Federal Individual Income Tax Terms: An Explanation

"This report describes the terms most commonly used when discussing the federal individual income tax. Most of these tax terms are explained in the order that they occur in the process of determining one’s income tax on the Form 1040.

Total income is the sum total of all income required to be reported for tax purposes. Total income does not include exclusions, items specifically excluded from determination of gross income. Total income may be reduced by certain adjustments to income for special types of expenses that Congress has determined should be considered in calculating gross income. These adjustments, often referred to as above-the-line deductions, can generally be claimed by all eligible taxpayers, not just those who itemize deductions. For 2020 and 2021, taxpayers who do not itemize their deductions can claim an additional deduction for charitable contributions.

Adjusted gross income (AGI) equals gross income less above-the-line deductions (i.e., qualifying adjustments to income). It is the income measurement before a taxpayer claims either the standard deduction or the sum of all their itemized deductions (whichever is greater). Itemized deductions are subtracted from AGI and are allowed for certain types of expenditures for which income taxation is deemed inappropriate or inadvisable. The standard deduction, by contrast, is a set amount that varies by filing status and may be subtracted from AGI if it is greater than a taxpayer’s itemized deductions. An additional standard deduction amount is available to certain individuals, for example the blind or elderly. Deductions function like adjustments and exclusions in their effect on tax liability.

Taxable income is adjusted gross income reduced by either the standard deduction (plus the additional standard deduction in some cases) or itemized deductions along with a deduction for qualified pass-through business income, when applicable. Taxable income is the base to which the income tax rates are applied to calculate income tax liability. Tax liability is calculated by applying the marginal tax rate and schedule to taxable income. Tax credits are then subtracted from gross tax liability to arrive at a taxpayer’s final tax liability. Hence, tax credits reduce tax liability directly, on a dollar-for-dollar basis. Tax credits are available to all qualifying taxpayers, whether they itemize deductions or not..."
Federal Individual Tax