There are 3 important numbers when doing tax planning. Gross Income, Adjusted Gross Income and Taxable income. If you use turbo tax, the software regurgitates these numbers to you in a summary at the end of the return when you file.

Here is the definition of all 3.

Gross Income- sum of all the wages you earned. If you have two jobs both salaries are summed, if two spouses work, the two salaries are added up.

Gross income determines a few things. Medicare and SS liability is the biggest. Gross income is also the guideline used for saving (for example save 20% means save 20% of the GROSS income calculated by adding all salaries together).

Adjusted Gross Income- Gross income minus pre-tax contributions or payments.

To calculate AGI, 401k contributions are substracted from gross income. So are health care premiums paid by employer, HSA/FSA contributions, child care account contributions, traditional IRA (deductable IRA) contributions and a few other things not mentioned here. Add up the contributions or payments and subtract that sum from the gross income above.

It should be noted that AGI is used to determine whether you are eligible for some of the deductions which reduce AGI (like deductable IRAs). AGI is also used to determine if you eligible for a Roth IRA (even though the Roth contribution does not modify AGI).

The third number is taxable income. Taxable income is calculated by adding up deductions and substracting the deductions from AGI.

Popular deductions include mortgage interest paid, property taxes paid, federal, state and local taxes paid, business expenses paid, education expenses and student loan interest paid, and many many others.

Some deductions are phased out based on AGI. If your AGI is high enough, you cannot deduct student loan interest for example.

It is also good to know the tax tables. The reference I use is http://fairmark.com/refrence/index.htm.

Why is this important?
Take my 2007 tax return. Married filing jointly.

Gross income of 120k+
AGI was around 103k. 401k contributions are the key reducer for me in this regard.
Taxable income was 62k. I had deductions which added up to more than 40k. Mortgage interest and taxes were the keys here.

Now look at the tax tables from fairmark:
Married filing jointly.

Income between 0 and $16050 is taxed at 10% (tax from prior bracket is zero).
Income between $16051 and and $65100 is taxed at 15% (so add $1605 from 10% bracket to any income less than $65100).
Income between $65101 and $131450 is taxed at 25% (plus the $8962.50 which is the $1605 from 10% bracket and the $7357.50 from the 15% bracket).

If you looked at my gross income, you would think I was square in middle of 25% tax bracket. If you looked at AGI, same issue. But after deductions are factored in, my taxable income is at top end of 15% bracket.

15% bracket caps at $65100
My taxable income was 62k and change. I can get 3k of raises and still be in 15% bracket- this makes the Roth IRA a real good deal for me- I am contributing to it while paying 15% taxes and will probably withdraw when I am in 25% tax bracket based on my income need.

A few points-
Taxes change each year. The percentages (10%-15%-25%...) change around every 8-10. The caps ($16050, $65100, $131450) change each year.

I am not a tax accountant or tax preparer. Most of what is above was learned or interpreted from turbo tax.