What are Tax Deductions?
A tax deduction is defined as a tax deductible expense paid by a taxpayer. This deduction is subtracted from gross income, thereby lowering the taxpayer’s taxable income and overall tax liability. The federal income tax system in the United States is both a tiered and progressive tax. There are a total of six federal income tax brackets ranging from 10 – 35%. As income increases, a taxpayer may find themselves in progressively higher tax brackets – and they pay a higher percentage of income tax on each incremental dollar earned. Since tax deductions lower gross income, each dollar deducted results in a percentage savings to the taxpayer. For example, a person in the 10% tax bracket will save 10 cents for every deductible dollar they can take on their income tax return. While someone in the 35% tax bracket will save 35 cents for every dollar of deduction found.
