A tax deduction is an expense incurred by a
taxpayer that is subtracted from gross income or adjusted gross income. If
it is subtracted directly from
gross income it is an
above-the-line tax deduction. If it is subtracted from
adjusted gross
income it is a
below-the-line tax deduction. The value of a tax deduction (i.e.
reduced tax liability)
is dependant on the taxpayer's
tax bracket. The
tax bracket along with gross income are use to determine a taxpayer's
effective tax rate.
A tax deduction is similar to a
tax credit, except a
tax credit is paid dollar for dollar.
