An expense that reduces taxable income, lowering the amount of tax owed.
A tax deduction is an expense you can subtract from your gross income to reduce your taxable income, thereby reducing the tax you owe. Deductions can be standard (fixed amount) or itemized (specific expenses like mortgage interest, property taxes, charitable donations). For example, if your gross income is $60,000 and you claim the $13,850 standard deduction (2024), your taxable income is $46,150. Deductions are more valuable than credits dollar-for-dollar: a $1,000 deduction at a 24% tax rate saves $240; a $1,000 credit saves the full $1,000. Understanding deductions is important for tax planning: maximizing deductions reduces taxes owed. Self-employed people and homeowners typically have more deductible expenses than employees.