Definition
A tax deduction reduces the amount of income subject to tax.
How It Works
Deductions lower taxable income, so their value equals the deduction amount times your marginal rate. They come in two forms: above-the-line adjustments that reduce AGI, and below-the-line deductions taken as either the standard or itemized deduction.
Example
For someone in the 35% bracket, a $10,000 deduction saves $3,500 in tax.
Who It Applies To
Every taxpayer.
Watch-Outs
A deduction is worth more to a high earner than a low earner because the savings scale with the marginal rate.
