This article was last edited on March 1, 2017. For an updated list of essential tax vocabulary, read What Tax Terms Do You Need to Know Before Filing?
Recently, TaxSlayer conducted a survey to find out how Americans feel about taxes. It was interesting to learn that many Americans are not very familiar with common terms such as standard deduction, exemptions, tax credit, and withholding. In this blog, we will take a look at each of these terms and break down what they mean when filing your taxes.
Standard deduction: This is the dollar amount that reduces the amount of taxed income and is based on your filing status. The standard deduction is used in lieu of itemized deductions – you cannot use both. For the majority of Americans, the standard deduction is:
- Single or Married filing separately: $6,300
- Married filing jointly: $12,600
- Head of household: $9,300
Exemptions: An exemption is similar to a deduction in that it also reduces the amount of the taxed income. Exemptions are either related to you or your spouse (personal) or your child or qualifying family member (dependent). The amount you can deduct for either exemption is $4,050. Nevertheless, this amount depends on the number of dependents you have and if you meet the standard qualifications.
Tax Credit: There are a number of tax credits available to taxpayers. Tax credits are categorized into refundable and nonrefundable and subtracted from the taxes owed. According to the IRS, nonrefundable credits provide a refund up to the amount you owe for taxes. On the other hand, refundable credits allow you to get a refund even if it exceeds the amount owed. Tax credits are available in the following categories:
- Family and dependents
- Income and savings
More information on available tax credits in each category can be found on the IRS webpage Credits & Deductions for Individuals.
Withholding: Withholding is the amount of money taken out of your paycheck and considered a tax that you pay throughout the year. If you have additional income like bonuses or winnings, taxes may also be withheld from these items. You determine the amount of taxes to be withheld from your paycheck via a W-4. The number of allowances you claim will impact that amount of taxes you owe. You can get assistance determining your allowances and withholdings, by utilizing the Withholding Calculator.
If you have yet to file your taxes this year, now is a great time to learn more about how to reduce your taxable income. TaxSlayer guides you through the process so you don’t miss any deductions and you get the maximum refund.