Definition

A deduction reduces your taxable income, so its value depends on your marginal tax rate — a $1,000 deduction saves $240 for someone in the 24% bracket. This differs from a credit, which cuts tax owed dollar-for-dollar. Common deductions include retirement contributions, HSA contributions, and itemized expenses.

1. Tax Credit

   A dollar-for-dollar reduction of the tax you owe.
2. Standard Deduction

   A flat amount that reduces taxable income without itemizing.
3. Marginal Tax Rate

   The tax rate applied to your next dollar of income.