Taxable income is reduced by what?

• A. Credits
• B. Deductions
• C. Exemptions
• D. Bonuses

Answer: (B)

Deductions reduce taxable income by subtracting allowable expenses from your gross income, leaving a smaller amount that’s actually taxed. Think of deductions as the costs you’re allowed to subtract before applying the tax rate, like the standard deduction or itemized deductions (mortgage interest, charitable contributions, medical expenses, etc.). This lowers the income that sees tax, which is why deductions are the mechanism that reduces taxable income. Credits, in contrast, lower the tax you owe after tax is calculated, not the taxable income itself. Bonuses are extra income and don’t reduce taxable income. Exemptions can also reduce taxable income in some tax systems, but the factor most directly reducing taxable income in this context is deductions.