Deduction

Deduction in tax law (referred to as a tax deductible) means an item or expense that can reduce the taxes a person owes in a given year. A deductible item is subtracted from the total taxable income which can substantially reduce taxes owed by an individual or corporation. Often charitable contributions, other taxes, healthcare costs, capital losses, and many business expenses can be deducted, but what can be deducted and how much varies based on the jurisdiction and whether the tax is for an individual or organization. On the federal level, an alternative tax minimum limits the amount many individuals can deduct from their taxes. For example, if an individual made $300,000 with a tax rate of 25%, the taxes would be $75,000, but if the individual had $50,000 worth of deductibles, that person would only owe $25,000 ($75,000-$50,000=$25,000). However, if there was a minimum tax rate of 10% for individuals with income over $100,000, that person would be required to pay the minimum of $30,000 ($300,000*.1=$30,000).  

[Last updated in July of 2021 by the Wex Definitions Team]