For the sake of an understanding example, if we assume that someone is taxed at a flat tax rate of 40% and is paying taxes, they can buy something for $400 that is not tax-deductible or something for $900 that is, and have just as much money left over. This is because the $400 represents the same $900 in earnings, but after taxes have been paid on it. However, the interpretation i.e. a flat tax rate of 40% taxes does not depict the U.S. tax system in most conditions.
By contrast, the United States income tax system is cumulative. It means that as taxable income rises, a higher percentage is charged on a tiered system. E.g., in 2006 for Single taxpayer's, the first $7,550 of taxable income is charged 10 percent; however, if a person has more than $7,550 in taxable income, then he or she must pay a flat $755 (10 percent of the first $7,550), plus 15% of the amount over 7,550. The next progressive tier is reached at $30,650; the percentage that is charged goes up again (to 25%) for taxable incomes above $30,650.
In the United States there are many different types of tax deductions. One may choose between a standard tax deduction (which is actually meant for US citizens and resident foreigners who are individuals, married persons, and heads of household) or catalogued deductions.
Some tax deductions are planned for individuals while many are aimed at businesses.
Famous examples of tax deductions for individuals are as follows. Each of these deductions may or may not be befitting and is dependent upon the taxpayer's filing status, income, and so forth, and may have separately calculated limits (dollars or percent of expense or percent of Annual Gross Income, etc), or be carried from one year to the next.
Many tax deductions granted by federal law are also allowed under the tax laws of various states. Each state government may allow some other expenditure also to be tax-deductible, such as rent in security of mortgage.
Tax deductions are not meant for married individuals, filing jointly, with an income of about $145,000 or higher, beyond that point, the full amount of the expenses cannot be deducted.
The benefits of the tax deductions are that it boosts up the common public to contribute more money in federal acticvities and acts as a catalyst in over all development of the nation.