What is Tax Deduction?

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What is Tax Deduction?
A tax deduction is a decrease offered by the government to reduce taxpayer’s total income on which he pays the tax due. The reduction of the taxes is based on the income bracket of the taxpayer. Ultimately, a tax deduction lowers the tax liability as a whole.

For instance, when a taxpayer utilizes a $1500 deduction on his income of $100000, then his taxable income is reduced to $98500. Often tax deductions and tax credits are mistakenly used interchangeably. However, in the case of a tax credit, it would reduce the amount of taxes owed by $1500. The difference is that tax credit reduces taxes on dollar-for-dollar basis.

In the United States, one’s income bracket decides the amount of taxes owed to the government. The tax rate is directly proportional to the income, lower for lower income and higher for higher ones. Generally people use tax deductions, to reduce their income bracket and pay a lower percentage of income tax. The amount of deductions offered differs from country to country. Some of them are applicable to individuals and some to businesses only.

In the United States., taxpayers may partake of different deductions based on his or her family position. If the taxpayer qualifies as the head of the family, the taxpayer is entitled to additional deductions over a single taxpayer. Citizens also enjoy a tax deduction for their spouses as well as for each dependent.

In addition to these, citizens enjoy tax deductions on expenses like loans, educational expense, state and local taxes, capital losses, charitable giving, tax advice and many more. There are some special business related deductions like expenses involved in start-up, travel related and depreciating asset expenses. These deductions cannot only be used on federal level, but also on state and local level.

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