Day 3: Key Tax Terminology
Understanding the key tax terminology used in tax filing is crucial to navigating the process smoothly. Today, we’ll break down some of the most common tax terms you’ll encounter.
Gross Income
Gross income is the total income you earn before any deductions or taxes are taken out. This includes wages, salaries, bonuses, interest, dividends, and rental income.
Adjusted Gross Income (AGI)
Adjusted Gross Income is your gross income minus certain adjustments. These adjustments can include contributions to retirement accounts, student loan interest, and tuition fees. AGI is used to determine your taxable income.
Taxable Income
Taxable income is the amount of income that is subject to taxes. It’s calculated by subtracting deductions and exemptions from your Adjusted Gross Income.
Deductions
Deductions are specific expenses that you can subtract from your income to reduce your taxable income. There are standard deductions and itemized deductions. The standard deduction is a fixed amount, while itemized deductions are specific expenses like mortgage interest, medical expenses, and charitable contributions.
Credits
Tax credits reduce the amount of tax you owe, dollar for dollar. Unlike deductions, which lower your taxable income, credits directly reduce your tax bill. Common credits include the Earned Income Tax Credit (EITC) and the Child Tax Credit.
Exemptions
Exemptions reduce your taxable income. There are personal exemptions for yourself and dependents, though recent tax reforms have suspended personal exemptions.
Withholding
Withholding is the amount of money your employer takes out of your paycheck to cover your estimated tax liability. This amount is sent directly to the IRS and state tax agencies.
W-2 and 1099 Forms
-W-2 Form: Issued by your employer, it reports your annual wages and the amount of taxes withheld from your paycheck.
-1099 Form: Used to report various types of income other than wages, such as freelance earnings, interest, and dividends.
Filing Status
Your filing status determines your tax rates and eligibility for certain deductions and credits. Common statuses include Single, Married Filing Jointly, Married Filing Separately, and Head of Household.
Tax Bracket
Tax brackets determine the rate at which your income is taxed. The US tax system is progressive, meaning higher income is taxed at higher rates.
Why This Matters
Understanding these key tax terminology terms will help you navigate tax forms and instructions more effectively. It empowers you to make informed decisions, maximize deductions and credits, and accurately file your taxes.
Stay Engaged
Feel free to ask questions, leave comments, and share your thoughts. Tomorrow, we’ll explore the different types of taxes in more detail.
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Stay tuned and prepare to become a tax filing pro with MTF & Co. and One Web One Hub!
Ready to dive deeper into the world of taxes? See you tomorrow!
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