FAQ

A tax deduction reduces your taxable income, lowering the amount of income subject to tax. Deductions can be for things like mortgage interest, charitable donations, or medical expenses. The more deductions you have, the lower your taxable income and potential tax liability.

A tax deduction reduces your taxable income, while a tax credit reduces the amount of tax you owe. Credits are generally more valuable because they reduce your tax bill dollar-for-dollar, whereas deductions only reduce the income subject to tax.

Taxable income is the amount of income you are required to pay taxes on after all deductions, exemptions, and adjustments have been applied. It includes wages, salaries, interest, dividends, and other forms of income.

The standard deduction is a fixed amount that taxpayers can subtract from their income if they choose not to itemize deductions. The amount varies depending on filing status (e.g., single, married, head of household). For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.

Itemized deductions are specific expenses that you can list to reduce your taxable income, such as mortgage interest, state and local taxes, medical expenses, and charitable donations. Taxpayers can either take the standard deduction or itemize, depending on which gives the greater tax benefit.

 A tax bracket is the range of income that is taxed at a particular rate. The U.S. has a progressive tax system, meaning the more you earn, the higher your tax rate. Different portions of your income are taxed at different rates based on which tax bracket they fall into.

Capital gains are the profits you make from selling assets like stocks, bonds, or real estate. Short-term capital gains (on assets held for less than a year) are taxed as ordinary income, while long-term capital gains (on assets held for more than a year) benefit from lower tax rates.

Self-employment tax is the tax that self-employed individuals pay to cover Social Security and Medicare contributions. This tax is typically higher than the payroll tax paid by employees because self-employed individuals must cover both the employer and employee portions.