A tax deduction is an element you can subtract from your taxable income to reduce the amount of tax you owe. You can choose the standard deduction (a one-time deduction for a fixed amount) or itemize the deductions in Schedule A of your income tax return. Tax deductions reduce the amount of tax you owe by allowing you to subtract certain expenses from your income. By effectively reducing your taxable income, deductions reduce the amount of tax you owe.
A tax deduction reduces the amount of income that is subject to tax by the federal and state governments. All federal taxpayers have the right to choose the standard deduction or to itemize a range of deductions, thus reducing their taxable income. One of the most common is the state and local corporate tax deduction, which allows companies to deduct taxes already paid to state governments from their revenues. A tax deduction may lower your taxable income slightly on the tax table, but a tax credit lowers the tax you owe, dollar for dollar.
Most of the 41 states that impose income taxes follow the format of federal forms as faithfully as possible. If they choose to itemize, taxpayers usually request a mortgage interest deduction, a state and local tax deduction, and a deduction for charitable contributions. This means that the contribution will lower your taxable income, even if you choose to take the standard deduction instead of itemizing it. About a third of taxpayers itemize deductions on their federal tax returns, and nearly everyone who details the details claims a deduction for local and state taxes paid.
The more expenses you have that are eligible for the deduction, the lower your tax bill and, if amounts are withheld from your check for income taxes, they can increase the amount of your refund check. In any case, it's worth reading your state's tax forms carefully to see if there are additional deductions you might qualify for. A particularly valuable deduction for self-employed individuals defers taxes on their contributions to retirement plans. Both the standard deduction and itemized deductions will reduce adjusted gross income (AGI) and reduce taxes owed, but the choice of which one to use depends on the taxpayer's specific circumstances.
When it's time to prepare your tax return, keep in mind that the government allows you to deduct some common expenses, such as mortgage interest and property taxes on your home, donations made to charities, and medical and dental expenses. A tax deduction is a part of taxable income that can be excluded from taxation when certain conditions are met, while a tax exemption constitutes income that is not subject to tax in the first place.