What is a tax deduction?

A tax deduction is an expense that can be subtracted from gross income, reducing the total amount of income that is subject to taxation. This process lowers an individual’s taxable income, which in turn can decrease the total tax liability owed to the government. For instance, if someone has a gross income of $50,000 and qualifies for $10,000 in tax deductions, their taxable income would effectively be $40,000. By doing this, taxpayers can take advantage of various allowable expenses, such as mortgage interest, property taxes, and certain business expenses, ultimately leading to potential savings on their tax bill.

The other options refer to concepts that are not aligned with the definition of a tax deduction. For example, an expense that increases taxable income contradicts the fundamental purpose of a deduction. Similarly, an exemption refers to income that is free from tax rather than a deductible expense. Lastly, an additional fee applied to investments typically relates to costs associated with investment management and does not pertain to deductions affecting taxable income directly.