Introduction to Adjustments, Deductions & Tax Credits
Reducing Taxable Income and Tax Liability
After determining gross income, taxpayers reduce it through adjustments to arrive at Adjusted Gross Income (AGI). From AGI, deductions are applied to calculate taxable income. Finally, tax credits directly reduce the amount of tax owed. Understanding these three concepts is essential because they affect every individual income tax return.
- Adjustments reduce gross income to calculate AGI.
- Deductions reduce AGI to determine taxable income.
- Tax credits directly reduce tax liability.
Note
Tax credits are generally more valuable than deductions because they reduce tax dollar-for-dollar.
Summary
The progression from gross income to AGI, taxable income, and finally tax liability is a fundamental concept in individual taxation.