Taxes 101: Brush Up on These Key Terms Before You File
Taxes. They’re one of the two certainties of life, according to former Philly resident Benjamin Franklin. And with the arrival of tax season comes the inevitable arrival of tax jargon – terms that would have even Mr. Franklin scratching his head.
Whether you’re new to filing taxes or just need a refresher, we want to help you file with more confidence and less confusion. Understanding the basic tax terms and concepts will be key to filing your return quickly and accurately – and without overpaying. So, before you file your 2019 tax return, make sure you know these nine essential terms.
No one wants a huge tax bill for last year’s income. That’s why your payroll taxes are “withheld” from your wages as you earn them. Your total amount of taxes that were withheld can be found on the W-2 you get from your employer. If too much money was withheld during the year, you’ll be getting a refund. Too little, and you’ll owe the government additional taxes.
2. Tax Return
The standard federal income tax Form 1040 is the one most people use to calculate their total tax liability and determine how much they still owe or will get back from the government. You must complete a tax return and file it with the IRS every year, typically by April 15. You’ll also need to file a return with your state and often your local tax collection agency.
3. Filing Status
The filing status you choose – including Single, Head of Household, and Married Filing Jointly – is based on your relationship status. More importantly, it determines your tax rate and the amount of the standard deduction you can take (we’ll get to this shortly) to help you lower the amount of taxes you owe.
4. Adjusted Gross Income (AGI)
AGI is the total amount of all the money you earned during the year, minus certain deductions (such as retirement plan contributions). Income sources include wages and tips, interest, capital gains, and dividends.
5. Tax Credits
Tax credits are your friend. These lower the amount of tax you owe, dollar-for-dollar. For example, a tax credit of $500 would cancel out $500 in taxes. Common examples include the Earned Income Tax Credit and American Opportunity Tax Credit.
6. Tax Deductions
These are also great, though they may not save you quite as much as tax credits will. Tax deductions are generally subtracted from your Adjusted Gross Income, which lowers your taxable income, and thus the tax you owe. When filing your tax returns, you must either choose to take the standard deduction or, if it’s more beneficial for you, to itemize deductions.
7. Standard Deduction
This is a fixed amount of money you can deduct from your Adjusted Gross Income, based on your filing status. For instance, if your filing status is Single, your 2019 standard deduction will be $12,200. But if you’re Married Filing Jointly, your standard deduction will be $24,400.
8. Itemized Deduction
The alternative to taking the standard deduction is itemizing every deductible expense you incurred during the tax year. It’s more work, but if your itemized deductions are greater than the standard deduction, you could enjoy an overall tax reduction. Major itemized deductions include mortgage interest, charitable contributions, medical expenses, state income or state sales tax, and property taxes.
9. Taxable Income
After you’ve calculated your Adjusted Gross Income and then subtracted all allowable deductions, you’re left with your Taxable Income. This is your final taxable amount (minus any tax credits you qualify for).
As Ben Franklin said, “An investment in knowledge always pays the best interest.” And brushing up on these basic tax terms will undoubtedly pay off when you’re ready to fill out your tax returns.
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DON’T FORGET YOUR RETIREMENT SAVINGS
Tax season could be a great opportunity to boost your retirement savings. If you haven’t maxed your IRA contributions for last year, there’s still time. The 2019 contribution limit for Traditional and Roth IRAs is $6,000 (or $7,000 for those over 50). If you haven’t contributed this full amount, you have until April 15 (or your filing date) to make 2019 contributions.
IRA Certificates from American Heritage offer a simple, easy way to grow your nest egg while enjoying the benefits of an IRA. These certificates come in a variety of terms with great rates, and your funds are federally insured, so you’ll have more peace of mind. Learn more and open your IRA Certificate today.