Key Term

What is Tax Deduction?

Definition

A tax deduction is a reduction in taxable income granted by the Internal Revenue Service (IRS) for certain qualifying charitable contributions. When taxpayers make donations to IRS-approved charitable organizations, they can subtract the value of these contributions from their taxable income, effectively lowering the amount of income subject to taxation.

Significance

Tax deductions for charitable giving serve as a crucial incentive that encourages philanthropic behavior and supports the nonprofit sector. By reducing the after-tax cost of giving, deductions enable donors to give more generously while receiving a financial benefit. This mechanism has become a cornerstone of charitable fundraising in the United States, helping to sustain thousands of charitable organizations and the vital services they provide to communities. For strategic donors, understanding and properly documenting tax deductions is essential for maximizing both their philanthropic impact and tax efficiency.