What defines a tax deduction?

A tax deduction is defined as an expense that reduces taxable income. This means that when taxpayers incur eligible expenses, they can subtract these amounts from their total income before calculating the tax owed. The result is a lower taxable income, which can lead to a reduction in the total tax liability for the individual or business.

Tax deductions can be related to various expenses, such as business costs, charitable contributions, mortgage interest, and medical expenses, among others. Thus, understanding what qualifies as a tax deduction is crucial for effective tax planning and can significantly impact the overall tax situation of an entity.

The other options do not accurately capture the definition of a tax deduction. For example, repayments to the government do not directly reduce taxable income, tax rates applicable to dividends do not pertain to deductions, and limiting deductions solely to investment expenses ignores the broader range of qualifying expenses available to taxpayers.