What Is a Tax Deduction? Definition, vs. Credit, Example

What Is a Tax Deduction?

By Matthew Frankel, CFP – Updated Nov 10, 2025 at 12:04 AM EST

Key Points

Tax deductions reduce your taxable income, potentially lowering what you owe.
Itemizing deductions can outweigh the standard deduction if summed deductions exceed it.
Tax credits directly decrease your tax bill, unlike deductions which reduce taxable income.
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To say that the United States tax code is complicated would be an understatement. It is almost 7,000 pages, and many of the tax laws we must follow have quite a bit of a gray area in their interpretation.

However, one of the silver linings to the thousands of pages of tax code is that there are numerous tax deductions and tax credits Americans can use. In this article, we'll cover the basics of tax deductions, how they work, and how they differ from credits and provide an example of how they might work in the real world.

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Safety scissors lying next to the word Taxes. — Image source: Getty Images.

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The Tax Cuts and Jobs Act roughly doubled the standard deduction, beginning with the 2018 tax year, and reduced the number of available deductions. As a result, the vast majority of taxpayers are better off with the standard deduction. The "big four" itemizable deductions are:

Mortgage interest on as much as $750,000 in qualified personal residence debt
Charitable contributions
State and local taxes, with a limit of $10,000 per year
Medical expenses exceeding 7.5% of adjusted gross income (AGI)

For most people, if these four deductions add up to more than your standard deduction amount, itemizing could be worth it. If not, you're probably better off taking the standard deduction.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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