Deduction
dih-DUK-shun
/dɪˈdʌkʃən/
The action of deducting or subtracting something. In finance, an amount that is or can be deducted from something, especially from taxable income or from a paycheck.
Deductions reduce the amount of income subject to tax, thereby lowering the overall tax burden. They are distinct from 'credits,' which directly reduce the tax owed.
The story behind the word. The word 'deduction' comes from the Latin verb 'deducere,' which means 'to lead down' or 'to derive.' In the context of finance, it's about 'leading down' or subtracting an amount from a total. Think of it as an amount that is 'led away' from your gross income before calculating your tax.
Word relationships
- Subtraction: General mathematical term for taking one quantity away from another.
- Allowance: A sum of money paid regularly or an amount permitted, can sometimes refer to a tax allowance.
- Reduction: The action or fact of making something smaller or less in amount, degree, or size.
- Addition: The process or skill of calculating the total of two or more numbers or amounts.
- Increase: A rise in the amount, number, or size of something.
Commonly confused with
- Tax Credit: A 'deduction' reduces your taxable income, while a 'tax credit' directly reduces the amount of tax you owe.
Word family
- deduct (verb): To subtract or take away (an amount) from a total.
- deductible (adjective): Able to be deducted, especially from taxable income.
Collocations
- tax deduction
- itemized deduction
- standard deduction
- payroll deduction
- allowable deduction
Example sentences
- "Many charitable contributions are eligible for a tax deduction, lowering your taxable income." Tax filing advice.
- "After all the deductions for health insurance and retirement, her net pay was significantly less than her gross salary." Reviewing a pay stub.
Memory hook
A DEDUCTION 'DUCKs' out of your taxable income, making it smaller. DEDUCTION = DUCK out
When not to use
Do not confuse 'deduction' with 'credit.' A deduction reduces your taxable income, while a credit reduces your actual tax bill dollar-for-dollar.
Fun facts
- The mathematical sense of 'deduction' (reasoning from general to specific) also shares the same Latin root, implying 'leading down' to a specific conclusion.
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