First-Timer’s A to Z Guide to Income Tax Terms
If you’re tackling taxes for the first time (without the help of Mom or Dad), there are a few income tax terms you’ll need to know. Never fear. This quick, easily digestible guide to forms, paperwork, and lingo will get you through your tax season alphabet.
Get in Formation
Understanding tax forms is the first step. Most of these form names may sound like bad acronyms, but you’ll need them to file your taxes.
Form W-2: Chances are you’ve at least heard of this one. This is the most common tax form, and it tells you everything. This form comes from your employer and outlines your total income from the previous year. (So, if you get your W-2 in February 2018, the form will reflect your earnings for 2017.) Stay on the lookout for this form early in the year; employers must send it on or before Jan. 31.
Form 1099-MISC: Did you get your freelance business off the ground last year? Or were you briefly employed on a contract basis? If you muttered a hesitant “yes” to either of those questions, this is the form for you! Even if you’re not a full-time employee with one specific company, you still have to pay taxes on the wages you’ve earned. Your clients use this form to report your earnings to the IRS. So, if you worked with several clients throughout the past year and your invoices totaled $600 or more, you can expect to receive 1099 forms from these clients.
Form 1098-E: This form comes from your student loan servicer and shows the amount of interest you paid on your loans throughout the previous year. If you paid $600 or more in student loan interest, you might be able to deduct interest paid on your federal tax return. (This could reduce your taxable income.)
Form 1040EZ: If you have a pretty basic tax situation (a taxable income of less than $100,000, no dependents, etc.), this form is for you. The most basic information, included on the form’s 14 lines, will determine if you owe money or can expect a refund.
Form 4868: Need more time? If April 15 is approaching too fast, too furious, you can file this form for an extension. It automatically gives you six months to complete your taxes, and you’ll avoid any penalties (as long as you file by the extended deadline).
Form W-4: You’ll fill this out each time you start a new job. This form helps your employers figure out how much money to withhold from your paycheck for federal taxes. It’s a good idea to fill out one of these every year or as your finances change.
Talk the Talk
Words matter. And now that you know which form does what, let’s take an in-depth look at some terms you’ll need to know for a successful, stress-free tax season.
Credits: This is the amount you can deduct from what you owe to the federal government. But keep in mind: Tax credits do not apply to everyone, and values and types of tax credits can vary based on geographic location and industry.
Federal income tax: This is a tax on your annual earnings, which make up your taxable income. The money, collected by the IRS, is used for the upkeep and growth of the country, which can include anything and everything from infrastructure maintenance to space exploration. Note: Texas is one of seven states that don’t require a state income tax.
Gross income: This is every last cent you earned from all of your taxable sources, including investments, property, and retirement accounts. Don’t get enamored of this number. (No one actually takes home their gross income.) This is what you earned before anything was withheld for tax purposes.
Adjusted gross income (AGI): This is not the same thing as your gross income. This is your income after all of your taxes have been paid. Your AGI helps determine whether you’re qualified for specific credits or if you can deduct medical expenses, and dictates how much of your income is taxable.
Personal exemption: By claiming this, you can lower your taxable income, which, by proxy, reduces your income tax. You can claim a personal exemption for yourself if you are not claimed as a dependent on someone else’s (your parents’) tax return. The amount varies with inflation, but in 2016 it was $4,050. You can also claim the same amount for each of your dependents.
Taxable income: There’s very little income that’s not taxable. Still, this isn’t as simple a concept as you’d think. The IRS defines income in various ways, ranging from contest winnings to jury duty fees. Here’s a more comprehensive list of what counts as taxable income.
Tax deductions: Essentially, this is a reduction of your taxable income, which lowers your tax liability, the amount you are required to pay. The best part? Deductions have the potential to save you hundreds, sometimes thousands, of dollars by lowering your taxable income and potentially moving you into a lower tax bracket. There are two kinds of deductions: standard, which come in the form of specific dollar amounts set by the IRS, and itemized, which offer a larger opportunity to save money with different write-offs.
Tax liability: This is the amount of money you owe to the IRS. It’s the total amount of tax on your income throughout the previous year.
Tax refund: If your tax liability is less than the total amount of taxes you’ve paid throughout the past year, you can expect a refund.
Withholding: Also known as “pay-as-you-earn” taxation, this is the amount of money your employer deducts from each paycheck to pay directly to the IRS on your behalf. Sometimes, tax is withheld from bonuses and commissions, too.
Congratulations! You’ve made it through the basics. Tax season is coming, and it helps to prepare now so you don’t spend more money or time than you have to getting your documents together.
Doing taxes may never become one of your favorite pastimes but with a little understanding, you can get through it, worry-free. While you’re knee-deep in preparing your taxes, consider scheduling a 360 Review with your Texas Farm Bureau Insurance Agent — it’ll give you an opportunity to assess your current, and future, needs.
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