7 Tax Terms Everyone Should Know
Whether you're filing taxes on your own, or getting assistance with a tax professional, it helps to be informed. Below are 7 tax terms everyone should know.
Credits
For tax purposes, credits reduce how much you pay dollar for dollar.
Deductions
Deductions reduce the amount of income you claim on your income taxes.
Examples of deductions include:
- Student Loan Interest
- Mortgage Interest
- Retirement Account Contributions
- Charity Donations
Withholding
The amount of income that you choose to set aside for state and federal taxes each year is your withholding.
This should be based on how many allowances you have. It's best to set up your monthly withholding to come out of your paycheck. This could lower the amount you may owe when you file.
AGI
AGI is short for Adjusted Gross Income. It's calculated by subtracting certain IRS-specified deductions from your gross income.
Your AGI helps to determine your taxable income, and whether you qualify for any credits or deductions.
Dependent
A dependent is a person who is financially dependent on you, usually a child or an adult relative you support.
You may be able to claim certain tax credits or deductions for dependents.
Itemized Deduction
Itemized deductions are qualified expenses that the IRS allows you to subtract from your AGI.
Itemized deductions can include mortgage interest you paid, medical and dental costs, or charitable gifts.
Standard Deductions
This is a standard amount that can be used to reduce your taxable income.
Your standard deduction is based on your filing status. The standard deduction ensures that at least some of your income is not taxed.
