Taxes 101: 10 terms to know about taxes

Quick insights

• Before you file your taxes, calculating your adjusted gross income (AGI) can help determine how (or if) you should file a tax return.
• You may be eligible to claim certain credits and deductions on your tax return, which could lower your taxable income.
• You may want to consult a tax professional if you need specific advice about filing your taxes.

Whether you’re filing taxes for the first time or knowledgeable about the process, filing your tax return may feel like an overwhelming task at times. However, the task may feel more manageable if you know more about the process.

Below, we cover 10 tax terms and definitions, plus a few things you may want to consider before filing your tax return.

10 tax terms and definitions

Reviewing and understanding the following tax-related terms may be helpful prior to filing your tax return:

1. Withholding

Withholding refers to the amount of your paycheck that your employer holds back to pay your income taxes throughout the year. This means your employer will pay this amount to the IRS on your behalf.

The amount withheld from checks depends on the amount of income earned and the information an employee provides to their employer on their Form W-4 (Employee’s Withholding Allowance Certificate).

Details on Form W-4 include:

• Filing status (single or married)
• Number of withholding allowances claimed (each allowance claimed will reduce the withheld amount)
• Additional withholding requested by the employee

2. Adjusted gross income

Your adjusted gross income (AGI) refers to your total annual income from all sources. This can include wages, tips, capital gains, retirement income and other forms of taxable income (with some deductions applied). Your AGI helps determine eligibility for tax credits and other benefits.

To calculate your AGI, start with your total (gross) income from all sources.

3. Tax deductions

Tax deductions are expenses you can subtract from your AGI to reduce total taxable income. If a taxpayer qualifies for deductions, these deductions can reduce the amount they need to pay in taxes.

Refer to the IRS for an up-to-date list of deductions.

A few examples include:

• Alimony payments
• Educator expenses
• Deductible HSA or IRA contributions
• Deductible self-employment taxes
• Retirement contributions
• Student loan interest
• Savings account interest

The above expenses can be deducted whether you take the standard deduction or itemize deduction (both of which will be described in more detail below).

4. Tax credit

Tax credits are dollar-for-dollar reductions in the amount you owe in taxes. You can claim credits when you file your tax return. Ensuring that you get credits you are eligible for may lower your tax payment or increase a potential tax refund. Using tax filing software can help you find out which credits you qualify for.

5. Exemption

A tax exemption is a specific amount that can be excluded from your total income when filing taxes. This could include certain income from tax-exempt bonds. Additionally, the IRS grants some organizations tax-exempt status for federal income tax. For example, religious and charitable organizations may fall under this category if they meet certain criteria.

6. Filing status

Filing status is a category used to determine the rate at which your income is taxed. For example, you may file as single or married/filing jointly. Filing status can also determine your eligibility for certain tax credits.

7.Standard deduction

The standard duction is a fixed dollar amount taxpayers can subtract from their taxable income (if they do not itemize specific deductions). In general, the IRS adjusts the standard deduction annually for inflation.

A few factors that can impact the standard deduction include:

• Filing status
• Whether the taxpayer is 65 or older and/or blind
• Whether another taxpayer can claim you as a dependent

8. Itemized deductions

Itemized deductions are specific expenses allowed by the IRS that can be deducted from your AGI. A few expense examples may include mortgage interest, state taxes and charitable contributions. Itemizing deductions may be beneficial if they exceed the standard deduction.

9. Earned Income Tax Credit (EITC)

An Earned Income Tax Credit is a refundable tax credit for low- to moderate-income working individuals and families (particularly those with children). Those who qualify can use the credit to reduce the amount of taxes owed or potentially increase their refund.

The amount of this credit may change depending on whether qualified taxpayers have children or dependents, are disabled or meet other criteria.

10.Capital gains

A capital gain refers to the profit from the sale of an asset, such as stocks or real estate, which is subject to taxation. Capital gains are taxed at different rates depending on a taxpayer’s overall taxable income. For example, capital gain rates range from 0-20% depending on your income level.

You may want to consult with a tax professional for help navigating capital gains tax rates if this applies to you.

Things to consider before filing your tax return

Ready to file your taxes? Here are a few things you may want to consider that could help you start the process:

• Gather tax documents: Organizing relevant documents needed to file taxes in one place may allow you to avoid errors and delays. This might include relevant tax forms, paycheck stubs or other personal details.
• Track expenses throughout the year: If you expect to file an itemized taxdeduction, it could be helpful to keep track of deductible expenses throughout the year.
• Research tax preparation software: Using tax preparation software may help youdetermine which credits and deductions you qualify for. This may also be a goodoption if you are doing your own taxes vs. consulting a professional.
• Know when to file: April 15^th is typically the due date for filing taxes each year. Note that this deadline may be extended by a few days if the 15^th falls on a weekend or holiday. Refer to the IRS’ website for the official deadline for filing your tax return.
• Consider hiring a tax professional: If you have any questions or concerns duringthe tax preparation process, it may be wise to hire a tax professional for personalized guidance.

Taxpayers can also choose to create or visit their IRS Online Account prior to filing their tax return. Here, they can review key details regarding tax-related information from their most recent tax return, such as their AGI.

In summary

Taxes can be complex, and there are several terms that are important to understand prior to filing your taxes. You may also want to consult a tax professional or use tax preparation software to check if you qualify for any tax deductions or credits that reduce your taxable income.

The IRS also offers tax preparation software for taxpayers with an AGI under a certain amount. If you don’t qualify for this service, you may choose from manually completing forms, using tax preparation software or hiring a professional.