What is a Tax Deduction?

by Nikia Owens, Ph.D.

Photo by Nataliya Vaitkevich

A tax deduction is an expense or payment that can be subtracted from your gross income when calculating your taxable income under tax law. Essentially, it allows individuals or businesses to subtract certain expenses from their total income before calculating the amount of tax they owe. Common tax deductions include mortgage interest, charitable contributions, medical expenses above a certain threshold, and state/local taxes paid.

Tax deductions help reduce your taxable income, which in turn lowers the actual amount of tax you have to pay. So they provide a financial benefit on your tax bill.

The relationship between tax deductions and Pennsylvania state tax rates is important for understanding how much tax you might owe if you’re based in Philadelphia. The state of Pennsylvania has a simple, flat personal income tax rate of 3.07% as of 2023, meaning all taxable income is taxed at this rate, regardless of the income level.

So, while Pennsylvania has a single flat tax rate, taking qualifying deductions still results in tax savings and a lower overall tax liability for Pennsylvania taxpayers. The more eligible deductions you claim, the more taxable income gets reduced and the lower your final Pennsylvania state income tax payment will generally be. The availability of state tax deductions still provides financial relief despite the flat rate tax structure.

However, it’s important to note that federal taxes have a variety of deductions available (such as those for mortgage interest, state and local taxes, and charitable donations), and Pennsylvania’s state tax system offers fewer deductions. For instance, the state allows for some specific deductions like unreimbursed business expenses, contributions to medical savings accounts, and certain other items, but the scope is more limited compared to federal deductions.

This means that while you can reduce your federal taxable income significantly through various deductions, the impact on your Pennsylvania state taxes may be less substantial. However, understanding both federal and state deductions is crucial for accurate tax planning and ensuring you’re not paying more than necessary.

If this sounds like a lot to wrap your head around, Campaign for Working Families can help you navigate these tax rates and applicable laws with IRS-verified professional tax preparers for Free. Indeed, the IRS makes an investment in CWF so they can provide these services for low-middle income earners and senior citizens. Contact CWF today for more information or visit cwfphilly.org.

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