taxdeductibility

Tax deductibility is the extent to which a payment or expense can reduce a taxpayer’s taxable income. A deduction lowers the amount of income that is subject to tax, rather than directly reducing the tax bill. After calculating adjusted gross income, deductions are applied to arrive at taxable income, which is then taxed according to the applicable brackets. Because deductions operate on income, their value depends on the taxpayer’s marginal tax rate.

Deductions are typically categorized as standard deductions or itemized deductions. The standard deduction is a fixed amount, while itemized deductions are specific expenses such as charitable contributions, mortgage interest, state and local taxes, and unreimbursed medical expenses, subject to rules and limits. Businesses can deduct ordinary and necessary expenses, depreciation of assets, and certain travel costs. Some deductions are allowed above the line, reducing gross income even if the taxpayer does not itemize.

It is important to distinguish deductions from tax credits. Deductions lower taxable income; credits reduce the tax liability directly, and some credits are refundable.

Rules governing deductibility vary by jurisdiction and may involve caps, floors, phaseouts, documentation requirements, and anti-abuse provisions. Taxpayers must retain records to substantiate deductible claims. Tax planning often revolves around timing, categorization, and optimization of deductions within the applicable rules. Because deductibility rules vary, individuals and businesses should consult current tax guidance.