Top 10 tax terms you need to knowDate posted: 3/6/17 09:15:00 AM
With the April 18 tax filing deadline just around the corner, you should start preparing your personal return. To help you on that journey, here are the top 10 tax terms you need to know:
1. Form 1040
This is federal income tax return form you'll use to file your 2016 taxes. The Internal Revenue Service (IRS) has three different 1040 forms, and the one you fill out depends on your economic status.
- 1040: The standard tax return form. You report everything on this form, from income to properties owned.
- 1040A: A shorter and less complex version of the standard 1040.
- 1040 EZ: Designed for single or joint filers with no dependents. It's also less complicated than the previous two forms.
2. Adjusted gross income
Your adjusted gross income (AGI), according to Bankrate, is the income you received throughout all of 2016 minus any adjustments, such as traditional individual retirement account (IRA) contributions. Your AGI determines which deductions and credits you may claim.
3. Taxable income
Taxable income is the amount of your income (after credits and deductions) subject to income tax and is the number used to determine what you owe in taxes.
Filers can lower taxable income by claiming deductions, exemptions and credits.
4. Filing status
Your filing status indicates which tax rates apply to your income and the size of your standard deduction.
The different filing statuses are:
- Married filing jointly.
- Married filing separately.
- Head of household.
- Widow or widower.
5. Standard deduction
According to U.S. News & World Report, a standard deduction is a fixed dollar amount subtracted from your AGI that reduces the tax amount you'll owe. Standard deductions are available to every taxpayer and change annually, noted Bankrate.
6. Tax deductions
Tax deductions help lower your taxable income when you subtract these expenses from your AGI. Subtracting a $9,000 deduction from your $39,000 AGI means your taxable income is $30,000.
Common deductions include moving expenses if your relocation was related to work, traditional IRA contributions and any student loan interest you paid in 2016.
7. Itemized deduction
Subtract itemized deductions from your AGI to further lower your taxable income. Some itemized deductions may be medical expenses, mortgage interest and charitable donations.
According to TurboTax, exemptions either lower or completely eliminate your obligation to pay taxes. If you're single and can't be claimed as a dependent on anyone else's return, you can claim a personal exemption. But if you have children, you can take an exemption for each child.
9. Tax credit
Tax credits lower the amount of money you owe to the federal government. Credits are a dollar-for-dollar reduction. For example, if you claim the earned income tax credit for $1,000 and owe $400 to the IRS, you'll receive a $600 refund.
Claiming all of your eligible credits can help boost your refund.
10. Voluntary compliance
Every citizen who earned $10,350 or more in 2016 must file a tax return, and the IRS expects you to report income and file that return with honesty. If you file a return with falsified information, the IRS may fine you $5,000. You may also be criminally charged with tax perjury, CNN Money stated.
Make the most of tax season by knowing the top 10 tax terms.
This content is for informational purposes only and is not for the purpose of providing legal or tax advice.
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