A deduction is a dollar amount that a taxpayer can take off their taxable income. A lower taxable income means paying less in taxes.
Does the deduction amount equal the dollars I'm going to save on taxes?
No, but here's a rule of thumb you can use to guesstimate how much a deduction will save you. Multiply your deduction amount by your tax bracket percentage. That'll give you roughly your tax savings in dollars. For example, if you're in the 30% bracket and you get a $1000 deduction, that'll be about $300 in savings (1000*.3=300) on taxes owed.
What does this mean for my taxes?
Deductions happen in two phases—before your adjusted gross income is calculated, and after.
Before your adjusted gross income is calculated, you can take a number of deductions depending on your situation. Those might include:
Those deductions become part of your adjusted gross income.
After your adjusted gross income is calculated, you'll move on to deciding on whether you want to take the standard deduction or itemize your deductions. You can choose whichever approach gives you the biggest tax advantage. 90% of taxpayers choose the standard deduction, but everyone's situation is different. Itemized deductions might make sense for you, especially if you have significant expenses related to:
What is the difference between a write-off and a deduction?
No difference. A write-off is slang for a tax deduction.
Which gives you better tax savings, a tax deduction or a tax credit?
A tax credit almost always saves you more than a deduction. But some credits are only available to taxpayers at a certain income level. For example, a high-earning taxpayer who is paying for a college degree may save more by taking the tuition and fees deduction than they would by taking an education credit, which might be reduced because of their income level.
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