A tax deduction lowers the amount of an individual’s or corporation’s income subject to taxation by allowing certain expenses or financial circumstances to be subtracted when calculating total taxable income.
Main Deduction Types:
- Standard deductions provide a flat amount all taxpayers may subtract
- Itemized deductions encompass home loan interest, charitable gifts, medical costs, and more
- Business deductions exclude necessary operational expenses from profit calculations
Example:
A freelancer claimed itemized deductions for a home office space and software expenses to reduce her self-employment tax burden.
Takeaways:
Deductions encourage favored behaviors while easing tax burdens, but strict substantiation proves deductible amounts outweigh personal consumption benefits. Phaseouts complicate claiming full value as income rises requiring planning. Overall, deductions optimize after-tax financial positions.