The phrase refers to the clarification of what expenses can be subtracted from one’s gross income after taxes have already been calculated and initially withheld or paid. These subtractions offer individuals and businesses a method to lower their overall tax burden by adjusting their taxable income. An instance of this could be contributions made to a qualified retirement savings plan that permits deferral of tax obligations until retirement, which subsequently reduces the amount of tax owed for the current fiscal year.
Understanding these allowances is crucial for effective financial planning. It empowers individuals and companies to optimize their tax strategies, potentially leading to significant savings. Historically, provisions allowing for these reductions have been implemented to encourage specific behaviors, such as investment in retirement or charitable giving, thereby serving as instruments of fiscal policy.
