A tax deduction is an expense that taxpayers can subtract from their gross income to reduce the amount of income that is subject to taxation. Deductions lower taxable income, which in turn reduces the overall tax liability. Unlike a tax credit, which directly reduces the amount of tax owed, a tax deduction lowers the income on which taxes are calculated.
Common tax deductions include:
- Standard deduction: A set dollar amount that taxpayers can deduct from their income, based on filing status. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.
- Itemized deductions: Specific expenses that taxpayers can choose to deduct instead of taking the standard deduction. Common itemized deductions include mortgage interest, charitable contributions, and medical expenses.
Taxpayers should decide whether to take the standard deduction or itemize deductions based on which option provides the greater tax benefit. Keeping detailed records and receipts throughout the year ensures that taxpayers can claim all eligible deductions and minimize their tax liability.