Tax deduction

A tax deduction or a tax-deductible expense, is an item which is subtracted from gross income in order to arrive at the taxable income.

Related Topics:
Gross income - Taxable income

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Effectively, the taxpayer pays no income tax on the amount of money he spent on tax-deductible expenses. For example, if an individual earns $50,000 in a year and gives $5,000 to tax-deductible charities, he will end up paying income tax as though he had earned only $45,000 that year. In this way governments encourage certain types of spending such as charitable contributions, home ownership, entrepreneurship, environmental protection, and education.

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Some argue that the existence of the many deductions have severely bloated the tax code and that many deductions are abused and are used in situations that violate the spirit and intended purpose of these deductions. Since powerful corporations and wealthy individuals have access to lawmakers, deductions that favour these groups are common. This is a form of regulator capture. Many of these opponents favour reducing or eliminating many existing tax deductions and having the government encourage or subsidize spending on things like charities, home ownership, and education through means other than tax deductions.

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