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Deductible has two meanings depending on the context.

With insurance, a deductible is the amount of money the insured pays out-of-pocket before the insurance company pays for the loss.  Deductibles are one way insurance companies lower their premium rates.  By lowering their loss reimbursement costs, they can charge less for the insurance. 

As an example, if a driver with a $500 deductible has an accident that costs $1,200 in car repairs, the driver pays $500 and the insurance company pays $700.  If it only costs $500 to repair the car, the driver pays the entire amount.

However, insurance deductibles also serve another purpose.  By requiring a deductible, insurance companies hope to lessen, or even eliminate, moral hazard, which is a risk someone takes when they don’t have to suffer the consequences of that risk.  For instance, an insured driver with a $1,000 deductible is probably going to drive more carefully than an insured driver with no deductible.

With income taxes, deductible means anything that can be subtracted from income to reduce the amount of income subject to tax.  For businesses, most expenses incurred for business purposes are deductible.  Rent, salaries, legal and accounting fees, and office supplies are examples of deductible expenses. 

Individuals are also allowed certain deductions for things such as home mortgage interest and property taxes, charitable gifts, certain medical expenses, expenses related to investment income and unreimbursed job-related expenses.  All of these deductible items reduce the individual’s adjusted gross income, and ultimately, the owed income tax.

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