Back to Glossary
A tax deduction is an amount that can be subtracted from your taxable income, which lowers the amount of tax you owe.
In Depth
Tax deductions reduce your adjusted gross income (AGI), meaning less of your income is subject to taxes. This can result in a lower tax bill or a larger tax refund. Common deductions include contributions to traditional IRAs, student loan interest, and certain itemized deductions like mortgage interest or state and local taxes. You typically choose between taking the standard deduction or itemizing your deductions, whichever results in a lower tax liability.
Example
If you contribute $3,000 to a traditional IRA and your marginal tax rate is 20%, that deduction could save you $600 in taxes.