Tax Deduction
Definition
An expense that you can subtract from your taxable income, reducing the amount of income subject to tax. Deductions come in two forms: the standard deduction (a fixed amount based on filing status) and itemized deductions (specific expenses like mortgage interest, state taxes, and charitable donations). Unlike tax credits, deductions reduce your taxable income, not your tax bill directly.
Example
If you're in the 22% tax bracket and claim a $1,000 deduction, you save $220 in taxes (22% × $1,000). A $1,000 tax credit, by contrast, would save you the full $1,000.
Related Terms
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