Here are 10 common 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, including wages, interest, dividends
and capital gains, minus things such as contributions
to a qualified IRA, some business expenses,
moving costs and alimony payments. AGI 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 credits could even give you a refund
you weren't expecting.
3.
Deductions: Deductions are expenses
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 on
only $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 -- also
are listed directly on the 1040A or long Form
1040. The term "deductions" is most
commonly associated with the itemized deductions
(more on this later, too) that taxpayers who
file Schedule A claim.
4.
Standard deduction: This is a fixed
dollar amount that taxpayers can subtract
from their 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. Most taxpayers
use this deduction method, which eliminates
the need to itemize actual deductions such
as medical expenses, charitable contributions
and state and local taxes.
