Tax deduction - Financial definition
Concise definition of the term tax deduction
A tax deduction is an expense that reduces taxable income, resulting in lower tax liability.
Comprehensive definition of the term tax deduction
In finance, a tax deduction refers to a specific amount or expense that a taxpayer can subtract from their gross income when calculating their taxable income, thus reducing the amount of income subject to taxation. This deduction serves as a significant tool for taxpayers to decrease their tax liability, thereby retaining more of their earnings.
Tax deductions can encompass various expenses, such as mortgage interest payments, charitable contributions, medical expenses exceeding a certain threshold, and business expenses incurred in the pursuit of generating income. Understanding and strategically utilizing available tax deductions can play a crucial role in tax planning for individuals and businesses, allowing them to optimize their financial situation within the confines of the tax code.