Tax terms, explained simply

Common tax terms

Adjusted gross income (AGI)

Your total income for the year minus certain adjustments, such as retirement contributions. Many deductions and credits are based on this number.

Bookkeeping

Recording every sale, expense and payment in your business so your numbers are accurate and ready for tax time.

Deduction

An amount you subtract from your income before tax is calculated, which lowers the income you are taxed on.

Tax credit

A dollar-for-dollar reduction of the tax you owe. A credit is usually more valuable than a deduction of the same size.

Standard deduction

A fixed amount the IRS lets you subtract without listing individual expenses. Most people choose it unless itemizing saves more.

Filing status

A category such as single, married filing jointly or head of household that decides your tax rates and deduction amounts.

Withholding

Tax your employer takes out of each paycheck and sends to the IRS on your behalf.

Estimated tax payments

Quarterly payments made by people who do not have tax withheld, such as the self-employed and small business owners.

W-2 and 1099

Forms that report your income. A W-2 comes from an employer; a 1099 reports freelance, contract or other non-employee income.

Tax lien

A legal claim the government places on your property when tax debt goes unpaid. It protects the government's interest until the debt is settled.

Tax levy

The actual seizure of money or property, such as a bank account or wages, to pay a tax debt.

Installment agreement

A payment plan with the IRS that lets you pay a tax debt in smaller monthly amounts over time.

Offer in compromise

An agreement to settle a tax debt for less than the full amount when paying it in full would cause real hardship.

Penalty abatement

A request to remove or reduce IRS penalties when you have a good reason for filing or paying late.