Legal Definitions - deduction

Deduction in tax law means an expense or item that can reduce the amount of taxes a person or organization owes in a given year. When an item is deductible, it is subtracted from the total taxable income, which can significantly reduce the amount of taxes owed.

• Charitable contributions
• Healthcare costs
• Capital losses
• Business expenses

For example, if an individual made $300,000 with a tax rate of 25%, the taxes would be $75,000. But if the individual had $50,000 worth of deductibles, that person would only owe $25,000 ($75,000 - $50,000 = $25,000).

However, there is a minimum tax rate of 10% for individuals with income over $100,000. So, if an individual made $300,000 and had $50,000 worth of deductibles, they would still have to pay the minimum of $30,000 ($300,000 * 0.1 = $30,000).

These examples illustrate how deductions can significantly reduce the amount of taxes owed, but the amount and types of deductions vary based on the jurisdiction and whether the tax is for an individual or organization.