taxes

10 must-know tax terms

One of the hardest things about taxes is learning the language. You've got all the forms and instructions, but it seems they're harder to decipher than your VCR user manual.

Here are 10 common tax terms to help you start talking taxes.

1. AGI -- Adjusted gross income, or AGI, is all the income you receive over the course of the year such as wages, interest, dividends and capital gains minus items, such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. The adjusted gross income is the first step in calculating your final federal income tax bill.

2. Credits -- Tax credits are much like credits you get from a store. After you calculate your tax bill, you can use the credit to reduce the amount of the check you must write to Uncle Sam. Tax credits are more valuable than deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income. A $200 credit, for example, will turn a $1,000 tax bill into only $800. A few could even give you a refund you weren't expecting.

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3. Deductions -- Deductions are expenses that the Internal Revenue Service allows you to subtract from your AGI to arrive at your taxable income. In most cases, the lower your income, the lower your tax bill. If, for example, a single filer has income of $38,000 and $8,000 in deductions, then he would pay taxes only on $30,000. The IRS offers all filers a standard deduction amount (more on this later). Some other deductions, such as student loan interest, moving expenses, deductible IRA contributions and alimony payments, are also listed directly on Form 1040A or long Form 1040. The term is most commonly associated with the itemized deductions (more on this later, too) that are claimed by taxpayers who file Schedule A.

4. Standard deduction -- This is a fixed dollar amount that a taxpayer can subtract from his or her income. The standard deduction is available to all filers and is determined by the taxpayer's filing status. The amounts change each year because of inflation adjustments; you can find the current standard deduction levels listed on each of the three individual tax forms. This deduction method is used by most taxpayers and eliminates the need for them to itemize actual deductions such as medical expenses, charitable contributions or state and local taxes.

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