8 Basic Tax Terms You Need to Know this Tax Season
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For those new to the tax filing process, preparing your returns can feel intimidating and daunting. What if you forget something? What all do you need? And, what does everything even mean? We’ve put together an introductory list of basic tax terms you need to know this tax season.
Tax Terms You Need to Know
- Adjusted Gross Income: AGI this is your total income from all available taxable sources, like salary, wages, tips, capital gains, interests, etc., following a few initial adjustments.
- Audit: An audit is a requested review of your tax return by the IRS to make sure you’ve filed correctly. Usually, this happens by mail and only covers a certain line item of your return, not the entire thing.
- Credit: A tax credit is a certain amount or amounts of money allowed to be subtracted from your total taxes to be paid, but can’t bring the total to less than zero. Tax credits reduce taxes directly, whereas deductions reduce your amount of taxable income.
- Deduction: This is a reduction applied to your total taxable income. Common deductions include personal exemptions, mortgage interest and retirement contributions, to name a few. While a tax credit reduces your total taxes to be paid, a deduction reduces your amount of taxable income.
- Exemption: Exemptions, like deductions, reduce your tax liability by a certain amount per exemption. You can generally file one personal exemption as well as one exemption per dependent.
- Filing Status: How you file and what what tax deductions you qualify for are determined by your marriage status, whether you’re single or married filing jointly.
- Taxable Income: Taxable income determines your tax liability and is determined by subtracting your deductions and exemptions from your adjustable gross income.
- Withholding: A withholding is the amount of money your employer reserves from your paycheck each month throughout the year and sends to the government as partial payment of your yearly tax. You can claim allowances that allow you to reserve an amount of money each month, but the more allowances you have, the more you may end up owing when tax season comes around.