What are Deductions in the context of income tax?

Deductions in the context of income tax refer to amounts that lower taxable income. They are specific expenses or allowances that taxpayers can subtract from their total income, thus reducing the amount of income that is subject to taxation. For example, common deductions can include mortgage interest, student loan interest, medical expenses, and charitable contributions. By lowering the taxable income, deductions ultimately reduce the overall tax liability of the taxpayer.

This concept is crucial for tax planning and preparation, as taxpayers seek to maximize deductions to minimize their tax burden. Understanding how deductions work allows individuals to make informed financial decisions throughout the tax year, including the potential impact of expenses they incur.

While other options might mention aspects related to taxation, they do not accurately describe the function and purpose of deductions in tax calculations.