Tax deduction facts for kids

A tax deduction is a special way to lower the amount of money you have to pay taxes on. Think of it like this: if you earn money, the government usually takes a part of it as tax. A tax deduction helps reduce the amount of your earnings that the government counts for taxes.

Tax deductions and tax credits both help you pay less in taxes, but they work differently. A tax deduction lowers your total income that is taxed. A tax credit directly reduces the amount of tax you owe.

What is a Tax Deduction?

A tax deduction is subtracted from your total income before taxes are calculated. This total income is often called your gross income. When you subtract deductions, you get your taxable income. This is the smaller amount of money that the government actually taxes.

How Deductions Work

Let's say a couple earned $60,000 in a year. If they paid $10,000 in interest on their mortgage (a loan for their home), that $10,000 could be a tax deduction. This means their income for tax purposes would drop to $50,000. They would then pay taxes on $50,000 instead of $60,000.

The amount of money you save with a tax deduction depends on your tax rate. Your tax rate is the percentage of your income that goes to taxes. This rate can change based on how much money you earn. People with higher incomes often have a higher tax rate, so a deduction might save them more money than someone with a lower income.

Deductions vs. Tax Credits

• Tax Deduction: Lowers the amount of your income that is taxed. The actual money you save depends on your tax rate.
• Tax Credit: Directly reduces the amount of tax you owe. For example, a $100 tax credit means you pay $100 less in taxes, no matter your income or tax rate.

In countries like the United States, there are many different kinds of tax deductions. Some are only for people who earn a certain amount of money. Others are for specific types of businesses or industries.

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  A robot representing financial concepts.