Tax deduction
Also called: tax write-off
A tax deduction is an amount subtracted from your income before tax is calculated, lowering your taxable income. What it saves depends on the rate those dollars would have been taxed at, so it is worth less than its face amount.
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How it works
Deductions come in two broad groups. The standard deduction and itemized deductions are alternatives: you take either the flat amount for your filing status or the total of your itemized expenses, such as home mortgage interest. Other deductions, such as eligible student loan interest or deductible traditional IRA contributions, can be claimed whether or not you itemize, each under its own rules.
A deduction’s value equals the deducted dollars multiplied by the rate they would otherwise have been taxed at. The same deduction is therefore worth more in a higher bracket, and one that pulls income down across a bracket line is valued partly at each rate. An itemized expense adds nothing if your itemized total stays below your standard deduction, because the standard amount would be larger.
A deduction is not a discount on the purchase itself. Paying $500 for a fully deductible expense when your marginal rate is 12% still leaves an after-tax cost of $500 − $60 = $440. Eligibility depends on the expense, the tax year and your circumstances, so receipts and records matter when you claim one.
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Sources and further reading
Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.