Final answer:
The 'standard deduction' is the amount set by the IRS that is not taxed, which reduces adjusted gross income and determines taxable income. Taxpayers must file their taxes by April 15th and might receive a tax refund if they've overpaid. IRAs and 401(k)s are special accounts that defer taxes on savings until retirement.
Step-by-step explanation:
The amount of money set by the Internal Revenue Service that is not taxed is referred to as the standard deduction. This figure is used to reduce the amount of adjusted gross income (AGI), which eventually determines the amount of income that is taxable. Taxpayers can use the standard deduction unless they choose to itemize deductions, which involves listing out each deductible expense to potentially claim a larger reduction. For example, as described by LibreTexts™, the upper panel of the figure shows adjusted gross income, and the lower panel shows taxable income after the standard deduction has been applied.
It is essential to file taxes before the yearly deadline, typically April 15th. If more tax is paid throughout the year than what is actually owed, the taxpayer will receive a tax refund. This scenario illustrates why accurate withholding and timely tax payments are crucial.
Additionally, certain savings vehicles like Individual Retirement Accounts (IRAs) and 401(k) accounts offer tax advantages. The contributions made to these accounts are not taxed until withdrawal, which generally happens after retirement. Avoiding present taxation on these savings aims to increase the return of these saving accounts, thus promoting higher savings.