Tax Deduction
An expense subtracted from your taxable income, lowering the amount of income that gets taxed.
A tax deduction reduces your tax base, the income on which tax is calculated, rather than the tax itself. Common deductions include retirement contributions, mortgage interest in some countries, and certain work or charitable expenses. Because a deduction only removes income from the calculation, its value depends on your tax rate, unlike a credit, which cuts the tax directly. Stacking legitimate deductions is a key way to lower your bill. Good documentation is essential, as you may need to prove each one.
Example
An $8,000 deduction at a 15% tax rate saves you $1,200, because it removes $8,000 from the income that is taxed.
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Related terms
Tax Base
The amount of income or value on which tax is calculated, after deductions but before credits.
Tax Credit / Allowance
An amount subtracted directly from the tax you owe, reducing your bill euro for euro.
Tax Return
An annual filing that reports your income and deductions to calculate the tax you owe or are refunded.
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VAT (Value Added Tax)
A consumption tax added to the price of most goods and services, ultimately paid by the end consumer.
Insurance Deductible (Excess)
The amount you pay out of pocket on a claim before your insurance starts covering the rest.
Insurance Premium
The recurring amount you pay, monthly or yearly, to keep an insurance policy active.
Insurance Claim
A formal request to your insurer to pay for a covered loss or event.
Liability Insurance
Coverage that pays for harm or damage you cause to other people or their property.