10 Terms You Need to Know This Tax Season

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Tax season luckily only comes once a year, however, it is never too late to educate yourself on your tax terms. This includes forms, cuts and everything in between. Tax terms can seem intimidating and daunting and this is by design.

Understanding these terms don’t have to be confusing. With a little time, you can gain a basic understanding of what you are reading and what your tax return entails. You can simplify your tax preparation system in no time. You can use this list as a guide to help you submit your taxes, or have a more knowledgeable conversation with your accountant this year.

1)1040 forms

• 1040EZ-The 1040EZ is the shortest of the 1040 forms and you cannot use this form for an itemized deduction. You must meet certain qualifications to file with this form, including but not limited to: taxable income of less than $100,000, you can’t have any dependents, and must file as single or married-filing jointly.
• 1040A-The 1040A is more comprehensive than the 1040EZ and allows you to create more deductions than on the 1040EZ form. Unfortunately, this form still doesn’t allow you to make itemized deductions.
• 1040-The 1040 or “long form” is the most comprehensive of the tax forms. It allows you to make itemized deduction, but there will be more forms to fill with if this is the case. A Schedule A will most likely be the form required. This form will list out those itemized deductions.

2)Adjusted Gross Income (AGI)-The adjusted gross income is your gross income minus your deductible items. Adjusted gross income is used to calculate your total taxable income.

3)Taxable Income–Taxable income is the amount calculated on your gross income minus the tax deductions for which you are eligible. Your taxable income determines how much tax you owe.

4)Archive Status-Filing status is how you define your relationship status on your taxes. This is what determines the rate at which your income is taxed. The different options include: single, married-filing jointly, married-filing separately, head of household, qualifying widow(er) with child.

5)Dependent-Your family members are people in your household who rely on your income. This includes any children you have and your partner. This would also include any children that you are the legal guardian of.

6)Deductions-Deductions are expenses that you have accrued during the year that you can deduct from your gross income, according to the IRS. Possible cuts include student loan interest, charity deductions, or relocation expenses. In most cases the following applies: the lower your taxable income, the lower your tax bill, in most cases.

• Standard Deductions-Standard deductions are a fixed dollar amount that is applied to your gross income before any income tax is charged. The amount of the deductions depends on your filing status.
•  Itemized Deductions-Itemized deductions are deductions that can be claimed if you choose not to use standard deductions. If you opt for the itemized deductions, the amount of your deductions will be deducted from your gross income based on eligible expenses instead of the standard deductions. To do this, you must complete a 1040 Form and then attach a Schedule A Form that will list the itemized deductions.

7)Exemption-The exemption is the amount the IRS allows you to deduct from your income based on the number of dependents that you claim. This includes your spouse and children, but they must be claimed as dependents.

8)W-4 Form-A W-4 is the form you fill out when you first start a job. The information in the form (marital status, number of dependents, savings, etc.) will determine how much federal income tax will be deducted from your paycheck.

9)W-2 form-The W-2 form will be given to you by your employer to be presented with your 1040 when tax season approaches. It includes the wages you earned for that year, the amount of federal and state income taxes on your pay slips, and your Social Security tax information.

10)Withholding-This is the amount that will be deducted from your check on each specified payday to go to your Social Security and income taxes. The amount withheld depends on your salary and the information included on your W-4 such as marital status and number of dependents.

Adding these 10 tax terms to your vocabulary will help you more easily navigate tax season for your mind and your forms.