Loading the player...

What is a 'Tax Deduction'

A tax deduction is a reduction in tax obligation from a taxpayer's gross income. Tax deductions can be the result of a variety of events that the taxpayer experiences over the course of the year. Tax deductions are removed from taxable income, also known as the adjusted gross income, and thus lowers the taxpayer's overall tax liability.

BREAKING DOWN 'Tax Deduction'

Different regions have different tax codes that allow taxpayers to deduct a variety of expenses from taxable income. Tax codes vary at the federal and state level. Taxation authorities in both the federal and state governments set the tax code standards annually. Tax deductions set by government authorities are often used to entice taxpayers to participate in community service programs for the betterment of society. Taxpayers who are aware of eligible federal and state tax deductions can greatly benefit through both tax deduction and service-oriented activities annually. In the United States, tax deductions are available for federal and state taxes.

Standard Deductions

In the United States, a standard deduction is given on federal taxes for most individuals. The amount of the federal standard deduction varies by year and is based on the taxpayer's filing characteristics. Each state sets its own tax law on standard deductions, with most states also offering a standard deduction at the state tax level. Taxpayers have the option to take a standard deduction or to itemize deductions. If a taxpayer chooses to itemize deductions, then deductions are only taken for any amount above the standard deduction limit.

There are a number of common tax deductions and also many overlooked tax deductions at the federal and state tax level that taxpayers can utilize to lower their taxable income. Common tax deductions include property tax and charitable donations. Homeowners also enjoy some added advantages in regards to tax deductions.

Some uncommon tax deductions include sales tax on personal property purchases and annual tax on personal property, such as a vehicle. Many expenses incurred throughout the year for personal and business reasons may also be eligible for itemized deductions, such as networking expenses, travel expenses, health expenses and some transportation expenses.

Tax Loss Carryforward

One additional type of deduction not included in standard or itemized tax deductions is the deduction for capital losses. A tax loss carryforward is a legal means of rearranging earnings to the benefit of the taxpayer. Individual or business capital losses can be carried forward from previous years. Capital losses of $3,000 are allowed per year.

RELATED TERMS
  1. Schedule A

    Schedule A is a U.S. income tax form that is used by taxpayers ...
  2. Above The Line Deduction

    Above the line deductions are certain types of deductions that ...
  3. Charitable Contributions Deduction

    One of the itemized deductions available for taxpayers who donate ...
  4. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
  5. Schedule L

    A form attached to Form 1040 that is used to calculate the standard ...
  6. IRS Publication 535 - Business ...

    A document published by the Internal Revenue Service (IRS) that ...
Related Articles
  1. Taxes

    9 Ways the New Tax Law Affects Millennials

    The new tax bill, the Tax Cuts and Jobs Act, includes some important changes for Millennials.
  2. Taxes

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  3. Taxes

    7 Expenses You Won't Believe Are Deductible

    Many taxpayers would be surprised to discover some of the things that qualify as legitimate deductions.
  4. Taxes

    Do Your Research Before Claiming These Deductions

    Be sure to read the fine print about any deduction or credit that you’re planning to claim.
  5. Personal Finance

    11 Tax Deductions You Can't Actually Write Off

    These are some of the most common tax write-offs that you can't really claim.
  6. Tech

    Top Tax Tips to Deduct Investment Management Fees

    Investment expenses can be deducted by those who meet three main criteria. Here's what they are and how they work.
  7. Taxes

    Tax Credits And Deductions For Parents

    Your children can help you save on your taxes with these credits and deductions.
  8. Retirement

    Top Tax Tips for Retirees

    Filing your taxes during retirement can be just as time consuming as when you were employed. We have some tips to help you out.
  9. Taxes

    Top Tax Deductions Not to Overlook

    If you want to pay as little as possible in taxes, it's important to learn about all the different credits and deductions available. Here's a primer.
  10. Taxes

    Trump's Paradox: Real Estate CEOs Brace for Change

    Real estate industry executives are expressing fears over Trump carrying out radical tax reform.
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center