A tax deduction or a tax-deductible expense directly influences an individual's income tax. A tax deduction is an expense acquired by a taxpayer. The expenses are varying amounts that you can take off - or deduct - of your gross income. A deduction is subtracted from gross income when the taxpayer calculates his or her income taxes.
The upshot of these expenses is that the tax deduction will lower overall taxable income and therefore lower the amount of tax that needs to be paid. The precise amount of tax savings depends on the the tax bracket the individual ends up in after all deductions are made, and can be complicated to determine. For many taxpayers with higher incomes, claiming all eligible tax deductions results in having to pay the alternative minimum tax, and would, in fact, result in a higher total of tax that has to be paid.
A tax credit is a comparable concept, but it is different in that it lowers the amount of tax owed, instead of lowering taxable income. The amount of tax savings using a tax credit does not depend on the rate the taxpayer pays.
A taxpayer must decide whether they want to to itemize deductions or to use the standard deduction. You should itemize deductions if the itemized deductions you qualify for are more than your standard deduction.
Some taxpayers must itemize deductions because they do not qualify for the standard deduction; these include nonresident aliens, dual-status aliens, and persons who file returns for periods of less than 12 months. For more information, refer to IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
"You may be subject to a limit on some of your itemized deductions based on your adjusted gross income, please refer to the Form 1040 Instructions for these limitation amounts," says the IRS. "This limit applies to all itemized deductions except medical and dental expenses, casualty and theft losses, gambling losses, and investment interest."
For more information on itemized deductions and how they compare to using the standard deduction, take a look at your Form 1040 Instructions or Publication 17, Your Federal Income Tax. You can also refer to IRS documents Topic 551 and Publication 501.