A tax deduction lowers a taxpayer's tax liability by reducing the amount of taxable income.
Why It's Important
You have probably heard a lot about tax deductions and tax credits during tax season, so I wanted to debunk what they are. I covered tax credits so now it's all about deductions. Deductions are usually expenses that you pay throughout the year that can be subtracted from your gross income.
All taxpayers can either take the standard deduction or itemize their deductions. You can't do both! If itemizing your deductions gives you a bigger tax break, that's the route you would want to go!
Some examples of deductions would be charitable donations and business expenses. Let's look at a simplified example:
Business Expenses: $2,000
Taxable income (from subtracting all deductions): $27,700
Uncle Sam will only tax $27,700 of the $30,000 I made.
I highly recommend talking to a tax professional if you have a complicated tax situation. They are experts at finding hidden deductions and credits!
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