Tax Deduction
An expense that reduces taxable income, lowering the amount of tax owed.
What is Tax Deduction?
A tax deduction reduces a taxpayer's taxable income, thereby reducing the amount of tax owed. The tax savings from a deduction equal the deduction amount multiplied by the taxpayer's marginal tax rate. For example, a $1,000 deduction saves $220 in taxes for someone in the 22% bracket. Individuals can take the standard deduction (a flat amount) or itemize deductions — whichever is larger. Common itemized deductions include mortgage interest, state and local taxes (capped at $10,000 under TCJA), charitable contributions, and medical expenses above a threshold. Business deductions reduce business income. Deductions differ from tax credits, which reduce the tax owed dollar-for-dollar rather than reducing taxable income.
Example
For 2025, the standard deduction is $15,000 for single filers and $30,000 for married couples filing jointly. A married couple with $25,000 in itemized deductions would be better off taking the $30,000 standard deduction, saving an additional $5,000 in taxable income (worth $1,100+ in tax savings at the 22% bracket).
Source: IRS — Itemized Deductions