What is a deduction that lowers your taxable income called?

A deduction that lowers your taxable income is known as a standard deduction. This deduction is a fixed amount allowed by the IRS that reduces your taxable income, thereby lowering your overall tax liability. It simplifies the tax filing process, as taxpayers can claim this deduction without having to itemize their individual expenses. The standard deduction amount varies based on filing status (single, married filing jointly, head of household, etc.) and may be adjusted annually for inflation.

On the other hand, itemized deductions also lower taxable income but require taxpayers to list and provide documentation for specific expenses, such as medical expenses, mortgage interest, and charitable contributions. An exemption, formerly available prior to tax reforms, was a deduction for each dependent in your household that also reduced taxable income but is no longer in use since the Tax Cuts and Jobs Act. A tax credit, while beneficial, directly reduces the amount of tax owed rather than lowering taxable income itself.