2.3.1. Amounts excluded from income
Savings in a qualified retirement plan are excluded fromyour income before you pay federal income
taxes. The term “qualified plan” means that the plan qualifies for special, advantageous, tax treatment.
The Long-Term Savings portion of this project (see Section 4) explains these types of savings
in greater detail. Note that the Social Security and Medicare tax calculations do not exclude the amount
saved in a qualified retirement plan.
2.3.2. Exemptions and deductions
Before calculating the federal income tax owed, taxpayers are allowed a personal exemption (a certain
amount of earnings per person that is not taxable) and a deduction for certain types of expenses. Individuals
may subtract the greater of a “standard” deduction or the actual total of these specific expenses,
or “itemized” deductions. The standard deduction varies according to tax filing status, which is based
on your marriage/family status: single, married filing jointly, married filing separately, or head of household.
Both the personal exemption and standard deduction usually increase from year to year.