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My understanding is that tax deductions "deduct" from the Adjusted Gross Income value. Is that right?

As a very simple example, let's say I have an AGI of $10 and I owe $3 in taxes (before any itemized deductions). If I'm eligible for a deduction of $1, would that dollar subtract from the amount I OWE in taxes? Or would it subtract from the AGI?

I think it would come from AGI, so I would have a new taxable income of $9 and owe $2.7 dollars in taxes.

Chris W. Rea
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Mike B
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1 Answers1

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Think of it this way. The government has determined that certain expenses are effectively offsets of your income.

So you are allowed to subtract things like mortgage interest, property taxes, charitable contributions, etc from your return. To reduce paperwork and provide equity to folks who do not own homes, there is a "standard deduction" that everyone is entitled to.

There are also "tax credits", which are reductions in your tax liability. Credits are often implemented to encourage certain behaviors... for example, if you make energy-saving modifications to your home, you will get a certain amount of money credited to you.

duffbeer703
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