What can be subtracted from adjusted gross income to reduce tax liability?

Itemized deductions are expenses that individuals can subtract from their adjusted gross income (AGI) to reduce their taxable income. This reduction in taxable income directly leads to a lower tax liability. Examples of itemized deductions include mortgage interest, state and local taxes, medical expenses exceeding a certain percentage of AGI, and charitable contributions, among others. By itemizing deductions, taxpayers can potentially lower their total tax bill more significantly than they would by taking the standard deduction, depending on their specific financial situation.

Tax credits, while beneficial, operate differently; rather than reducing taxable income, they directly reduce the amount of tax owed. Non-taxable income does not affect taxable income, thus it does not contribute to reducing tax liability. Capital gains, which are profits from the sale of assets or investments, can actually increase taxable income unless offset by capital losses, but they do not serve as a deduction from income.