what “tax deductible” actually means, practically speaking

Question

I just don’t get it.

In: 3

Answer 1

Let’s say you earn $50,000 per year.

With no deductions, the IRS will tax you based on earning $50k.

Let’s now say that you earn $50,000 per year and you also donate $3,000 to charity, which is tax deductible.

Now the IRS will only tax you as if you earned $47,000 because that $3,000 was tax deductible.

So tax deductions make it so your income looks smaller come tax time. Which means you pay less taxes.