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I'm self employed and I'm curious if there is a way for me to figure out what the "real" cost of an item will be that I will use as a tax deduction.

For example, if I want to buy a $800 computer for my business, will the deduction on my taxes be $200? Or maybe $400? So the real cost would be $600 or $400.

What are the variables that I need to figure that out?

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    Be careful that you aren't being overly optimistic in this; personally I believe it is better to think about things in the same 'pre-tax' dollars as your normal income. After all, when you get a client through your business and charge $500, do you think about that as $500, or $400 after tax?
    – Grade 'Eh' Bacon
    Commented Jul 4, 2017 at 14:10
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    I actually do try and save a portion of money coming in for taxes :). The way I see it, if the government is taking all this money and I can legally keep some and look at it as a discount on getting a nicer replacement for a computer that needs replacing anyway. Why not?
    – Johnny
    Commented Jul 4, 2017 at 20:13
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    A deduction is not a fixed reduction in tax; a deduction reduces the income subject to tax, but how much it reduces your tax depends on the marginal rates applicable which depend on nearly everything about your situation: amounts and often types of other income, other allowable expenses and deductions (sometimes limited or modifed by your income), filing status, and state and sometimes city of residence. However I don't think there's any situation where your Federal marginal rate could be as much as 50%.
    – dave_thompson_085
    Commented Jul 5, 2017 at 1:39
  • Thanks! So I could basically ballpark it by my effective rate from last year? i.e i if my effective rate was 20% then I am saving $20 in taxes on a $100 because I am paying with pretax dollars?
    – Johnny
    Commented Jul 5, 2017 at 14:47
  • Not your effective rate, your marginal rate. My effective rate may be around 12%, but the next $100 is taxed at 25%, and the last $100 was taxed at 15%. Yes, I can plan that closely.
    – JTP - Apologise to Monica ♦
    Commented Jul 6, 2017 at 17:19

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In the simple case, the real cost of the item is the cost you pay minus the taxes you save. The taxes you save are equal to the cost of the item times your marginal tax rate, T. So then the cost would be

COST = PRICE * (1 - T)

You can get a guess of your marginal tax rate by looking up your taxable income (after exemptions and deductions) somewhere the tax brackets are posted.

Of course, there are lots of cases where this won't be exactly right, such as if you are on the edge of a marginal tax bracket or when reducing your taxable income will entitle you to special tax breaks (like the child tax credit). Also it is possible, if you desire, to spread the deduction over several years using depreciation instead of expensing it in the year in which you actually spent the money.

======== Edit =======

TTT makes a good point. Your marginal tax rate actually includes the effects of all applicable taxes: federal, state, local, and possible FICA taxes. For simplicity you can add these tax rates together to get a good approximation. T = Ta + Tb + Tc where Ta, Tb, and Tc are the various taxes you must pay on your income.

Technically any taxes that deduct the cost of other taxes should be multiplied (for example, you often can deduct state taxes from your federal income tax). In that case the math would be

COST = PRICE * (1 - Ta) * (1 - Tb) * (1 - Tc)

But that's getting very specific. Adding the tax rates together is a good approximation.

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    Good answer. I'll add that T is the sum of your federal and state tax rates, and possibly even 15% more than that for FICA taxes depending on how the company is set up.
    – TTT
    Commented Jul 6, 2017 at 15:24

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