Tax Deduction

Deductions lower the income on which tax is charged. Their value depends on the taxpayer's marginal tax rate, the rate paid on their last unit of income.

For example, a deduction of 1,000 for someone in a 20% tax bracket reduces their tax bill by 200. For someone in a 40% bracket, the same deduction saves 400. This is why deductions tend to be worth more to people with higher incomes.

Common deductions, depending on the country, include contributions to pensions or retirement accounts, certain business or work-related expenses, interest on some types of loans, charitable donations and some medical or education costs.

Deductions are different from tax credits. A deduction reduces the income that is taxed; a credit reduces the tax itself, unit for unit. A 1,000 tax credit saves 1,000 of tax regardless of the taxpayer's rate, making it more valuable than a 1,000 deduction for most people.

Tax rules usually require records to support deductions, and some systems let taxpayers choose between claiming a standard deduction and listing their actual deductions.