Taxes can feel overwhelming, but understanding a few key terms can make filing much easier. Knowing these basics will help you claim deductions, apply for credits, and avoid common mistakes. Here’s a breakdown of the most important tax terms that affect most filers.
1. Gross Income
Gross income is the total amount you earn in a year before taxes or deductions. It includes wages, salaries, tips, bonuses, rental income, and interest from investments.
2. Adjusted Gross Income (AGI)
AGI is your gross income minus specific adjustments. Common deductions include student loan interest, educator expenses, and retirement contributions. Your AGI helps determine your tax bracket and eligibility for tax credits and deductions.
3. Taxable Income
Taxable income is what remains after subtracting the standard deduction or itemized deductions from your AGI. This amount determines how much tax you owe.
4. Standard Deduction
The standard deduction is a fixed dollar amount that reduces your taxable income. The amount depends on your filing status (single, married, etc.). Most taxpayers take the standard deduction instead of itemizing expenses.
5. Itemized Deductions
Instead of taking the standard deduction, you can list certain expenses to reduce your taxable income. Common itemized deductions include:
- Mortgage interest
- Medical expenses
- Charitable donations
If your total itemized deductions exceed the standard deduction, it might be worth itemizing.
6. Tax Credits
Tax credits directly lower the amount of tax you owe dollar for dollar. Some popular credits include:
- Child Tax Credit – Helps parents reduce their tax bill for each qualifying child.
- Earned Income Tax Credit (EITC) – A credit for low- to moderate-income workers. Some credits are even refundable, meaning you can get money back even if you owe no tax.
7. Withholding
This is the amount your employer takes out of your paycheck for federal and state taxes. If too much is withheld, you get a refund. If too little is withheld, you may owe taxes. You can adjust your W-4 form to change how much is withheld.
8. Filing Status
Your tax rate and deductions depend on your filing status. The five main statuses are:
- Single
- Married Filing Jointly
- Married Filing Separately
- Head of Household
- Qualifying Widow(er)
9. Dependent
A dependent is someone you support financially, like a child or a qualifying relative. Claiming dependents can help you qualify for valuable tax credits.
10. Capital Gains and Losses
If you sell stocks, property, or other investments, you may have a capital gain (profit) or capital loss (loss). Short-term gains (held for less than a year) are taxed at a higher rate than long-term gains.
11. Alternative Minimum Tax (AMT)
The AMT is an extra tax that applies to high-income earners who use too many deductions. It ensures that everyone pays a minimum tax amount.
12. W-2 Form
A form your employer provides that reports your wages and the taxes withheld from your paycheck. You need this form to file your tax return.
13. 1099 Form
If you earn income outside of traditional employment—such as freelance work, interest, or dividends—you’ll receive a 1099 form instead of a W-2.
Stay Informed and Organized
Understanding these terms can help you file with confidence. Also, make sure you have all your necessary tax forms before you start filing. Need a refresher? Check out our previous post on Essential Tax Forms to Gather Before Filing. For more details, visit the IRS website or consult a tax professional.
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