What is meant by the term deduction in financial contexts?

In financial contexts, the term "deduction" refers to the process of subtracting specific amounts from total income or taxable income. This reduction is typically related to expenses that can be legally subtracted when calculating the amount of income that is taxable, thereby lowering the overall tax liability. For example, various expenses such as mortgage interest, medical expenses, or certain charitable donations can be deducted, ultimately contributing to a lower taxable income.

Understanding this concept is crucial for effective financial management, as it impacts how much tax an individual or business may owe. The other possibilities do not accurately reflect the meaning of deduction; while adding to income or calculating total income might relate to financial statements, they do not align with the definition of deduction. Similarly, an increase in expenses would not be termed a deduction, as it implies additional financial burden rather than a reduction of income.