The tax world has its own lingo, which can add to the complexity of filing your tax return. But don’t despair. Knowing these 10 key tax terms can help you understand taxes in no time.
Key tax terms to know
- AGI
- Tax credits
- Tax deductions
- Standard deduction
- Itemized deductions
- Exemptions
- Taxable income
- Tax withholding
- Progressive taxation
- Voluntary compliance
1. AGI
Adjusted gross income, or AGI, is all the income you receive over the course of the year, including wages, interest, dividends and capital gains, minus certain things, such as contributions to a qualified individual retirement account (IRA), educator expenses, and some business expenses. AGI is the first step in calculating your final federal income tax bill.
2. Tax credits
Tax credits reduce your bill dollar-for-dollar. For most taxpayers, tax credits are more valuable than tax deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income, which is what a tax deduction does. A $200 credit, for example, will turn a $1,000 tax bill into $800. Some credits, such as the “additional” child tax credit and the earned income tax credit, can even give you a refund.
3. Tax deductions
Tax deductions are expenses the IRS allows you to subtract from your AGI to arrive at your taxable income. Generally, the lower your taxable income, the better.
If, for example, a single filer has income of $38,000 and $8,000 in deductions, then that taxpayer pays taxes on only $30,000. All filers can claim the standard deduction amount that applies to their filing status (more on this later). Generally, taxpayers must choose to claim the standard deduction or to itemize their deductions.
However, there are a handful of other deductions, such as student loan interest and deductible IRA contributions, that you can claim along with the standard deduction. These are often called “above-the-line deductions” because they are deducted from your income before you calculate your adjusted gross income.
Keep in mind that the term “deductions” is most commonly associated with the itemized deductions (more on this later, too) that taxpayers claim on Schedule A.
4. Standard deduction
The standard deduction is a fixed dollar amount that taxpayers can subtract from their income (specifically, their AGI) to calculate their taxable income. The standard deduction is available to all filers and is determined by the taxpayer’s filing status. The amounts change each year because of inflation adjustments.
The standard deduction amount for tax year 2024 (tax returns filed in 2025) is $14,600 for single taxpayers and married individuals filing separately, $29,200 for married couples filing jointly and $21,900 for heads of household.
For tax year 2025 (tax returns filed in 2026), those figures increase to $15,000 for single taxpayers and married individuals filing separately, $30,000 for married couples filing jointly and $22,500 for heads of household.
Most taxpayers claim the standard deduction, which eliminates the need to itemize actual deductions such as medical expenses, charitable contributions and state and local taxes. However, if your itemized deductions add up to more than the standard deduction for your filing status, then generally it would make more financial sense to itemize.
5. Itemized deductions
Itemized deductions are expenses that can be deducted from your AGI to help you reach a smaller taxable income amount upon which you calculate your tax bill. You must choose between claiming the standard deduction and claiming itemized deductions.
Itemized deductions include medical expenses, state and local taxes, mortgage interest, charitable contributions, casualty and theft losses, and gambling losses. Some itemized deductions must meet IRS limits before they can be claimed.
6. Exemptions
In the past, exemptions were an amount that the IRS let you subtract from your income to reflect all the people who rely on your income. You could claim a tax exemption for yourself, your spouse, and your dependents. However, as part of the Tax Cuts and Jobs Act of 2017, the personal exemption was temporarily eliminated. Exemptions are set to be available again starting with tax year 2026, though it’s unclear at this point whether or not lawmakers may make changes to the law before exemptions renew.
Prior to 2018, the IRS would allow a set dollar amount for each exemption and, as with deductions, this total was subtracted from your AGI to come up with your final taxable income upon which you would figure your tax bill. Your personal exemption amount was in addition to any tax deductions, either standard or itemized, that you claimed.
7. Taxable income
Taxable income is your overall or gross income reduced by all allowable adjustments, deductions and exemptions. It is the final amount of income you use to calculate how much you owe in taxes.
8. Tax withholding
Also known as pay-as-you-earn taxation, the withholding method enables taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck. Employees inform their employers how much to withhold by filling out Form W-4. These withheld taxes are deposited in an IRS account and you are credited for the amount when you file your return. In some cases, taxes also may be withheld from other income such as dividends and interest.
Self-employed individuals, on the other hand, are expected to pay estimated taxes throughout the year.
9. Progressive taxation
This is the term for a system in which higher tax rates are applied on portions of income as income levels increase. The U.S. tax system uses progressive taxation with tax brackets starting at 10 percent and rising to 37 percent for the highest-income taxpayers.
The U.S.’s progressive tax system can be confusing, because your top tax rate — also known as your marginal tax rate — isn’t the same thing as your effective tax rate.
10. Voluntary compliance
This describes the philosophy upon which our tax system is based: U.S. taxpayers voluntarily comply with the tax laws and report their income.
The IRS relies upon taxpayers’ honesty, but the agency also checks tax filings to make sure people file correctly. Taxpayers who fail to report correct information may be subject to penalties. Same goes for taxpayers who don’t file a tax return.
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