Tax LanguageDefinitions and explanations to help you better understand how to file your taxes.

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.

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.

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.

Itemized DeductionItemized 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.

Standard DeductionA 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.

ExemptionAn 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.

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.

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.

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.

Voluntary ComplianceTaxpayers 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.