What is a Tax Deduction?

Nicole Madison
Nicole Madison
Education expenses may be deductible.
Education expenses may be deductible.

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.

Business travel may be deductible.
Business travel may be deductible.

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 interest paid on home mortgages may be deductible.
The interest paid on home mortgages may be deductible.

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.

Donations to a tax-exempt charity are tax deductible.
Donations to a tax-exempt charity are tax deductible.

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.

Nicole Madison
Nicole Madison

Nicole’s thirst for knowledge inspired her to become a SmartCapitalMind writer, and she focuses primarily on topics such as homeschooling, parenting, health, science, and business. When not writing or spending time with her four children, Nicole enjoys reading, camping, and going to the beach.

Nicole Madison
Nicole Madison

Nicole’s thirst for knowledge inspired her to become a SmartCapitalMind writer, and she focuses primarily on topics such as homeschooling, parenting, health, science, and business. When not writing or spending time with her four children, Nicole enjoys reading, camping, and going to the beach.

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Discussion Comments

anon144934

From what I read in this article, I found out that you could benefit from tax deductions even if you're an individual, not only if you run a business. You could solicit a tax reduction for a spouse and for another dependent. Interesting piece of news for me.

After digging a bit, I also become aware that you could solicit tax deductions as a freelance writer. I spend a few hours a day working for an online company at home. Does this mean that I could include in the solicitation for tax reductions a computer, paper and printer, even some furniture?

Do I have to prove that I use my computer, for example, 50 percent and more for business? How will I prove that? I've read some articles, but I'm still confuse about everything.

Babalaas

@ Dfrum32- There are some situations that will make an audit more likely. You should definitely take all your allowable tax deductions, but as you say, record keeping is key.

Large charitable deductions relative to your tax bracket can trigger an audit. The IRS is also more likely to audit those in higher tax brackets. For those who work from home, deductions taken for home offices raise a red flag, so be sure that you follow the rules for home office deductions very carefully.

The accuracy of your deductions is also important. Do not round up to the nearest ten dollar amount, only round to the nearest dollar. Even numbered deductions are rare, and numerous even numbered deductions (say $120, $2000, $1200) will warrant review.

dfrum32

If you don't want to get audited by the IRS, make sure that you have documentation for all of your deductions. Don't take deductions that wouldn't stand up in an audit because these things can also trigger an audit.

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    • Education expenses may be deductible.
      By: Intellistudies
      Education expenses may be deductible.
    • Business travel may be deductible.
      By: pressmaster
      Business travel may be deductible.
    • The interest paid on home mortgages may be deductible.
      By: pics721
      The interest paid on home mortgages may be deductible.
    • Donations to a tax-exempt charity are tax deductible.
      By: Monkey Business
      Donations to a tax-exempt charity are tax deductible.
    • Tax deductions are allowances that help individuals and businesses reduce their tax liability for certain expenditures.
      By: didden
      Tax deductions are allowances that help individuals and businesses reduce their tax liability for certain expenditures.
    • Office furniture might be used as a tax deduction for people who work from home.
      By: terex
      Office furniture might be used as a tax deduction for people who work from home.
    • People who work from home often deduct office supplies as a business expense on their taxes.
      By: fusolino
      People who work from home often deduct office supplies as a business expense on their taxes.
    • Some job-related moving expenses are tax deductible.
      By: Africa Studio
      Some job-related moving expenses are tax deductible.