Knowing these ten tax terms will make it much easier to file taxes or any tax related form. They also let you know what goes out of your income.
Adjusted Gross Income (AGI)
AGI is a term that refers to income earned through the year adjusted from certain allowed deductions. This the gross income like salaries, interest income, royalties, rental income, income from retirement accounts, dividends, capital gains, alimony received, etc. Certain deductions may include some business expenses, alimony paid, moving expenses, contribution to IRA, health savings account etc. You can find it on 1040 Form in the last line of first page.
Tax Credits
Tax credits are refundable or non-refundable. They are different from deductions and hence directly influence your tax liability. Tax credits are the extra tax you are paying at source before you filed returns because the taxation rate is higher. Whatever is refundable tax credit can be reduced from the tax liability directly.
Tax Deductions
Any expense which is considered for tax deductible is referred by this term. These deductions reduce the overall or gross income mentioned in the first term. It increases the purchasing power of money because certain purchases are considered tax deductible. Unlike tax credit only a percentage of tax deductions does affect tax.
Standard Deductions
This is a fixed dollar value that can be deducted from income to arrive at taxable income. The value depends on the status of the individual like single, married or head of household, male, female, retired/blind etc. But this is only for those tax payers who do not go for Itemized deduction discussed in the next term.
Itemized Deductions
Itemized deductions are certain allowed deductions that are used to reduce the AGI to calculate net tax liability. These include medical expenses, theft losses, mortgage interest, other taxes etc. One can select either Standard or Itemized deductions. It is better to select either of them to get a lesser taxable income. But if the taxpayer's status is married and filing separately then the spouse should also choose the same type deductions.
Tax Exemptions
Exemptions are also used to deduct amount used for certain activity from the AGI. This again reduces the net tax liability. Exemptions are based on government's laws for certain economic activity like charitable donations, tax saving, or even exemptions for dependents. Note that this is in addition to deductions.
Progressive tax
Progressive taxation refers to increase in the tax rate as the income increases. The tax structure like a slab structure wherein first slab takes 10%, second 15%, third 25% and above that 33%. This effectively increases the taxes for rich people while reducing them for the poor people.
Taxable Income
This refers to the gross income after removing adjustments, deductions and exemptions. This can vary based on tax rate on certain incomes. But it is used to calculate final tax for an individual.
Voluntary Compliance
It refers to social responsibility that an individual or a corporation takes while paying the taxes to the government. It is alternative to state regulations and help increase public image of an organization.
Tax Withholding
Withholding refers to employers taking taxes of employees to put in their IRS account as they earn money. Instead of at the end of the year, this is paid at source before receiving pay checks. Dividends and interest income also come after tax withholding.
One important thing a citizen must remember is that apart from these terms, there is a "tax refund". When all taxes are paid at source and the person had done some tax savings but it was too late to be reflected in tax deducted at source, then there will tax refund depending on the net tax payable by the person.
This is one important thing to remember for us, as the government will be very busy in collecting the taxes rather than refunding them to the citizens. By due diligence one can regain lost refunds.
This is one important thing to remember for us, as the government will be very busy in collecting the taxes rather than refunding them to the citizens. By due diligence one can regain lost refunds.