Tax Deduction

Personal Finance

A tax deduction reduces your taxable income, indirectly lowering your tax bill by the deduction amount times your marginal rate. A $5,000 deduction saves $1,200 at a 24% marginal rate. Above-the-line deductions reduce AGI (better, because they unlock other benefits); below-the-line deductions only reduce taxable income. Common above-the-line: HSA contributions, traditional IRA contributions, student loan interest (up to $2,500), educator expenses. Common below-the-line: charitable giving, mortgage interest, SALT (capped at $10K), medical expenses over 7.5% AGI. Always evaluate deductions in terms of actual tax savings, not face value.