Define 'tax deduction.'

The correct definition of a 'tax deduction' is that it is an expense that reduces taxable income, thereby lowering the overall tax liability. When individuals or businesses incur certain expenses that qualify under tax laws, they can subtract these amounts from their total income before calculating how much tax they owe. This reduction in taxable income ultimately leads to a lower tax bill, making tax deductions beneficial for taxpayers.

Tax deductions can include a range of expenses, such as charitable contributions, mortgage interest, and certain business expenses, among others. By effectively lowering taxable income, tax deductions serve as a crucial tool in personal finance planning, helping individuals and businesses manage their tax obligations more efficiently.

Other options discuss different financial concepts that are not related to tax deductions, such as advisory fees, net worth calculations, or retirement savings plans, which do not pertain to the definition and function of a tax deduction.