What is a tax deduction?

A tax deduction is defined as an expense that is subtracted from gross income, thereby reducing the amount of income that is subject to taxation. This process is essential because it helps taxpayers lower their taxable income, which can result in a lower tax liability.

When individuals or businesses incur expenses that are necessary for earning revenue—such as medical expenses, mortgage interest, or business expenses—these can typically be claimed as deductions. By doing so, they effectively lower the overall amount of income that is taxed, allowing for potentially significant savings on their tax bills.

Understanding this concept is vital for effective tax planning, as it allows both individuals and businesses to maximize their deductions and minimize the taxes they owe legally.