taxes

tax deduction

An expense that can be subtracted from taxable income, reducing the amount of tax owed.

Example

“Her mortgage interest was a tax deduction that reduced her taxable income by $12,000.”

Memory Tip

DEDUCT = subtract. A tax deduction SUBTRACTS from your taxable income.

Why It Matters

Tax deductions directly reduce the amount of income subject to taxation, which means you pay less in taxes overall. Understanding what qualifies as a deduction helps you keep more of your money and make better financial decisions throughout the year.

Common Misconception

Many people confuse tax deductions with tax credits. A deduction reduces your taxable income, while a credit directly reduces the tax you owe dollar-for-dollar, making credits more valuable than deductions of the same amount.

In Practice

If you earn 50,000 dollars in income and have 8,000 dollars in qualifying deductions, your taxable income becomes 42,000 dollars. At a 22 percent tax rate, this saves you 1,760 dollars in taxes compared to having no deductions at all.

Etymology

Tax (government levy) + deduction (subtraction) — amounts subtracted from your taxable income.

Common Misspellings

tax deducktiontax deductointax deducitontaxdeduction

More in taxes

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