Answer
Deductible expenses that a tax payer deducts from adjusted gross income are the deductions. It is a lump sum of monetary value that is claimed from gross income.
Work Step by Step
Deductions are the sum of monetary value that a tax payer claims from his earnings. Deductions can be in two forms: Standard deductions or itemized deductions.
Standard deductions are total amount that a tax payer can minus from his adjusted gross income. It is a fixed amount that the tax payer deducts from the earnings. However, itemized deductions items are listed separately. This is done when the deduction value is greater than the standard deductions listed by the regulations. It can include state taxes, property taxes, medical expenses, interest paid on home mortgages, charitable amount, etc.
Example: A person falling in to the taxable income category earns $1,050 in a week and has rental income of $200 per week. He puts 100 in property tax and contributed $300 to a charitable trust. Calculate his taxable income by itemizing deductibles.
In order to calculate taxable income, first, calculate gross pay, by adding all the income, that is, earnings per week and rental income.
\[\begin{align}
& \text{Gross}\,\text{pay}=\text{earnings}\,\text{per}\,\text{week}+\text{rental}\,\text{income} \\
& =\$1050+\$200\\&=\$1250\end{align}\]
Then, the adjusted gross income is computed, that is, computed by subtracting adjustments and deductions from gross pay.
\[\begin{align}
& \text{Adjusted}\,\text{gross}\,\text{pay}=\text{gross}\,\text{pay}-\text{adjustments} \\
& =\$1250-\$150\\&=\$1100\end{align}\]
Taxable income is computed by deducting the deduction from adjusted gross pay:
\[\begin{align}
& \text{Taxable}\,\text{income}=\text{adjusted}\,\text{gross}\,\text{pay}-\text{deductions} \\
& =\$1100-\left(\$300+\$100\right)\\&=\$1100-\$400\\&=\$700\end{align}\]
Here, deductions are property tax and charitable trust contribution.
