Definition of a Tax Deduction

• A tax deduction denotes any expense that reduces taxable income. The Internal Revenue Code contains specific rules that allow taxpayers to deduct only certain types of expenses. Generally, expenses must relate to a business or investment activity (as opposed to a personal cost of living) in order for the expenditure to constitute a valid deduction (IRC Sections 162 and 262). Deductions may also include losses, such as those that occur when a taxpayer sells a business asset for less than it's worth.
  
  

Definition of a Tax Cut

• Broadly speaking, the term "tax cut" can refer to just about any reduction in taxes. A tax cut typically takes the form of a legislative act that changes the tax code. Politicians, economists and other government officials oftentimes discuss cutting taxes as a means to win favor with the public and stimulate economic activity. The government may reduce taxes through various different types of cuts, including lowering the tax rate, shrinking the base of income subject to tax or allowing taxpayers to claim additional credits.
  
  

Examples of Tax Deductions

• Common deductions for business expenditures include employee compensation, travel expenses, training and education, insurance costs, advertising, utility bills, office supplies and interest payments. The Internal Revenue Service allows deductions for most business expenses that are ordinary, necessary and reasonable in amount, but beware that many onerous rules exist to prohibit or limit deductibility. In contrast, taxpayers cannot deduct most personal expenditures, although the tax code contains special exceptions for items such as home mortgage interest, medical expenses and charitable contributions.
  
  

Examples of Tax Cuts

• The federal government has approved numerous tax cuts in recent years. For instance, the American Recovery and Reinvestment Act of 2009 included tax credits for homebuyers, families and college students. The Job and Growth Tax Relief Reconciliation Act of 2003 reduced capital gains tax rates, amongst other provisions. In addition, the Economic Growth and Tax Relief Reconciliation Act of 2001 consisted of widespread changes to the tax code, such as lowering the tax rates for individuals.
  
  

Other Relevant Considerations

• Note that while tax deductions and tax cuts affect taxpayers, individuals only have control over what deductions they claim on their tax returns. The government decides when to legislate changes to the tax code that result in tax cuts. Taxpayers have the responsibility to inform themselves about how to take advantage of favorable provisions in the law. For further assistance with navigating this challenging terrain, consult your local tax attorney or certified public accountant.