GROSS INCOME/AGI/TAXABLE INCOME/ABOVE THE LINE DEDUCTIONS/CREDITS
Gross income is the total amount you earned during the year (W2 income, int./dividend income etc.). Above the line deductions: Some are interchangeably called above-the-line deductions or adjustments to income. These can vary from year to year, but examples include deductions for self-employment taxes, Individual Retirement Accounts (IRAs), educator expenses, and student loan interest. Each of those is available for the 2017 tax year and will remain under the new tax reform bill.
When you subtract above-the-line deductions from your total income, you get a new number to work with for your subsequent tax calculations: your adjusted gross income (AGI).If you don’t have any adjustments, your AGI will equal your total income.
You can claim the standard deduction. This is an amount set by the Internal Revenue Service (IRS). For example, for the 2018 tax year, it’s $12,000 for single filers, $18,000 for those filing as head of household, and $24,000 for married couples filing jointly.
Alternatively, if you have a number of qualifying expenses that total more than the amount of your standard deduction, you can subtract these from your AGI as itemized deductions. You may also be able to claim your charitable contributions, home mortgage interest and medical expenses as such deductions.
It’s easy to confuse tax credits with tax deductions. Credits are very different because you subtract these from the amount of tax you owe. For example, if you owe $3,000, a $500 credit will drop your bill to $2,500. If you have a nonrefundable tax credit, you get a refund only up to the amount you owe, according to the IRS. If your credit is refundable, you get a refund even if it’s more than the amount you owe. The child tax credit and the earned income tax credit (EITC) are among the credits that can be advantageous for those who qualify. Be sure to take the time to determine whether or not you’re eligible. When it comes to tax credits, every little bit can be immensely helpful.
A Taxpayer’s Responsibility
The country’s tax system is based on the idea of voluntary compliance in which, the IRS says, “taxpayers in the United States assess their tax liabilities against themselves and pay them voluntarily.” For most taxpayers, this compliance consists of preparing an accurate return, filing it on time and paying any taxes due; penalties “support and encourage” voluntary compliance.