Tax Terms
Withholdings
On your paycheck, withholdings is a section that shows how much money your employer has taken from your paycheck to be given to the government. Most commonly, this money goes to taxes (at federal, state, and local levels) as well as government programs, like Medicare and Social Security.
Deductions
In the tax world, the word deductions has multiple meanings:
On your paycheck, deductions are a section that show the money you have voluntarily allowed your employer to take in order to fund certain benefit programs offered through your work. These can include retirement accounts like 401Ks or employer-sponsored health insurance.
On your annual return, deductions refer to a reduction in the amount of your income that is taxable. Deductions can be given for a number of reasons, including charitable donations, paying student loan interest, and more.
Example of an annual tax deduction: If your income is $10 and the tax rate is 10%, you would normally pay $1 of tax. But, if you are entitled to a $1 deduction, only $9 is taxable, so my total tax is $0.90 (10% of $9).
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