- Learn tax key terminology such as AGI, W-2, 1099 Forms, Tax Deductions, etc.
- Gain essential insights to understand tax obligations and optimize financial decisions.
Do taxes have you feeling like you've stumbled into a secret society with its own language? You're not alone! The tax season is full of jargon that can leave even the savviest of individuals scratching their heads. But don't worry, we’re here to help! In this brief guide, we’ll give you the lowdown on some of the most important tax terms you should know.
By the time you reach the end, you’ll be on your way to feeling like a certified tax expert – or at least like you can impress your friends at the next tax season party.
AGI (Adjusted Gross Income)
AGI is, in many ways, the starting point of your tax journey. It's your total taxable income before any deductions or credits, and it's a number that is magic for tax professionals.
Tax Season-Speak: "Your AGI is a critical factor in determining your taxable income."
W-2 Form
IRS Form W-2 is the wage and tax statement that employers send to employees to summarize their earnings and the taxes withheld. It's like a report card, so to speak, for grown-ups.
Tax Season-Speak: "Don't forget to report your W-2 income."
1099 Form
If you're a freelancer or contractor, you should receive IRS Form 1099 from every client you had over the tax year. It tells the IRS that you've earned income without any withholding, which means you'll have to pay up come tax time.
Tax Season-Speak: "Freelancers usually receive a 1099 form."
Generally, it’s smart for freelancers to set aside at least 20% of their income for tax payments, particularly if they are required to pay quarterly taxes. Remember: As the gig economy becomes more and more popular, Uber drivers, DoorDash delivery personnel, and others who work similar gigs are all considered freelancers by the IRS!
Tax Deductions
Deductions are like tax discounts. They reduce your taxable income and can include things like mortgage interest, medical expenses, and charitable contributions.
Tax Season-Speak: "Don't forget to itemize your tax deductions."
Tax Credits
Unlike deductions, credits directly reduce the taxes you owe. Most are not, but some are refundable. They're like the golden tickets of the tax world, offering you cold, hard cash from the IRS. Even if not refundable, tax credits will reduce income tax dollar for dollar.
Tax Season-Speak: "You might qualify for the Child Tax Credit."
IRS
The Internal Revenue Service, or IRS, is the federal agency responsible for collecting taxes. It's the big boss of tax land.
Tax Season-Speak: "I need to file my return with the IRS."
Filing Status
Your filing status defines how you'll file your taxes – single, married, head of household, etc. Your status determines all sorts of things about your annual tax return, including your tax rate and eligibility for certain deductions.
Tax Season-Speak: "Your filing status affects your tax rate."
Tax Bracket
Tax brackets are like VIP sections for your income. The more you earn, the higher the percentage of your income you pay in taxes. The United States has a progressive tax system, in which people who earn more money pay more taxes when they reach certain income thresholds.
Note, though, that only the money earned above a specific income threshold is taxed at that particular rate.
Tax Season-Speak: "I'm in the 22% tax bracket."
Tax Refund
If you've paid more in taxes throughout the year than you owe, the IRS gives you a refund. It's the government's way of saying, "Here's your money back." A tax professional who specializes in tax planning can give you the best shot at maximizing your refund each year.
Tax Season-Speak: "I'm expecting a nice tax refund this year."
Dependent
Dependents are the people you financially support, like children or elderly parents. Claiming them can lead to valuable tax breaks. The IRS has specific qualifications a person must meet to qualify for dependency status.
Tax Season-Speak: "My kids are my dependents."
Taxable Income
In short, taxable income is what's left of your adjusted gross income after deductions. The IRS wants a piece of this pie. Tax professionals will often employ various strategies, such as charitable giving, to reduce their clients’ taxable income, thereby reducing their tax burden.
Tax Season-Speak: "Your taxable income is the amount you owe taxes on."
Standard Deduction
The standard deduction is the IRS's way of saying, "Here's a simplified, no-questions-asked discount on your income." You can take it without needing to itemize your deductions, Unless you have more in itemized deductions than the standard deduction it makes sense.
Tax Season-Speak: "Should I itemize or take the standard deduction?"
Feeling smarter? Now you can navigate the tax season with a little less stress and a lot more confidence. Tax jargon doesn't have to be your kryptonite. With these terms at your fingertips, you're well on your way to mastering the secret language of taxes. Just remember, it's always a good idea to consult a tax professional for expert guidance. Click here to Request a consultation with a Fiducial Advisor at our office locations. Happy filing!
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