What is a tax deduction?

A tax deduction is defined as any expense that can reduce taxable income. When individuals or businesses incur certain types of expenses that the tax code recognizes as deductible, they can subtract these expenses from their total income, effectively lowering the amount of income that is subject to taxation. This process can result in a lower tax liability, allowing taxpayers to retain more of their earnings.

Understanding tax deductions is vital for effective financial planning, as they can significantly influence the final amount of tax owed. Common examples include deductions for mortgage interest, charitable contributions, and certain medical expenses. By utilizing tax deductions, individuals can strategically manage their finances and potentially save money on taxes.

The other options do not accurately describe a tax deduction; for instance, a specific tax rate applied to high incomes is called a tax bracket, not a deduction. A type of investment that decreases taxes is more of a tax credit or strategy rather than a deduction itself, and an additional fee charged by the IRS is not relevant to the definition of a tax deduction.