10 Key Tax Terms You Must Know
Updated: Nov 3, 2021
For all of the tax novices, it is essential to understand the important tax terms that are often used during tax season. These definitions will help you better understand your income and deductions, which will be helpful when filing taxes with a professional or preparing them on your own.
Adjusted Gross Income - This refers to an individual's gross taxable income minus any adjustments they are eligible for such as contributions to qualified retirement plans like 401(k)'s or IRA's, college tuition, moving expenses, self-employment expenses (including health insurance premiums), alimony paid or received, and certain employee business expenses.
Withholding - The amount that an employer withholds from an employee's salary and pays directly to the government is known as a withholding tax. The amount withheld is used as a credit against the employee's taxable income for the year.
Gross Income - Your gross income is your entire earnings before deductions and taxes. Salary, wages, tips, capital gains, interest, and dividends are all examples of gross income.
Tax exemptions - amounts that lower the amount of your taxable income that is subject to taxation. If you're married, you may usually claim one exemption for yourself and one for your spouse. For each dependent, you can claim one exemption.
Deductions - Deductions are costs that the IRS permits you to deduct from your adjusted gross income (AGI) to arrive at your taxable income. The smaller your income, the lesser your tax burden will be in most situations.
Standard Deduction - This is a set amount of money that a taxpayer can deduct from his or her earnings. All filers are eligible for the standard deduction, which is determined by the taxpayer's filing status.
Itemized Deduction - These are costs that can be subtracted from your AGI to assist you arrive at a lower income level from which to compute your tax obligation. Medical costs, other taxes (state, municipal, and property tax), mortgage interest, charity donations, casualty and theft losses, unreimbursed employee expenses, and other deductions like gambling losses are all itemized deductions.
Credits - Tax credits are similar to store credits in that they help you save money. You can utilize the credit to lower the amount of the check you must pay to the IRS once you compute your tax bill. Tax credits are more useful than deductions since they reduce the amount of tax you owe rather than the amount of taxable income you earn.
Filing Status - The way you file and the tax advantages you're entitled to, such as the size of your standard deduction, are determined by your relationship status. Single, Married Filing Jointly, and Head of Household are the most common filing status options.
Taxable Income - All permissible adjustments, deductions, and exemptions are subtracted from your overall, or gross, income. It's the total amount of money you've earned that you'll use to figure out how much tax you owe.
Each of these terms has an importance in maintaining your financial well-being as you try to keep up with filing your taxes each year. These terms are very vital to know, but in terms of relieving your current tax debt, the only term you really need to know is the IRS Fresh Start Program.
IRS Fresh Start Program
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