Question: I get confused by the various kinds of deductions allowed on income tax returns. Can you define the different categories?

Answer: There are three basic categories of "subtractions" you can use to reduce your tax bill. (I try to avoid using the word "deductions" because that's the name of one of the categories.)

The first of these is called "adjustments to income" and includes such things as moving expense, employe business expense, contributions to an IRA or Keogh plan and alimony payments.

The second group is called "deductions" -- and here you have a choice. You can take the zero bracket amount (ZBA), which used to be called the standard deduction. (And may be again: As part of a forms simplification program, the IRS is considering returning to the old name, which I think was more descriptive.)

If you use the ZBA, you don't have to do anything. It already is built in to both the tax tables and the tax rate schedules. You automatically are credited with the proper ZBA for your filing status when you look up or calculate your tax liability.

If you decide to itemize deductions, you do the supporting calculations on Schedule A, which then must be attached to your return. The main categories of itemized deductions are medical expenses, taxes, interest, contributions and casualty losses, plus quite a few that fall under the "miscellaneous" heading. After you have arrived at deductions, you must then subtract your proper ZBA, since that amount is already credited in the tax tables and rate schedules. The balance (the excess over the ZBA) should then be transferred to line 33 on page 2 of Form 1040.

"Tax credits" is the third major group of items used to reduce your tax liability. Credits are subtracted from the initial tax figure which had been either extracted from the appropriate tax table or calculated from the proper tax rate schedule (using Schedule TC).

Since a tax credit reduces your liability dollar for dollar, it offers the largest tax savings. Included in this group are such things as political contributions, child care expenses, energey credits and the credit for the elderly -- all found on page 2 of Form 1040.

There also is a fourth category that usually isn't considered with the other three because it doesn't appear anywhere on your tax return. This fourth group could be called "exclusions from income;" it consists of income that is simply not taxable.

You may have social security payments or Veteran's Administration benefits, interest received on tax-free municipal bonds, gifts and bequests, and lump-sum life insurance payments to you as beneficiary.

Remember to exclude these payments entirely when adding up your income. But if you itemize, you can hold them back in (on your worksheet) to get total spendable income on which to figure the table allowance for the sales tax deduction.

I hope this explanation clears up your confusion. More detailed information on all of these items was published in the annual Washington Post Income Tax Guide on March 2.

Q: I've heard that I can take advantage of the high rate on six-month certificates of deposit even though I don't have the required $10,000 minimum. If there is a way to do this, would you please explain?

A: You're talking about what generally is called a "loophole" money market certificate, available at many financial institutions.

If you don't have the minimum $10,000, the bank or other savings institution will lend you the money to make up the shortfall -- often as much as half of the total.

We can use an example to demonstrate how the loophole certificate works (interest rates are changing so quickly that those I use here may have no relation to the real world when this column appears -- but they will serve as an illustration.)

Let's say you have $6,000 available to invest, and you would like to purchase a six-month CD paying 12 percent. You go to your bank, and the people there agree to lend you the missing $4,000 at an annual interest rate of 16 percent.

You take the loan and buy the certificate (which is itself collateral for the loan). What do you have at the end of the six-month period?

The $10,000 certificate will bring you $600 interest; the $4,000 loan will cost you $320. So you end up with a net return of $280 on the $6,000 of your own money.

That figures out to a yield of 9.3 percent (on an annual basis) -- quite a bit more than the same $6,000 would have earned in the normal savings account at a bank, savings and loan or credit union.