(NewsNation) — The U.S. tax code may be notoriously complex, but understanding some basic terms can help you breeze through your tax return in no time.
According to the Tax Foundation’s 2024 tax literacy poll, only 2% of respondents had “proficient” tax knowledge. Most of those surveyed did not know or were not sure of basic tax concepts related to income tax filing.
Here are some tax terms you should know.
Tax liability
Your tax liability is the amount of tax you owe to the IRS or your state government.
It’s mainly determined by your taxable income, tax bracket, filing status and any tax credits or deductions for which you qualify.
You pay your federal income tax liability through withholding from your paycheck, estimated tax payments (usually if you’re self-employed) and payments made with the tax forms you file with the government.
Taxable income
Your taxable income is the amount of income you earn or receive that can be taxed, including your salary, any bonuses, tips, interest from savings accounts, dividends from stocks, unemployment benefits and even jury duty pay.
It’s what’s left after any adjustments, deductions and exemptions have been made.
This is the income you use to figure out how much you owe in taxes.
Tax filing status
This determines the rate at which your income is taxed and is generally based on your marital status on the last day of the year. For your 2024 return, that would be Dec. 31, 2024.
There are five IRS filing statuses:
- Single if you’re unmarried, divorced or legally separated.
- Married filing jointly if you’re married or if your spouse passed away during the year.
- Married filing separately if you’re married and don’t want to file jointly or find that filing separately lowers your tax. Most couples save money by filing jointly.
- Head of household if you’re single and have paid more than half of your living expenses for yourself and a qualifying dependent.
- Qualifying surviving spouse if your spouse died during the past 2 years and you have a dependent child.
Your filing status is one of the most important decisions you’ll make because it can affect:
- Whether you must file a return
- How much tax you owe
- Credits you can claim
- The type of form you should file
- Your standard deduction amount
- Whether you get a refund
Tax credits
A tax credit directly reduces the amount of tax you owe dollar-for-dollar.
That makes them more valuable than a tax deduction, which reduces your taxable income but not your tax bill.
For example, let’s say a tax credit and a deduction are both valued at $1,500 and your tax liability is $5,000. With a $1,500 tax credit, your tax bill is reduced to $3,500. If you’re in the 12% tax bracket, a $1,500 tax deduction takes $180 off your taxable income.
Federal tax credits are available for a range of purchases, including electric vehicles and clean energy home investments.
There’s also the child tax credit, which is a tax benefit for people with dependent children under 17.
Tax deductions
A deduction is an amount you subtract from your income when you file so you don’t pay tax on it. By lowering your taxable income, deductions lower the taxes you owe, though not directly like a tax credit.
You can deduct these expenses whether you take the standard deduction or itemize, according to the IRS:
- Alimony payments
- Business use of your car
- Business use of your home
- Money you put in an IRA
- Money you put in health savings accounts
- Penalties on early withdrawals from savings
- Student loan interest
- Teacher expenses
- For some military, government, self-employed and people with disabilities: work-related education expenses
- For military service members: moving expenses
If you itemize, you can deduct these expenses:
- Bad debts
- Canceled debt on home
- Capital losses
- Donations to charity
- Gains from sale of your home
- Gambling losses
- Home mortgage interest
- Income, sales, real estate and personal property taxes
- Losses from disasters and theft
- Medical and dental expenses over 7.5% of your adjusted gross income
- Miscellaneous itemized deductions
- Opportunity zone investment
Standard deduction
The standard deduction is the fixed amount set by the IRS that taxpayers can subtract from their income before income tax is applied. Lowering your taxable income can reduce the taxes you owe.
Unlike itemized deductions, which require you to track specific expenses, you don’t have to prove anything to take the standard deduction.
That’s one of the reasons most taxpayers claim the standard deduction — it’s easy.
The amount of your standard deduction is based on your filing status, not your income, and the IRS generally adjusts the standard deduction each year for inflation.
Remember: You’re only allowed to take the standard deduction if you don’t itemize your deductions.
2024 standard deductions
| Filing status | Standard deduction |
| Single or married filing separately | $14,600 |
| Head of household | $21,900 |
| Married filing jointly or qualifying surviving spouse | $29,200 |
Itemized deductions
Some taxpayers may choose to itemize their deductions, which are qualifying expenses that you can claim to lower your taxable income.
This option tends to be less popular than the standard deduction because it’s more time-consuming. Itemized deductions require you to track and record expenses throughout the year, saving documentation along the way.
Itemized deductions can result in a lower tax bill depending on your situation.
According to the IRS, deductible expenses include amounts you paid for state and local income or sales taxes, real property taxes, personal property taxes, mortgage interest, disaster losses, gifts to charities and medical and dental expenses.
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