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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

More by this author

Anum Yoon

Writer & Journalist

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Last Updated on January 21, 2020

How to Develop a Millionaire Mindset in 6 Simple Steps

How to Develop a Millionaire Mindset in 6 Simple Steps

We all like to dream about being financially wealthy. For most people though, it remains a dream and nothing more. Why is that?

It’s because most people don’t set their mind to achieving that goal. They might not be happy in their current situation but they’re comfortable – and comfort is one of the biggest enemies of growth.

How do you go about developing that millionaire mindset? By following these simple steps:

1. Focus On What You Want – And Take It!

So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”.

Millionaires play to win, not to avoid defeat.

This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

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2. Become Goal-Orientated

It’s almost impossible to achieve anything if you don’t set firm goals. Only lottery winners become millionaires overnight. By setting yourself attainable goals, you will get there eventually. Don’t try to get rich quickly — get rich slowly.

Let’s take the idea of making your first million dollars and expand on what kind of goals you might set to get there. Let’s also say you’re starting at a break-even position – you’re making enough to get by with a few luxuries, but nothing more.

Your goal for the first year can be having $10,000 in the bank within a year. It won’t be easy but it is doable. Next, you need to figure out the steps you need to take to achieve that goal.

Always look at ways to make growth before cutbacks. With that in mind, you might want to see if you can negotiate a pay rise with your boss, or if there’s another job out there that will pay better. You might be comfortable in your old job but remember, comfort stunts growth.

You may also have other skills outside of your workplace that you can monetize to boost your bank balance. Maybe you can design websites for people, at a fee of course, or make alterations to clothes.

If this is still not enough to make the money you need to save $10,000 in a year, then it’s time to look at cutbacks. Do you have a bunch of old junk that someone else might love? Sell it! Do you really need to spend $10 on your lunch everyday when you could make your own for a fraction of the cost?

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If you are to become a millionaire, you need to start accumulating money.

Here’re some tips to help you: How to Become Goal Oriented and Achieve More in Life

3. Don’t Spend Your Money – Invest It

The reason you need to accumulate money is for step three. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with becoming a millionaire. You’ll want to quit your regular job at some point.

Stop working for your money and make your money work for you.

Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

There’s not just the stock market — there’s also property, and your own education.

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4. Never Stop Learning

The best thing you can invest in is yourself.

Once most people leave the education system, they think their learning days are over. Well theirs might be, but yours shouldn’t be. Successful people continually learn and adapt.

Billionaire Warren Buffet estimates that he read at least 100 books on investing before he turned twenty. Most people never read another book after they’ve left school. Who would you rather be?

Learn everything you can about how economics works, how the stocks markets work, how they trend.

Learn new skills. If you have an interest in it, learn everything you can about it. You’d be surprised at how often, seemingly useless skills, can become extremely useful in the right situation.

Start developing the habit of learning continuously: How to Create a Habit of Continuous Learning for a Better You

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5. Think Big

While I advise to start off with small goals, you absolutely should have a big goal in mind. If you have a business idea, then that is your ultimate goal – to start that business and make a success of it. If you want to invest your way to millions of dollars and do little work other than research, then that is your big goal.

There is no shame in not achieving a big goal. If you run a business and aim to make $1 million profit in a year and “only” make $200,000, then you’re still significantly ahead of most people.

Aim for the stars, if you fail you’ll still be over the moon.

6. Enjoy the Attention

To be successful, you have to be willing to promote yourself and enjoy the attention to a certain extent. Now the attention doesn’t need to be on yourself, it could be on your brand, but attention definitely attracts money.

Never be embarrassed to get your name out there. That means finding a spotlight and being brave enough to step right up underneath it.

If you run a business, try contacting the local papers. You’d be surprised at how amenable they often are to running a story about you and your business, and it’s all free publicity.

Above all, remember: You control your own destiny. Push hard enough for anything and you’ll get it.

More About Thinking Smart

Featured photo credit: Austin Distel via unsplash.com

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