Deduction Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Deduction, written in plain English, along with examples of how it is used.
What is Deduction?
n. An amount which is subtracted from total income in order to determine taxable income. The expenditure applies to tax payers and is not equivalent to exemptions such as for marital status, age over 65, disability, or number of dependents which reduce the total amount of owed tax.
History and Definition of Deduction
A deduction is a reduction in the amount of income that is subject to taxation. The purpose of this is to lower a taxpayer's tax liability by reducing their taxable income. Deductions are expenses that the taxpayer is allowed to claim that will lower their taxable income, which in turn lowers the amount of taxes owed.
Examples of Deduction
Business expenses: A business owner can deduct expenses that were incurred in order to run the business, such as rent, utilities, and office supplies.
Charitable donations: Taxpayers who make donations to qualified charitable organizations can deduct the amount of their donation from their taxable income.
Mortgage interest: Homeowners can deduct the interest paid on their mortgage from their taxable income.
Medical expenses: Taxpayers can deduct medical expenses that exceed 10% of their adjusted gross income.
Related Legal Terms
Exemption: A type of deduction that reduces the amount of income that is subject to taxation based on specific criteria, such as marital status, age, or number of dependents.
Tax credit: A credit that can be applied against the amount of taxes owed, rather than reducing the amount of taxable income.
Taxable income: The amount of income that is subject to taxation after all deductions and exemptions have been applied.