A tax deduction is an expense or contribution that reduces your taxable income, lowering the amount of income subject to tax. Deductions don’t directly reduce the tax you owe but decrease the income on which your tax is calculated.
Examples
- RRSP contributions: Reduce taxable income and may lead to a tax refund.
- Childcare expenses: Allow families to deduct eligible costs for child care.
- Business expenses: Self-employed individuals can deduct costs related to running their business.
Why It Matters
By lowering taxable income, deductions reduce how much tax you pay indirectly. They are valuable tools for tax planning and maximizing after-tax income.
Final Thoughts
Understanding and using tax deductions effectively can lead to significant tax savings. They are different from tax credits, which directly reduce the amount of tax owed.