1. Adjusted gross income (AGI)
Adjusted gross income is the amount of income you receive over the course minus specific deductions. This income is received from sources such as wages, salaries, dividends and capital gains. Taxable income is adjusted gross income minus allowances for personal exemptions and itemized deductions. For most individual tax purposes AGI is more relevant than gross income.
2. Taxable income
Tax able income is your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions.
3. Tax deductions
Tax deductions are expenses the IRS allows you to subtract from your adjusted gross income (AGI), which equals your taxable income. Generally, the lower your income, the lower your tax bill will be. For example, if you currently make $40,000 and have $5,000 in deductions, then you would only pay taxes on $35,000. Standard deductions are offered by the IRS to all filers.
4. Standard deduction
As mentioned above, the IRS offers standard deductions to all filers. Since the Tax Cuts & Job Act (TCJA), the standard deduction amount has changed for 2019. The standard deductions is determined on your current filing status. Most filers use the standard deduction. When the standard deduction is used the need to itemize individual deductions like charitable contributions and medical expenses is eliminated. Below is a chart to help you determine what the current standard deduction for 2019 for your filing status compared to the previous year’s standard deduction.
| Tax Filing Status | 2018 Standard Deduction | 2019 Standard Deduction |
| Married Filing Jointly | $24,000 | $24,400 |
| Head of Household | $18,000 | $18,350 |
| Single | $12,000 | $12,200 |
| Married Filing Separately | $12,200 | $12,200 |
5. Itemized deductions
Itemized deductions are expenses that can be deducted from your adjusted gross income (AGI). These deductions help you reach a smaller income amount that is used to calculate your tax bill. The most popular itemized deductions for the 2018 tax season were state and local taxes, charitable contributions, interest paid, unreimbursed expenses, medical and dental expenses, gambling losses, casualty or theft loses and other miscellaneous deductions. The Tax Cuts & Job Act (TCJA) eliminated or restricted many itemized deductions in 2018 through 2025 but raised the standard deductions. Because of this, the number of taxpayers who itemize deductions will be reduced for the 2019 tax season. Click Here to see a breakdown of how the TCJA affected itemized deductions.
6. Tax exemption
Tax exemption is a monetary exemption which reduces taxable income. Tax exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items. Tax exemptions are similar to tax deductions in that they lower the amount of your income that’s subject to taxes. They differ in the fact that exemptions are based on your filing status and the number or dependents you claim, while deductions are related to expenses you’ve paid throughout the tax year.
7. Progressive tax
A progressive tax imposes a higher rate on the wealthy than on the poor. It is based on the taxpayer’s ability to pay. With progressive tax, tax rates get higher as income increases. The below chart is the 2018-2025 federal income tax rates after the TCJA, for single and married couples filing jointly. The chart shows that have a higher income, also have a higher income tax rate.
| Income Tax Rate | Income Levels for Those Filing As: | |
| Current | Single | Married-Joint |
| 10% | $0 – 9,525 | $0 – $19,050 |
| 12% | $9,325 – $38,700 | $19,050 – $77,400 |
| 22% | $38,700 – $82,500 | $77,400 – $165,000 |
| 24% | $82,500 – $157,7500 | $165,500 – $315,000 |
| 32% | $157,500 – $222,000 | $315,000 – $400,000 |
| 35% | $200,000 – $500,000 | $400,000 – $600,000 |
| 37% | $500,000 + | $600,000 + |
8. Tax Withholdings
The amount of withholding is the amount of federal income tax withheld from your paycheck. The amount of income tax your employer withholds from your regular pay depends on three things that are provided to your employer on your Form W-2:
The amount you earn
Marital status
Number of withholding allowances
9. Tax Credits
A tax credit is the amount of money that can be offset against a tax liability. Many people confuse tax credits for tax deductions. While they are both types of tax breaks and are similar in many ways, there are several differences between the two. Most importantly, tax credits help reduce the amount of tax that you owe, while tax deductions only helps to reduce the amount of your taxable income.
10. Voluntary Compliance
Voluntary compliance refers to the principle that taxpayers will cooperate with the tax system by filing honest and accurate annual returns. The US income tax system operates under the assumption. Voluntary means that each taxpayer is expected to prepare and file returns without government involvement.
By: Paige Knight
