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A tax deduction is a reduction of a taxpayer’s total income that decreases the amount of money used in calculating the tax due. Essentially, it's a break granted by the government that reduces taxes by a percentage that is dependent upon the income bracket of the taxpayer.
A tax credit and a deduction are two different things. For example, if an individual takes advantage of a $1,000 US Dollar (USD) tax deduction on $50,000 USD worth of taxable income, his or her taxable income is reduced to $49,000 USD. The amount of money saved in this scenario would be a small portion of the $1,000 deduction. On the other hand, a tax credit of the same amount would reduce the amount of taxes owed by $1,000 USD. The actual savings realized would be the entire $1,000 USD, since tax credits reduce taxes on a dollar-for-dollar basis, while deductions do not.
In the United States, the amount of taxes due is directly related to an individual’s income bracket. Individuals with lower incomes are generally taxed at a lower rate, and as taxpayer incomes rise, tax-rate percentages rise as well. Fortunately, tax deductions can be used to lower taxable income enough that some taxpayers may fall into lower income brackets and pay a lower percentage of income taxes.
The United States tax system provides for many deductions. Certain ones are available to individuals, while others are intended for businesses. There are many other countries that offer tax deductions to their citizens, as well, although the amount, type, and requirements for deductions vary from country to country.
In the United States, a taxpayer may enjoy a tax deduction based on his or her household makeup. He or she may be able to take one for a spouse, as well as additional deductions for each dependent. If the taxpayer qualifies as the head of the household, according to tax-code standards, he or she can take a deduction for that status as well.
In addition to family-related deductions, there are those related to the payment of interests on certain loans, like mortgages and equity loans. There are also ones for educational expenses, state and local taxes, capital losses, charitable giving, tax advice, and certain moving expenses. Even certain job-search expenses may be deductible.
For businesses, there are also many possible deductions. They may be able to deduct everything from start-up expenses and business-related travel to certain office expenses and the depreciation of business assets. Businesses may also be able to take advantage of ones for business-related meals and entertainment.
Taxpayers can take advantage of tax deductions not only on a federal level, but also on a state or local level. States that charge income taxes offer federally allowed deductions as well as additional, state-specific, deductions, in most cases.