tax (tăks) n. : One of the only things certain in life. See also Death.
Tax season can be intimidating to those who aren’t certified accountants or tax professionals. With all the tax terminology out there, simply understanding the terms on the form you’re filling out can be daunting. No fear—a tax-terminology-debunker is here:
Understanding: Adjustable Gross Income
First things first, you need to understand the total income. Total income refers to all income that was made in the fiscal year, either earned or unearned, before any exemptions or deductions. So, total income will refer to all the money you made in the year, including money from social security benefits, unemployment, alimony, wages/tips, pensions, etc.
Your adjustable gross income (AGI) refers to your total income minus adjustments that were made for moving expenses, IRA contributions, student loan interest, and alimony. Any adjustments can be found on your 1040, on lines 23-35. Don’t panic; If you need help filing your taxes, you can always consult an R&G Brenner tax professional.
Understanding: Taxable Income
Taxable income is pretty simple, and refers to the amount of money that you can be taxed for. This number is found by taking your AGI less your deductions and personal exemptions. This number will be used to find what tax bracket you fall into, and to then calculate your tax rate.
A tax exemption can be taken by an individual, a business, or a charity, and refers to money or property that taxes do not have to be paid on, or may be reduced for. For example, charitable organizations do not have to pay property taxes. Another exemption sometimes granted is the case of those who inherit larges amount of money not having to pay an inheritance tax. In some cases, a tax exemption entirely precludes an individual from paying taxes, or significantly reduces the amount of money one has to pay.
A tax deduction, or a “tax write-off,” refers to an amount of money you get to subtract from your AGI due to various expenses that you paid or incurred throughout the year. For example, a deduction may be educational expenses, health insurance, mortgage interest, royalties, a home office, or auto expenses. Depending on whether you’re filing taxes as an individual or as a business, the types of deductions you quality for will differ as will the total percentage one is allowed to deduct.
A dividend is a percentage of profit that is paid out, in the form of income, to shareholders of stock and the like. A dividend tax is a tax that is levied on the amount of money that is allocated to each shareholder. If you are a shareholder and received money from those shares this year, you can expect to pay a dividend tax.
Understanding: Tax Due
Perhaps the most simple of tax terms (and the most detested), tax due means exactly what it says. The last line of your 1040, the tax due box, will tell you the total amount of money you owe to the IRS for any given tax year after all your deductions and exemptions have been calculated and applied.
Making sense of tax terms can initially feel frustrating—but it shouldn’t be. With a little bit of research, and a FREE consultation with an R&G Brenner tax professional, you can make this tax season your easiest yet!