If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content

Tax deductions introduction

Understanding what a tax deduction is. Created by Sal Khan.

Want to join the conversation?

  • mr pants teal style avatar for user Wiebke Janßen
    I didn't understand what is the difference between tax deduction and tax credit.
    (15 votes)
    Default Khan Academy avatar avatar for user
    • blobby green style avatar for user merveil3977
      Andrew is right. Another way to see it is this:
      For example....
      a) You have calculated your taxes and you owe $8,000. But wait a minute! You uave a $1,000 tax CREDIT and you apply it to your FINAL bill is= $8,000 minus $1,000 equals $7,000 check to the IRS. You are very happy.
      b) You are calculating your taxes. Your taxable income (salary for example) is $20,000. Your tax bracket is say 20%. During the year you spent $6,000 that the government allows you to DEDUCT. So after you report your salary, you take out the amonts you can deduct from your income: $20,000 minus $6,000 =$14,000. The deduction has helped you decrease the income on which the IRS is going to calculate your taxes. See the difference?
      Now you pay only pay taxes on the $14,000 or 20% times $$14,000 equals $2,800 check to the IRS.
      The difference is that a tax credit is applied to reduce the final bill...... and a tax deduction is applied against your income to decrease it before you calculate your final bill.
      (9 votes)
  • blobby green style avatar for user Reilly Carter
    Could a tax deduction change your bracket? Say, x amount into a bracket, and your tax deduction was x+y. Would that bring you down into a lower bracket?
    (15 votes)
    Default Khan Academy avatar avatar for user
  • leaf green style avatar for user christian.piansay
    If I have more tax deductions than income, will the government give me money? Is that even a possible scenario?
    (6 votes)
    Default Khan Academy avatar avatar for user
    • male robot hal style avatar for user Andrew M
      No, deductions have to be deducted from income. No income, no deduction. However, there are in addition to deductions such a thing as tax credits. A small number of tax credits, including the Earned Income Tax Credit, are "refundable", meaning the government will give you money if your net tax liability is negative.
      (6 votes)
  • duskpin ultimate style avatar for user secret tracy
    Im only in 9th grade, why do we have to learn this so early?
    (8 votes)
    Default Khan Academy avatar avatar for user
  • duskpin ultimate style avatar for user tuannb1997
    Can you explain in more detail again what Tax Deductions are ?
    (4 votes)
    Default Khan Academy avatar avatar for user
  • female robot ada style avatar for user J-CM
    What is the difference between tax deductions and tax credit?
    (5 votes)
    Default Khan Academy avatar avatar for user
  • piceratops ultimate style avatar for user old_english_wolfe
    What sorts of things would cause you to receive tax CREDITS? They sound rather awesome.
    (3 votes)
    Default Khan Academy avatar avatar for user
    • winston baby style avatar for user William Coley
      Tax credits are a useful tool to reduce your tax liability. For an individual taxpayer, the most common credits are the Earned Income Credit, the Child Tax Credit and the education credits.

      An important point to remember when researching tax credits is that they come in two varieties, refundable and non-refundable. A nonrefundable tax credit (ie. the Child Tax Credit) acts similar to a coupon for your tax liability. It reduces your tax liability but not below zero. For example, if your tax liability is $300 and you have a $1,000 child tax credit, your tax liability is lowered to $0. The remaining $700 is not used.

      A refundable credit increases your withholding. An example of this would be the Earned Income Credit. To continue from my previous example, let's say you have a $300 tax liability, a $1,000 Child Tax Credit, and $5,000 Earned Income Credit. The $1,000 Child Tax Credit will reduce your tax liability to $0, but the remaining $700 cannot be used. Even though your tax liability is zero, the Earned Income Credit will increase your refund by $5,000.

      If you should have any other questions on tax credits, I encourage you to reach out to an Enrolled Agent in the area. They are licensed by the IRS and regarded as the leading tax professionals in the country.
      (3 votes)
  • leaf green style avatar for user George
    Just to be clear it is as if you are subtracting the interest twice? Because in order to come up with your gross income you would have taken away what you paid in interest already. So what Sal is saying here is now you subtract it again?
    (3 votes)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user cchang0624
    Why do governments introduce tax deduction? Doesn't it mean that the government will have less income in the year which is not beneficial to the government?
    (3 votes)
    Default Khan Academy avatar avatar for user
  • leaf yellow style avatar for user Les
    So when someone donates to charities, are their actual tax amounts going down (tax credit) or is it that the taxable income has gone down?
    (2 votes)
    Default Khan Academy avatar avatar for user

Video transcript

In this video, I now want to cover one of the other most misunderstood ideas when people think about taxes, and that's the idea of deductions. So, one of the most common tax deductions is the deduction you get on interest on your mortgage. So let's say that this year on my mortgage-- of the part of my mortgage that is interest, let's say it's $10,000. It is $10,000 on my interest on my mortgage. And you'll either already know or someone might tell you that this is tax deductible. And the misconception that I've seen many, many times is that people think that since this is a tax deduction, that this $10,000 should be deducted from their taxes. So in the previous example, we showed the scenario where this person making $100,000 would have to pay $21,720 in taxes. And so based on that misconception, they would say, OK, I get a $10,000 tax deduction, now I would pay $11,720. And that is wrong. The deduction doesn't happen from the taxes you pay. The deduction happens from your stated income. So if this person right here had a $10,000 tax deduction, instead of saying that they made $100,000 that year, they would say that they made $90,000. So once again, the deduction does not come directly from the taxes. That would be a tax credit. The deduction comes from the reported income. So what would be the actual effect on the taxes? Well, we just have to look at this $90,000. It still kind of shows up in that top bracket. So the real difference is just going to be this $10,000 difference. Before, he was paying 28% on this $10,000. Now he won't have to pay 28% on that incremental $10,000. Another way to think about it, instead of this being 17,750 times 28%, it would now be 7,750. Because the reported income is now only $90,000. So the actual number-- we can get our calculator out and just calculate it. There's two ways you could do it. You could just say, look, if I'm going to have spent 10,000-- if my income is deducted by 10,000, and I'm going to save 28% on that 10,000, you could just subtract 2,800 from this. But just to show you how it'll all work, that it all works out to the same thing, let's just go through the same calculation again. We have 7,750 times 0.28 plus 48,300 times 0.25 plus 25,600 times 0.15 plus $835. And it's $18,920. So now the taxes will be $18,920. And as you can see, the difference between the old and the new is exactly $2,800 because that's essentially what the amount that we would be taxed on that $10,000 if we had made that much money. Anyway, hopefully that doesn't confuse you too much.