As a normal individual, a financial adviser, a business owner, accountant, politician or whatever your position in the society, tax is a major part of your finances and expenses. Every now and then, you are faced with numerous tax forms, papers and related things, but the question is, do you truly understand what these things mean? If you don’t know more about taxes, they might seem a cryptic message from space asking you to pay your taxes, but the truth is no, it’s really easy to understand if you just take some time to research and understand more about taxes. Setting those things aside, let’s see some of the most important tax terms that you need to know.
- AGI – this is an abbreviation for adjusted gross income. Should be pretty commonsense but if you still don’t get it, then it means that it covers all and every money you made in a particular year such as wages, interests, dividend, capital gains, etc. AGI is the first thing you need to take into account.
- Tax credits – just like the credits that you can get from a store, tax credits work almost the same. This one is more valuable than tax reductions because they will directly reduce the amount of tax you owe as opposed to the reduction of your income tax. You might even be shocked when you found that you’ve got a decent amount of reduction.
- Tax deduction – these are the expenses that the Internal Revenue Service that allows you to subtract from your taxable income. Most of the time, if you have lower income, you’ll get lower tax deduction.
- Standard deduction – this is a fixed amount that you should subtract from your income. This amount changes each year due to the inflation adjustments, and you can see the current standard deduction levels on each tax forms.
- Itemized deductions – these expenses can be deducted from your AGI to help you reach a smaller income amount to calculate your final tax bill. These includes mortgage interest, medical expenses, other taxes, charitable contributions, theft and others. There are itemized deductions that needs to meet IRS limits before they can be claimed.
- Exemption – this lets you subtract from your income to reflect people who depends on your income. You can claim exemptions for yourself, spouse and children. These deductions can be reduced from your total gross income to reach a final and lower income amount for your tax bill calculation.
- Progressive taxation – higher tax rates are applied as income increases. The US tax system uses this system which starts at 10% up to 39.6% for the wealthiest tax payers.
That’s some of the tax terms you need to know so you won’t feel alienated.