At Abacus!, we believe better guidance leads to smarter decisions. That starts with understanding the terms that show up on your tax return. Here’s a quick guide to some of the most common ones and how they impact what you owe or what you get back.

Tax Credit
A tax credit directly lowers the amount of tax you owe. If you owe $2,000 and qualify for a $500 credit, your bill drops to $1,500. Credits are one of the most valuable tools in your tax toolkit because they reduce your tax bill dollar for dollar.

Refundable vs. Nonrefundable Credit
A refundable credit can give you a refund even if you owe no tax. A nonrefundable credit only reduces the tax you owe to zero but does not create a refund. The Earned Income Tax Credit, for example, is refundable.

Tax Deduction
Deductions reduce your taxable income. If you earned $50,000 and have $5,000 in deductions, the IRS only taxes you on $45,000. Unlike credits, deductions save you money based on your tax bracket.

Above-the-Line Deduction
These deductions come before you calculate your adjusted gross income, or AGI. That’s why they’re called “above the line.” They’re available whether you itemize or not and include things like contributions to a traditional IRA or student loan interest.

Adjusted Gross Income (AGI)
Your AGI is your total income minus any above-the-line deductions. This number affects whether you qualify for certain tax credits or deductions, so it’s one to keep an eye on.

Standard Deduction
The standard deduction is a fixed amount you can subtract from your income without listing out specific expenses. It’s the simplest way to reduce your taxable income and is used by most taxpayers.

Itemized Deduction
If your deductible expenses add up to more than the standard deduction, you may choose to itemize. This includes things like mortgage interest, charitable donations, or medical bills. Itemizing takes more time, but it can lead to bigger savings if your expenses qualify.

Taxable Income
This is what’s left after all your deductions are subtracted from your income. It’s the number the IRS uses to figure out how much tax you owe.

Withholding
Withholding is the money your employer takes out of each paycheck for taxes. If too much is withheld, you could get a refund. If too little is withheld, you may owe more at tax time.

Understanding these terms is a great first step in taking control of your taxes. And if you’re not sure how they apply to your situation, that’s where we come in. At Abacus!, we’re here to help you navigate it all with clarity and confidence.