by jurisdiction, it’s advisable to consult a tax professional to ensure you’re maximizing your deductions and refund potential through accurate depreciation calculations.