Legal Definitions - deductible

A deductible refers to an amount that is subtracted from a larger sum, typically reducing the financial obligation of an individual or entity. This term is most commonly encountered in the contexts of insurance policies and tax law.

• In Insurance: A deductible is the specific amount of money an insured person must pay out of their own pocket towards a covered loss before their insurance company begins to pay for the remaining costs. It represents the initial portion of a claim that the policyholder is responsible for.

  • Example 1 (Health Insurance): Maria visits the emergency room for an unexpected appendicitis attack, resulting in $8,000 in medical bills. Her health insurance policy has a $1,500 deductible.

    Explanation: Maria is responsible for paying the first $1,500 of her medical expenses. Once she has paid this deductible, her insurance company will then begin to cover the remaining costs, according to the terms of her policy.

  • Example 2 (Auto Insurance): David is involved in a minor car accident that causes $3,500 worth of damage to his vehicle. His collision insurance policy has a $750 deductible.

    Explanation: David must pay the first $750 towards the car repairs. After he pays this deductible, his insurance company will cover the remaining $2,750 of the damage costs.

• In Tax Law: A deductible (often referred to as a tax deduction) is an expense that can be subtracted from an individual's or company's gross income to reduce the amount of income subject to taxation. By lowering taxable income, deductions effectively reduce the total amount of tax owed.

  • Example 1 (Individual Income Tax): Sarah, a self-employed consultant, earns $90,000 in a year. During that year, she spent $7,000 on eligible business expenses such as office supplies, professional development courses, and mileage for client meetings.

    Explanation: Sarah can deduct these $7,000 in business expenses from her $90,000 gross income. This means her taxable income is reduced to $83,000, and she will pay taxes on this lower amount, thereby reducing her overall tax liability.

  • Example 2 (Corporate Income Tax): "Tech Solutions Inc." donates $25,000 to a recognized non-profit organization that supports STEM education in local schools.

    Explanation: This charitable contribution can be a deductible expense for Tech Solutions Inc. By deducting this $25,000 from its total business income, the company reduces its taxable profit, which in turn lowers the amount of corporate income tax it owes for the year.