What is the impact of a tax deduction on taxable income?

A tax deduction decreases taxable income, which means that it reduces the amount of income that is subject to taxation. When you claim a deduction, you essentially lower your overall taxable income by the amount of the deduction. This reduction can lead to a lower tax liability, as you're taxed on a smaller amount of income.

For example, if your total income is $50,000 and you have $5,000 in deductions, your taxable income would be reduced to $45,000. This can result in you owing less tax because the deductions effectively lower the baseline amount from which your taxes are calculated.

Understanding this concept is critical for effectively managing tax liability and maximizing tax benefits, as strategic use of deductions can significantly impact financial outcomes.