Tax Deductions
Definition
Tax deductions are expenses that taxpayers can subtract from their gross income to reduce their taxable income and overall tax liability.
Explanation
Tax deductions reduce the amount of income subject to tax. Taxpayers can choose between the standard deduction (a fixed amount based on filing status) or itemizing deductions (listing eligible expenses). Common deductions include mortgage interest, charitable contributions, medical expenses, and state and local taxes.
For businesses, virtually all ordinary and necessary business expenses are deductible. Understanding available deductions is essential for tax planning and minimizing tax liability within the bounds of the law.
Example
A taxpayer in the 22% bracket who claims a $1,000 tax deduction saves $220 in taxes.