Terms On A Tax Return
July 26, 2016
AGI, or adjusted gross income, is your gross income minus certain adjustments to your income, such as your deductible IRA contributions, moving expenses, and alimony you paid. Your AGI, or a modified version of it, affects your eligibility for and the value of some tax credits, deductions, and exemptions.
Tax credits and deductions
Tax credits reduce your taxes dollar-for-dollar. Tax deductions reduce the income on which you are taxed. Both are generally based on certain expenditures that you make and are often used to encourage tax- payers to do things the government believes are desirable, such as buy a home, improve the energy efficiency of that home, give to charity, save for your retirement, and pay for your children’s college educations.
Itemizing deductions enables you to reduce the amount of income on which you are taxed by the actual amount, or part of the amount, that you pay for expenses, such as real estate taxes, home mortgage interest, charitable contributions, and medical expenses.
The standard deduction is a fixed dollar amount that you can generally deduct from your income instead of itemizing your deductions. The standard deduction is generally the way to go if it is larger than your allowable itemized deductions.
An exemption is a dollar amount that you may subtract from your income for yourself, your spouse, and each of your dependents.
A phaseout reduces the value of certain tax benefits as income rises. Several tax credits, deductions, and exemptions begin to phase out when a taxpayer’s income exceeds a certain dollar threshold. Most phaseouts reduce the value of a tax benefit gradually as income rises above the threshold. They are used to prevent higher-income taxpayers from utilizing, or fully utilizing, tax breaks intended primarily for lower- and middle-income taxpayers.
Alternative minimum tax
The alternative minimum tax (AMT) is an alternative method of calculating tax that eliminates or reduces some of the deductions and exclusions from income that are allowed when calculating taxes the regular way. The AMT was originally intended to prevent wealthy Americans from using tax loopholes to pay little or no tax, but it now affects some middle-income taxpayers, in addition to high-income taxpayers.
To determine whether you are subject to the AMT, your taxes are calculated both ways. You pay the larger amount.