What are tax deductions?

Tax deductions refer to expenses that individuals can subtract from their gross income to arrive at their taxable income. This process effectively lowers the amount of income that is subject to taxation. By reducing the taxable income, taxpayers may owe less in taxes, potentially lowering their overall tax bill.

For example, common tax deductions include expenses such as mortgage interest, charitable contributions, and certain medical costs. These deductions help to account for costs incurred during the year that can be categorized as necessary living expenses, thus providing some relief in several taxpayers' financial burdens.

The other options do not accurately describe tax deductions. Late payment penalties or payments to tax officials would not reduce a taxpayer's liability; they only add costs. Financial incentives that increase tax obligations directly contradict the purpose of deductions, which is to reduce tax liabilities. Lastly, income that is not taxed is often referred to as tax-exempt or non-taxable income, which is a different concept altogether from deductions that specifically reduce taxable income.