Deductions: Expenses that may be subtracted from gross income before the tax is calculated. Deductions for some expenses, such as contributions to an Individual Retirement Account, are allowed regardless of whether a taxpayer itemizes deductions and are generally called adjustments. Other expenses, such as state and local income taxes and contributions to charities may be deducted only by taxpayers who itemize.
Credits: Reductions in the amount of tax paid. Allowances for child care expenses and investment taxes are taken in the form of a credit.
Adjusted Gross Income: Gross income minus adjustments for such expenses as child care costs, employee business expenses and tax preparation fees and for such deductions as Individual Retirement Account contributions and the deduction for two-earner families.
Taxable Income: Adjusted gross income minus itemized deductions and the $1,000 per-person allowance for personal exemptions. This is the figure on which federal income taxes are calculated.