Deduction
What does "Deduction" mean in law?
A deduction is an amount that Congress permits taxpayers to subtract from gross income or AGI, thereby reducing the tax base against which rates are applied. Deductions are a matter of legislative grace, meaning the taxpayer bears the burden of proving entitlement, and any ambiguity is resolved against the taxpayer. Key categories include business deductions under IRC Section 162 (ordinary and necessary business expenses), investment-related deductions under Section 212, and personal deductions such as mortgage interest (Section 163), charitable contributions (Section 170), and state and local taxes (Section 164). Unlike exclusions, which keep amounts out of gross income entirely, deductions reduce income that has already been included.
Definition
A deduction is an amount that Congress permits taxpayers to subtract from gross income or AGI, thereby reducing the tax base against which rates are applied. Deductions are a matter of legislative grace, meaning the taxpayer bears the burden of proving entitlement, and any ambiguity is resolved against the taxpayer. Key categories include business deductions under IRC Section 162 (ordinary and necessary business expenses), investment-related deductions under Section 212, and personal deductions such as mortgage interest (Section 163), charitable contributions (Section 170), and state and local taxes (Section 164). Unlike exclusions, which keep amounts out of gross income entirely, deductions reduce income that has already been included.
Example
A solo-practice attorney deducts $15,000 in office rent under IRC Section 162 as an ordinary and necessary business expense, reducing her gross income dollar-for-dollar by that amount.