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Taxes: 10 Terms You Should Know If You Want to File By Yourself This Year

Taxes: 10 Terms You Should Know If You Want to File By Yourself This Year

If you want to prepare and file your own tax return, you’re not alone. More than 27 million people did their own taxes[1] in 2014, a nearly 6 percent increase from the year before.

However, joining the 27 million-person-strong tax preparers and filers around the United States doesn’t mean that understanding your taxes is easy. Taxes can be daunting, especially if you don’t know the terms.

To help, here’s a list of 10 tax terms that you need to know if you’re doing your taxes yourself this year.

Adjusted Gross Income

Your adjusted gross income (AGI),[2] sometimes referred to as gross income, refers to all the income you’ve received in the year. This includes income you’ve earned, such as wages and income you may have received because of owning stocks, bonds or money market accounts. Interest, dividends and capital gains all fall into this category.

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The “adjusted” part of AGI comes in because you can subtract certain items from the income you’ve received. Contributions to an IRA, for example, might be subtracted, along with alimony costs. Be sure to read the fine print for what you can subtract. AGI is an important step in determining how much you owe.

Tax Deductions

Deductions are amounts of money that you can subtract from your AGI. They come in two forms: standard and itemized. The key to deductions is that they lower your AGI so that you do not have to pay as much tax. In general, the lower your income, the less tax you have to pay. So if, for example, you’ve earned $40,000 in a year and have a $9,000 tax deduction, you’ll only pay tax on $31,000, not the entire $40,000.

The Internal Revenue Service (IRS) lists a certain number of deductions right on the Form 1040A or longer and more detailed Form 1040. These include student loan interest, deductible individual retirement accounts contributions, alimony payments and moving expenses.

Standard Deductions

The IRS is the agency that determines tax code. Every year, all tax filers get a standard deduction. The standard deduction is an amount that you can deduct from your AGI to lower your taxes. The amount of standard deduction for the year will be given in the IRS instructions for 1040 and 1040A. The standard deduction depends on your income and is usually given in a table. The IRS adjusts this figure every year for inflation.

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Itemized Deductions

You can deduct items such as mortgage interest, state, local and property taxes, medical expenses, travel expenses if for work or medical needs, charitable contributions, casualty and theft losses and more from your AGI as well.

Note that in some states, medical expenses must exceed a certain percentage of your AGI. It’s a good idea to keep track of your expenses[3] so you know what your medical expenses, including health insurance deductibles, totaled for the year. These are called “itemized deductions” because they need to be itemized, on Schedule A of Form 1040.

If your itemized deductions equal more than the IRS’s standard deduction in a given year, it’s good tax news for you, as you’ll have to pay tax on less of your AGI. You can take itemized deductions or the standard deduction in a given year, not both. Be sure to read the fine print about what’s allowed as an itemized deduction and how much.

Exemption

An exemption is an amount the IRS allows you to subtract from income to reflect people who share your household and may depend on you for income. You can take exemptions, for example, for yourself, any dependents and your spouse. A fixed amount of money is provided for every exemption. You’ll subtract the amount of all exemptions, including for yourself, from your AGI to arrive at your taxable earnings.

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Withholding

Withholding refers to the amount of money taken out of your wages or other income as you earn it, but before you get your paycheck. Paycheck stubs will list the amount of withheld money and what it’s for. Employers withhold taxes for Federal, state and local tax, as well as Social Security.[4] The withholdings go  to your tax accounts. For example, your Federal taxes go into an IRS account.

When you calculate your taxes, you’ll arrive at the taxes you owe for the year. The final step is to subtract any taxes that have already been withheld. These are given on your W-2 and other income forms. If you owe $10,000 in Federal tax, for example, and have had $9,800 in Federal tax withheld from your paycheck, you’ll owe just $200 when you file. If you owe $10,000 in Federal tax and you have $10,100 withheld, you’ll receive a Federal tax refund of $100.

Tax Credits

You can compare tax credits to credits from a store. After you calculate your tax bill, you can use tax credits to reduce the amount you owe.[5] They’re more valuable to the individual taxpayer than deductions because they reduce the amount of tax itself, rather than just the amount of taxed income.

If you have a $1000 tax credit and owe $10,000 in taxes, you’ll end up owing $9,000 instead. You may receive tax credits for some educational programs and home solar power installation, for example. These are revised every year, so be sure to read the IRS’s information about available tax credits carefully.

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Taxable Income

Taxable income refers to your total before tax — or gross — income with every allowable deduction, exemption and adjustment subtracted. Taxable income is the final step in determining how much you owe in taxes.

Basis

If you have stocks, you’ll need to know its basis. Any asset’s basis is the value original paid for it. If you’ve sold stocks this year, you’ll need to know what you paid originally, in order to calculate the gain or loss upon sale. You’ll then use those gains or losses to calculate your tax.

Capital Gains

Capital gains refer to any profit you made from selling a capital asset. Real estate, stocks and bonds are all examples of capital gains. You’ll have to pay capital gains tax on the profit from sale. If you sold at a loss, the loss can generally be deducted.

Doing your taxes yourself may seem like a daunting task, but understanding the language is half the battle. Now you’re ready to get a head start on tax season!

Reference

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Anum Yoon

Writer & Journalist

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Last Updated on March 4, 2019

How to Use Credit Cards While Staying Out of Debt

How to Use Credit Cards While Staying Out of Debt

Many people will suggest that the best thing to do with your credit cards during these tough economic times is to cut them up with a pair of scissors. Indeed, if you are already in huge debt, you probably should stop using them and begin a payback strategy immediately. However, if you are not currently in trouble with your credit cards, there are wise ways to use them.

I happen to really love my credit cards so I will share with you my approach to how I use mine without getting into deep financial trouble.

Ever since about 1983 when I got my first Visa card, I continue to charge as many of my purchases as possible on credit. Everything from gas, groceries and monthly payments for services like my cable and home security monitoring are charged on credit. Despite my heavy usage, I have maintained the joy of never paying any interest fees at all on any of my credit cards.

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Here are some tips on how best to use your credit cards without falling into the trap of paying those nasty double-digit interest fees.

Do Not Treat Credit Cards as Your Funding Sources

Too many people treat their credit cards as funding sources for major purchases. Do not do this if you want to stay out of trouble. I use my credit cards as convenient financial instruments so I do not have to carry around much cash. In fact, I hate carrying cash, especially coins. When you buy things on credit, the purchases are clean and you will not get annoying coins back as change.

I do not rely on my Visa, MasterCard or American Express to fund any of my purchases, large or small. This brings me to my golden rule when it comes to whether I will pull out any of my credit cards either at a retail or online store.

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I never purchase anything with my credit cards if I do not have the actual cash on hand in my bank account.

If I really cannot pay for the item or service with cash that I already have at the bank, then I simply will not make the purchase. Remember, my credit cards are not used as funding sources. They are just convenient alternatives to actual cash in my pocket.

Make Sure to Always Pay Off Balances in Full Each Month

The next very important part of my overall strategy is to make absolutely sure that I pay the balances in full each and every month no matter how large they are. This should never be a problem if the cash has been budgeted for my purchases and secured in the bank. I have always paid my full balances each month ever since my very first credit card and this is why I never pay interest charges.

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Using Credit Cards with Rewards

Most of my credit cards are of the “no annual fees” type, including one MasterCard on a separate account I keep at home as a spare in case I lose my wallet or incur any fraudulent charges. However, I do use a main Visa card which does have an annual fee because all purchases on that card reward me with airline frequent flyer points. For me, the annual fee is worth it since I do travel and I get enough points to redeem many free flights.

You have to decide for yourself if you will charge enough purchases on credit each year without paying interest charges to warrant a credit card that rewards you with airline points (or other rewards). In my case, the answer is “yes” but that might not be the case for you.

I occasionally use a MasterCard or American Express card on small purchases just to keep those accounts active. Also, I have been to the odd retailer that accepted only a certain type of credit card, so I find that having one from each major company is quite handy. Aside from my main Visa card which earns the airline points, the rest of my cards are of the “no annual fees” variety.

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So this is how I use my credit cards without getting into any financial trouble with them. This strategy is recommended only if you are not in debt, of course. In fact, it is worth keeping in mind once you’re out of debt so that you can keep your credit cards active and treat them responsibly.

What are your credit card usage strategies? Let me know in the comments — I’d love to hear what methods you use.

Featured photo credit: Artem Bali via unsplash.com

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