Tax deductions are special provisions in the tax code that allow individuals and businesses to reduce their taxable income. They are expenses or transactions that can be subtracted from a person's total income, thereby lowering the amount of income that is subject to taxation.
Tax deductions aim to encourage certain behaviors or provide relief to individuals and businesses by reducing their tax liability. They can take various forms, such as deductions for business expenses, charitable contributions, mortgage interest payments, student loan interest, medical expenses, and retirement contributions, a**** others.
When filing their tax returns, taxpayers can choose between taking the standard deduction provided by the government or itemizing their deductions. If the total amount of their itemized deductions exceeds the standard deduction, it is more beneficial to itemize, as it can result in a lower taxable income and ultimately a lower tax bill.
It is important to note that tax deductions differ from tax credits. While deductions reduce a person's taxable income, tax credits directly reduce the amount of tax owed.
In summary, tax deductions are provisions in the tax code that allow individuals and businesses to reduce their taxable income by subtracting certain expenses or transactions. They aim to incentivize certain behaviors or provide relief to taxpayers by lowering their tax liability. Deductions can be taken through itemizing expenses or taking the standard deduction, and they differ from tax credits which directly reduce the amount of tax owed.