BROWSE

Tax Deduction

Definition

Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. The difference between deductions, exemptions and credit is that deductions and exemptions both reduce taxable income, while credits reduce tax.

What is a 'Tax Deduction'

A tax deduction is a reduction in tax obligation from a taxpayer's gross income. Tax deductions can be the result of a variety of events that the taxpayer experiences over the course of the year. Tax deductions are removed from taxable income, also known as the adjusted gross income, and thus lowers the taxpayer's overall tax liability.

Explaining 'Tax Deduction'

Different regions have different tax codes that allow taxpayers to deduct a variety of expenses from taxable income. Tax codes vary at the federal and state level. Taxation authorities in both the federal and state governments set the tax code standards annually. Tax deductions set by government authorities are often used to entice taxpayers to participate in community service programs for the betterment of society. Taxpayers who are aware of eligible federal and state tax deductions can greatly benefit through both tax deduction and service-oriented activities annually. In the United States, tax deductions are available for federal and state taxes.

Standard Deductions

In the United States, a standard deduction is given on federal taxes for most individuals. The amount of the federal standard deduction varies by year and is based on the taxpayer's filing characteristics. Each state sets its own tax law on standard deductions, with most states also offering a standard deduction at the state tax level. Taxpayers have the option to take a standard deduction or to itemize deductions. If a taxpayer chooses to itemize deductions, then deductions are only taken for any amount above the standard deduction limit.

Tax Loss Carryforward

One additional type of deduction not included in standard or itemized tax deductions is the deduction for capital losses. A tax loss carryforward is a legal means of rearranging earnings to the benefit of the taxpayer. Individual or business capital losses can be carried forward from previous years. Capital losses of $3,000 are allowed per year.


Further Reading


Tax biases to debt finance: Assessing the problem, finding solutions
onlinelibrary.wiley.com [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

Taxation and corporate financial policyTaxation and corporate financial policy
www.sciencedirect.com [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

Tax planning, regulatory capital planning, and financial reporting strategy for commercial banksTax planning, regulatory capital planning, and financial reporting strategy for commercial banks
academic.oup.com [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

Taxation, corporate financial policy, and the cost of capital: A commentTaxation, corporate financial policy, and the cost of capital: A comment
www.sciencedirect.com [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

Tax expenditures for owner-occupied housing: Deductions for property taxes and mortgage interest and the exclusion of imputed rental incomeTax expenditures for owner-occupied housing: Deductions for property taxes and mortgage interest and the exclusion of imputed rental income
pubs.aeaweb.org [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

A multiperiod theory of corporate financial policy under taxationA multiperiod theory of corporate financial policy under taxation
www.jstor.org [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

The economic effects of financial derivatives on corporate tax avoidanceThe economic effects of financial derivatives on corporate tax avoidance
www.sciencedirect.com [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

Corporate taxation, debt financing and foreign-plant ownershipCorporate taxation, debt financing and foreign-plant ownership
www.sciencedirect.com [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

Corporation tax, finance and the cost of capitalCorporation tax, finance and the cost of capital
academic.oup.com [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …

Effects of the Tax Reform Act of 1986 on corporate financial policy and organizational formEffects of the Tax Reform Act of 1986 on corporate financial policy and organizational form
www.nber.org [PDF]
… a parent will prefer debt finance for subsidiaries located in high-tax countries (to deduct interest at a … For instance, governments may impose a cap on the interest rate for tax deductions. Moreover, they could correct the deduction for inflation and allow only real instead of nominal …


Leave a Reply

Your email address will not be published. Required fields are marked *