Cracking the (Tax) Code: Your Guide to Tax Jargon
It seems like a different language
Do taxes have you feeling like you've stumbled into a secret society with its own language? You're not alone! The world of taxes is full of jargon that can leave even the savviest of individuals scratching their heads. But don't worry, we’re here to help! In this brief guide, we’ll give you the lowdown on some of the most important tax terms you should know.
By the time you reach the end, you’ll be on your way to feeling like a certified tax expert – or at least like you can impress your friends at the next tax season party.
1. AGI (Adjusted Gross Income)
Tax Season-Speak: "Your AGI is a critical factor in determining your taxable income."
Translation: AGI is, in many ways, the starting point of your tax journey. It's your total income before any deductions or credits, and it's a number that is magic for tax professionals.
2. W-2 Form
Tax Season-Speak: "Don't forget to report your W-2 income."
Translation: IRS Form W-2 is the wage and tax statement that employers send to exempt employees to summarize their earnings and the taxes withheld. It's like a report card, so to speak, for grown-ups.
3. 1099 Form
Tax Season-Speak: "Freelancers usually receive a 1099 form."
Translation: If you're a freelancer or contractor, you should receive IRS Form 1099 from every client you had over the course of the tax year. It tells the IRS that you've earned income without any withholding, which means you'll have to pay up come tax time.
Generally, it’s smart for freelancers to set aside at least 20% of their income for tax payments, particularly if they are required to pay quarterly taxes. Remember: As the gig economy becomes more and more popular, Uber drivers, DoorDash delivery personnel, and others who work similar gigs are all considered freelancers by the IRS!
4. Tax Deductions
Tax Season-Speak: "Don't forget to itemize your tax deductions."
Translation: Deductions are like tax discounts. They reduce your taxable income and can include things like mortgage interest, medical expenses, and charitable contributions.
5. Tax Credits
Tax Season-Speak: "You might qualify for the Child Tax Credit."
Translation: Unlike deductions, credits directly reduce the taxes you owe. They're like the golden tickets of the tax world, offering you cold, hard cash from the IRS.
6. IRS
Tax Season-Speak: "I need to file my return with the IRS."
Translation: The Internal Revenue Service, or IRS, is the federal agency responsible for collecting taxes. It's the big boss of taxland.
7. Filing Status
Tax Season-Speak: "Your filing status affects your tax rate."
Translation: Your filing status defines how you'll file your taxes – single, married, head of household, etc. Your status determines all sorts of things about your annual tax return, including your tax rate and eligibility for certain deductions.
8. Tax Bracket
Tax Season-Speak: "I'm in the 22% tax bracket."
Translation: Tax brackets are like VIP sections for your income. The more you earn, the higher the percentage of your income you pay in taxes. The United States has a progressive tax system, in which people who earn more money pay more taxes when they reach certain income thresholds.
Note, though, that only the money earned above a specific income threshold is taxed at that particular rate.
9. Tax Refund
Tax Season-Speak: "I'm expecting a nice tax refund this year."
Translation: If you've paid more in taxes throughout the year than you owe, the IRS gives you a refund. It's basically the government's way of saying, "Here's your money back." A tax professional who specializes in tax planning can give you the best shot at maximizing your refund each year.
10. Dependent
Tax Season-Speak: "My kids are my dependents."
Translation: Dependents are the people you financially support, like children or elderly parents. Claiming them can lead to valuable tax breaks. The IRS has specific qualifications a person must meet in order to qualify for dependency status.
11. Taxable Income
Tax Season-Speak: "Your taxable income is the amount you owe taxes on."
Translation: In short, taxable income is what's left of your income after deductions. The IRS wants a piece of this pie. Tax professionals will often employ various strategies, such as charitable giving, to reduce their clients’ taxable income, thereby reducing their tax burden.
12. Standard Deduction
Tax Season-Speak: "Should I itemize or take the standard deduction?"
Translation: The standard deduction is the IRS's way of saying, "Here's a simplified, no-questions-asked discount on your income." You can take it without needing to itemize your deductions.
Feeling smarter? Now you can navigate the tax season with a little less stress and a lot more confidence. Tax jargon doesn't have to be your kryptonite. With these terms at your fingertips, you're well on your way to mastering the secret language of taxes. Just remember, it's always a good idea to consult a tax professional for expert guidance. Happy filing!