10 terms you should know for tax season
Tax season comes once a year! That being said, it’s never too late to brush up on your tax terms.
From forms to deductions, and everything in between, tax season terms can seem a bit foreign and intimidating. It doesn’t have to be that way. With just a basic understanding of what you’re looking at and what makes up your tax return, you can streamline your tax prep in no time. Use this list as a guide to help you file your taxes or simply have a smooth conversation with your accountant this year.
- 1040 forms
The 1040EZ is the shortest of the 1040 forms and doesn't allow you to use an itemized deduction. You must meet certain qualifications including, but not limited to: taxable income less than $100,000, no dependents, and filing as single or married-filing jointly.
The 1040A is more extensive than the 1040EZ and allows you to make deductions that aren't allowed on the 1040EZ form. Unfortunately with this form you can still not make itemized deductions.
The 1040, or “the long form,” is the most extensive of the tax forms. It does allow you to make itemized deductions, but with it there will be more forms to fill out. Of the additional forms, a Schedule A is most likely to be in the mix, as the form will detail the itemized deductions you wish to make.
- Adjusted gross income (AGI)
Adjusted gross income is your gross income minus deductions. The adjusted gross income is used to calculate your total taxable income.
- Taxable income
Taxable income is the amount of income that is calculated by subtracting tax deductions, which you qualify for, from your gross income. Your taxable income decides how much you owe in taxes.
- Filing status
Filing status is how you define your relationship status as on your taxes, from there it will determine the rate that your income is taxed. The different statuses include: single, married-filing jointly, married-filing separately, head of household, qualifying widow(er) with child.
Dependents are the persons in your household that rely on your income. This would include any children that you have, as well as your spouse.
Deductions are any expenses that you accumulated during the year that the IRS allows you to subtract from your gross income. Possible deductions could be student loans, charitable deductions, or moving expenses. In the majority of cases the less taxable income you have, the lower your tax bill will be.
- Standard deductions
Standard deductions are a fixed dollar amount applied to your gross income before any income tax is applied. The amount of the deduction is dependent on your filing status.
- Itemized deductions
Itemized deductions are the alternative deductions available if you do not choose to utilize standard deductions. If you choose itemized deductions, the amount is deducted from your gross income based upon qualifying expenses. This will require you to file the 1040 form and then detail the individual deductions on another form called a Schedule A.
- Standard deductions
Exemption is the amount that the IRS allows you to subtract from your income that is based upon the number of dependents that rely on your income. This would include your spouse and children, but they must be claimed as dependents.
- W-4 form
The W-4 is the form you fill out when you first start a job. The information given on the form (marital status, number of dependents, savings etc.), will determine how much federal income tax will be withheld from your pay.
- W-2 form
The W-2 form is given to you by your employer to be submitted along with your 1040 when it comes time for tax season. It details the wages that you earned for that year, the amount of federal and state income tax that was taken from your paychecks, and your social security tax information.
This is the amount withheld from your check every payday that is designated to going towards your social security and income taxes. The amount deducted is based on your salary and the W-4 filed with your place of work.
Adding these tax terms to your vocabulary will help you prepare your mind (and your forms) making tax season a breeze.
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