It can be daunting to file your tax return, especially if you don’t understand any of the terms you come into during the process. Read up on useful tax terminology before you get started, so you can feel more secure as you apply.
Gross & Taxable Income
Over the span of the year, gross income is your overall earnings. This covers anything from salaries and tips to any earned interest, dividends, or capital gains. You are entitled to exclude those products from the gross sales straight off the bat, which are considered above-the-line deductions. This will start giving you what is known as your gross adjusted income. You may declare specific deductions from there. The amount you are left with is called your taxable income once those deductions are subtracted. You calculate your taxable income based on that amount.
According to the IRS:
When measuring your taxable income, you can subtract those expenses. For instance, if you made $55,000 last year and have $15,000 in deductions, you pay taxes on $40,000 of income effectively.
- Itemized Deductions. Using the IRS Form 1040 Schedule A, additional deductions are calculated. These deductions include certain medical expenses, charitable contributions, and more.
- Standard Deduction. You may usually qualify to take a standard deduction if you opt not to itemize. This is open to most persons, but some limitations apply, and the filing status normally dictates the number. If your itemized deductions surpass the sum of the standard deduction, you can continue to itemize them.
- Other Deductions. These, such as eligible donations to savings plans, are subtracted from the gross income right off the bat.
The amount of tax you owe to the government dollar per dollar is offset by a tax credit. In certain situations, you’re entitled to have the difference back as a refund if your credit reaches how much you owe.
The Earned Income Credit, designed to minimize taxation for low to modest income taxpayers, is one of the most common credits. Your wages and the number of children decide the amount of credit.
A dependent is someone that, for example, elderly parents or children, you support financially. It can help to qualify you for credits by alleging dependents. If they’re full-time students, children can count as dependents before they reach age 19, or age 24.
Older children or individuals who count as dependents may also file tax returns, and if their income reaches those amounts, they may still be forced to file them.
Married couples may opt to register or individually register a joint tax return. The total you owe the government as a couple could be higher or lower than if you were not married and filed as single people alone, based on how much money you both earn and how the tax is allocated. When, as a married couple, you owe extra, it is often referred to as a marital penalty. It’s also referred to as a marital benefit if you owe less.
Brackets of taxes and rates
Since the U.S. income tax system is proportional, at varying rates, varying parts of the income are charged. Income ranges are broken down into brackets and reduced tax rates on higher revenue brackets. Your income tax rate is known as whatever tax bracket the largest dollar of your income falls into. Yet your tax burden is probably smaller than the effective tax rate compounded by the gross income, thanks to the egalitarian method. Your effective tax rate is defined as the overall rate at which you spend.
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