What is the difference between tax deductions and tax adjustments?

Although you likely hear these terms used interchangeably, tax credits, tax deductions, and tax adjustments all have different meanings and outcomes. Deductions and adjustments reduce your taxable income, whereas tax credits directly reduce the amount you owe to the IRS, dollar for dollar.

How do tax adjustments work?

Though they’re used to lower your overall tax liability, you don’t go through the complicated and time-consuming process of itemizing them. Instead, adjustments are directly deducted from your gross income and are used to arrive at your Adjusted Gross Income (AGI).

What deductions reduce adjusted gross income?

Some common examples of eligible deductions that reduce adjusted gross income include deductible traditional IRA contributions, health savings account contributions, and educator expenses. But what does Adjusted Gross Income mean for you in real life? Here are a few places it comes into play! 1.