By Darcie Duttweiler
Filing your taxes can be a big pain. While online tax software, such as TurboTax and H&R Block, can help you file your taxes with ease, it can still be helpful to learn key tax terms before sitting down to file. The most important tax phrases you need to know are explained below in easy-to-understand language.
The Adjusted Gross Income is the income you receive over the course of the tax year, including wages, interest, dividends and capital gains, minus some key items, such as contributions to an IRA, business expenses, moving costs and alimony payments. Your AGI from last year is needed to e-file your tax return. If you used online tax software to file last year, you can import your AGI from last year’s tax return to your current return.
The Alternative Minimum Tax was originally designed in 1969 to tax only the 150 wealthiest Americans. However, because the AMT was not indexed for inflation, plenty of taxpayers pay it today.
The AMT uses a different set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back, and then the AMT exemption is subtracted to get the AMT taxable income. The AMTI is then taxed at the current rate to get tentative minimum tax. If TMT is higher than your regular tax liability for the year, the regular tax and the amount by which the TMT exceeds the regular tax are both paid.
Unfortunately, the only way you can tell if you owe the tax are by filling out the forms, essentially doing your taxes a second time. A temporary fix for 2009 tax returns sets the AMT exemption at $46,700 for single filers and $70,950 for joint filers.
Deductions are expenses the IRS allows you to subtract from your AGI to compute your taxable income. Typically the lower your income is, the lower your tax bill will be. For example, if a single filer has income of $38,000 and $8,000 in deductions, then he would pay taxes on only $30,000. Some standard deductions include student loan interest, moving expenses, deductible IRA contributions and alimony payments.
1. Standard deduction: This is a fixed dollar amount that is available to all taxpayers to subtract from their income. The amounts change each year because of inflation. The current standard deduction levels are listed on each of the three individual tax forms. Most taxpayers use this deduction method because it eliminates the need to itemize deductions such as medical expenses, charitable contributions and local taxes.
2. Itemized deductions: These deductions include medical expenses, other taxes (state, local and property), mortgage interest, charitable contributions, casualty and theft losses, unreimbursed employee expenses and miscellaneous deductions such as gambling losses. Itemized deductions must meet IRS limits before they can be claimed.
Your employer has a nine-digit Employer Identification Number, and this number is important in making online tax filing easy. With this number you can import your employment tax information directly onto online tax software.
The Earned Income Tax Credit is designed to give low income workers a chance to lower their taxes or claim a refund. To get the credit, your income cannot exceed $13,440 if you are single and have no children. You would be eligible for a $457 credit.
However, the more children you have, the more valuable the EITC becomes. The credit increases from $3,043 (one child) to $5,657 (three kids or more). But you cannot earn more than $43,279 if you are single and $48,279 if married and filing jointly with three or more qualifying kids.
An exemption is the amount the IRS lets you subtract from your income to reflect all the dependents, such as a spouse or child, who depend on your income. The IRS allows a set amount for each exemption, and this total is subtracted from your AGI to come up with the final (and lower) amount used to determine your taxes. Your personal exemption amount is in addition to any deductions, standard or itemized, that you claim.
This is your overall income reduced by all allowable adjustments, deductions and exemptions. Your taxable income is the final amount of income you use to figure out how much you owe the government.
Withholding enables taxes to be taken out of your wages as you earn it and before you receive your paycheck. These withheld taxes are deposited in an IRS account, and you are credited for the amount when you file your return.
Darcie Duttweiler is a copywriter at ChooseWhat.com.