Tax deduction is 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. 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).
Also, individuals can “itemize” their deductions, which means using all the specific deductions applicable to them, or they can use the standard tax deduction. However, they can only use one or the other. Every U.S. citizen can use the specific tax deduction which applies to them which will vary based on filing status and age. In 2021, single filers have a standard deduction of $12,550, and married filers have a standard deduction of $25,100. There are special categories which will increase the standard deduction such as being head of a household, being over age 64, blind, or for damages resulting from federally declared disaster. A person generally will use the much simpler standard deduction unless their itemized deductions will total more than the standard deduction.
[Last updated in October of 2021 by the Wex Definitions Team]