Decode Taxes: Vocabulary That Saves Money

Taxes can be confusing because there are so many terms to understand. It helps to know a few standard vocabulary terms as you review your annual taxes with your tax preparer.

1.       Deduction – an amount that is subtracted from taxable income to lower the amount of tax that is owed.

2.       Credit – an amount that is subtracted from the total amount of tax owed based on a taxpayer’s qualifications.

3.       Standard Deduction – The standards deduction is a fixed amount (adjusted for inflation each year) that is subtracted from the taxpayer’s income based on their filing status (single, married, married filing separately, married filing jointly, qualified surviving spouse, or head of household). For example, the standard deduction for single taxpayers in 2026 is $16,100.

4.       Itemized Deduction – The itemized deduction replaces the standard deduction for taxpayers that qualify for a higher amount of deductions than the standard deduction provides. For example, a single taxpayer that qualifies for more than $16,100 in credits and deductions would then itemize their taxes, resulting in them owing less tax.

5.       Phase Out – A phase out is a gradual deduction, typically based on an income limit, at which the taxpayer no longer qualifies for the tax deduction or credit. The student loan interest deduction phases out at $85,000 modified adjusted gross income. Taxpayers above this income only qualify for a partial or no deduction.