The Important Tax Terms Explained by Rani Jarkas

Rani Jarkas, the Chairman and CEO of Cedrus Investments, explains the following four important tax terms to help you sort out tax related questions.

1. AGI
Adjusted gross income, or AGI, is all the income you receive over the course of the year, including wages, interest, dividends and capital gains, minus things such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments.

2. Tax credits
Tax credits are much like credits you get from a store. After you calculate your tax bill, you can use the credit to reduce the amount that you owe to Uncle Sam. Tax credits are more valuable than tax deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income.

3. Tax deductions
Tax deductions are expenses the Internal Revenue Service allows you to subtract from your AGI to arrive at your taxable income. In most cases, the lower your income, the lower your tax bill.

4. Standard deduction
This is a fixed dollar amount that taxpayers can subtract from their income. Most taxpayers use this deduction method, which eliminates the need to itemize actual deductions such as medical expenses, charitable contributions and state and local taxes.

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