Credits, deductions, withholding, oh my! Tax vocabulary can be confusing. Here are explanations for some common terms that you should know.
Adjusted gross income (AGI). Calculated by taking all of your gross income from taxable sources (wages, dividends, interest, capital gains, etc.) minus specified deductions that are allowed in arriving at AGI, such as qualified retirement plan contributions, alimony payments, etc.
Deductions. Expenses that are subtracted from your AGI. You can take either the standard deduction, an inflation-adjusted fixed amount, or you can itemize deductions by listing specific expenses, such as real property taxes, qualifying mortgage interest, and charitable contributions.
Exemptions. An amount you can deduct for yourself, your spouse (on a joint return), and each dependent.
Taxable income. What’s left after your gross income is reduced by allowable adjustments, deductions, and exemptions.
Credits. Subtracted directly from your tax liability to reduce the amount of tax you owe.