The document defines key tax terms to help understand filing taxes. It explains that adjusted gross income includes all income minus certain deductions like IRA contributions and alimony payments. Tax credits directly reduce taxes owed, while deductions lower taxable income. Itemized deductions subtract expenses from adjusted gross income. Standard deductions are fixed amounts subtracted based on filing status. Exemptions subtract amounts for dependents. The U.S. uses progressive taxation where higher incomes face higher tax rates. Taxable income is the final amount used to calculate taxes owed after deductions and exemptions. Withholding takes taxes from paychecks throughout the year. Voluntary compliance refers to taxpayers honestly reporting income.

1. Tax Language
Definitions and explanations to help you better
understand how to file your taxes.

2. Adjusted Gross Income (AGI)
Adjusted gross income refers to all the income you receive
over the course of the year. This total will include wages,
interest, dividends and capital gains. Contributions to a
qualified IRA, eligible business expenses, relocation costs and
alimony payments are all things that can be subtracted from
your AGI, which lowers the amount of taxable income.
Calculating your adjusted gross income is the first step when
determining your final federal income tax fill.

3. Tax Credits
Think of tax credits like a credit that you would get from a
store. After you calculate your tax bill, you can use tax credits
to reduce the amount of money that you need to write to the
government. Tax credits are more valuable than tax
deductions because they directly reduce the amount of tax
that you owe.

4. Tax Deductions
Tax deductions are expenses that the Internal Revenue
Service (IRS) allows you to subtract from your adjusted gross
income at your taxable income. This is important because the
lower your income, the lower your tax bill tends to be. A tax
deduction, simply put, reduces the amount of income that is
taxed.

5. Itemized Deduction
Itemized deductions are expenses that are eligible to be
deducted from your adjusted gross income. This helps you
reach a smaller income amount for when you calculate your
tax bill. Itemized deductions include medical expenses,
mortgage interest, charitable contributions, casualty and theft
loses, unreimbursed employee expenses, other taxes (i.e.
state, local and property) and various other deductions such
as gambling loses. Keep in mind that some itemized
deductions must meet IRS limits before you are eligible to
claim them.

6. Standard Deduction
A standard deduction is a fixed dollar amount that taxpayers
are eligible to subtract from their income. This is available to
tax filers and is determined by the taxpayer's filing status. This
amount varies year to year because of inflation adjustments.
Most taxpayers choose to do a standard deduction over an
itemized deduction so they can avoid having to itemize actual
deductions such as medical expenses, state and local taxes
as well as charitable contributions.

7. Exemption
An exemption is the amount the IRS will let you subtract from
your income to reflect all the people who count on your
income. The people that you are allowed to claim as tax
exemptions includes yourself, your spouse and your
dependents (children or kids you are responsible for). For
each exemption, the IRS allows a set amount which is eligible
to be subtracted from your adjusted gross income. This will
help you achieve a lower earnings amount upon which you
then use to determine your tax bill. An exemption can be used
in addition to any tax deductions that you claim.

8. Progressive taxation
The United States uses a progressive tax system, which
means a larger percentage of income is taken from high-
income groups than from low-income groups; higher tax rates
are applied to those that have higher income levels based on
the concept of ability to pay. In the United States, tax brackets
start at 10 percent and rise to as high as 39.6 percent for the
wealthiest taxpayers.

9. Taxable Income
Taxable income is the overall income reduced by all allowable
adjustments, deductions and exemptions. It is the final amount
of income you use to calculate how much you owe the
government in taxes. If you have a lower taxable income then
you will find yourself in a lower tax bracket. Therefore making
sure you have correctly determined and calculated all of your
deductions and exemptions is important.

10. Withhold
Withholding enables taxes to be taken out of your wages or
other income as you earn it before you receive your paycheck.
These withheld taxes are deposited in an IRS account and
you are credited for the amount when you file your return.
Withholding is also known as pay-as-you-earn taxation as you
are essentially paying your taxes throughout the course of the
year.

11. Voluntary Compliance
Taxpayers in the United States voluntarily comply with the tax
laws and report their income and other tax items honestly.
Voluntary compliance refers to the philosophy in which our tax
system is based upon. If you are dishonest about the income
you claim on your tax forms you could find yourself in serious
trouble with the IRS, leading to an audit, paying a fine and
possible jail time. In addition, you could lose your job as well
as your credibility.