What purpose do deductions serve in tax calculations?

Deductions play a critical role in tax calculations by reducing taxable income. When an individual or business claims deductions, it lowers the amount of income that is subject to taxation, which can ultimately decrease the overall tax liability that they owe to the government. This mechanism is designed to incentivize certain behaviors or assist in accounting for expenses necessary for earning that income, thus reflecting a more accurate picture of an individual’s financial situation.

For instance, common deductions include expenses related to business operations, mortgage interest, state taxes paid, and medical expenses, among others. By allowing these deductions, the tax system acknowledges that not all income is available for spending, as certain amounts are required to maintain the individual's or business's operations.

The other options provided do not accurately represent the primary function of deductions. For example, increasing overall tax liability contradicts the very purpose of deductions, while determining tax credits and establishing minimum tax standards are separate aspects of tax policy that do not directly connect with the role of deductions in reducing taxable income.