With so many forms to understand and lots of unfamiliar terms to get used to, filing your taxes can seem like an alien process, especially for the first-time or inexperienced taxpayer. It’s easy to make a wide range of mistakes. To help prepare for the tax season, it makes sense to get to grips with the vocabulary paying before attempting to fill in your tax return. We’ve broken down five important terms to know when doing your taxes.
1. Filing status
Before you sit down to prepare your taxes, you need to understand what your fiscal identity looks like and what the implications are. Single, Married Filing Jointly, Married Filing Separately, and Head of Household are all different options that have an effect on the way in which you file and what tax breaks you are entitled to.
One thing is for sure about doing your taxes; there are a lot of forms involved! We could be here all day going over all the different forms, but for first-time filers, the three main ones to understand are the 1040, W-2, and 1099.
Your standard tax form which can either be filled in manually and sent by post or completed electronically and sent online. This is where you report your income, claim deductions and credits, and calculate your tax return or bill.
If you are an employee, it is important to make sure you receive this form from your employer. Your employer reports your income and the amount of taxes withheld from your paycheck. If you are self-employed or work independently, your earnings are reported via a Form 1099.
There are several types of 1099 forms. The main one is used to report any income you receive that does not come from your employer. Other types of 1099 forms should be prepared for those who receive payment from the government, a retirement plan, or through interest and dividends.
Your amount of taxable income can be lowered by deducting certain items or expenses. The way that deductions work is influenced by the decision to take a standard or an itemized deduction.
A standard deduction is calculated based on several factors, including your age and filing status.
An itemized deduction is a list of all possible deductible expenses detailed by the taxpayer. This requires keeping close track of expenses throughout the year. The amount that can be claimed as expenses are limited according to the individual’s adjusted gross income and thresholds set by the IRS.
Income refers to the money you receive either from an employer or through other means and must be declared to the IRS. There are three different types of income to bear in mind when filing your taxes:
Gross income is your total income from your salary, tips, and any interest or dividends before taxes and deductions.
Adjusted gross income (AGI) is your gross income minus certain deductions. This would be your retirement plan payments, some business expenses, and other exemptions.
Taxable income – the amount of income, after exemptions and deductions, from which your tax bill or return is calculated.
To help you navigate the world of taxation, it’s helpful to understand the terminology, and if you still feel unsure, it may be better to consult the services of a tax preparer to guide you through the process.
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