Tax Basics: Key Terms and Concepts
Core terms
| Term | Meaning |
|---|---|
| Gross income | All income from all sources that is not specifically excluded by law. |
| Adjusted gross income (AGI) | Gross income minus certain "above-the-line" adjustments, such as some retirement contributions and student loan interest. |
| Standard deduction | A fixed amount that reduces taxable income. Set each year by the IRS and adjusted for inflation. |
| Itemized deductions | Specific allowable expenses, such as mortgage interest and charitable gifts, claimed instead of the standard deduction when they total more. |
| Credit | A dollar-for-dollar reduction in tax owed. Usually more valuable than a deduction of the same amount. |
| Withholding | Tax taken from wages by the employer and sent to the IRS during the year. |
| Estimated tax | Tax paid during the year on income that has no withholding, such as self-employment or investment income. |
Deduction vs. credit
A deduction lowers the income that is taxed. A credit lowers the tax itself. A $100 deduction saves less tax than a $100 credit, because the deduction only saves the tax rate times $100.
Exam tip
When a question asks which provides more tax savings for the same dollar amount, the answer is almost always the credit.
Forms vs. instructions
- The form is the document you file. It asks for specific information and sets out who must use it.
- The instructions explain how to complete the form and the rules behind each line. They are often the most reliable source for eligibility and deadlines.
- Publications provide broader explanations of a subject, such as a topic-specific guide.
Our Form 4547 notes follow this pattern: the summary comes first, then the detail from the instructions, with the official sources at the end.
Withholding and estimated payments
- Employees have tax withheld from each paycheck based on the Form W-4 they file.
- Self-employed people and others with income that has no withholding generally pay estimated tax in quarterly installments.
- Underpayment penalties can apply when the amount paid during the year is too low. Safe-harbor rules can protect taxpayers from the penalty when certain thresholds are met.
Common confusion
Filing a form does not always change tax owed. Some forms are informational or elections that affect how accounts are handled, which is why the instructions matter.
Review questions
- What is the difference between AGI and taxable income?
- Why might a taxpayer choose the standard deduction over itemizing?
- Which source is most useful for checking who must file a specific form?
General educational notes. Rules, limits and thresholds change each year; confirm current figures with irs.gov and a qualified tax professional before acting.