Taxes. You have to file them every year, and they affect how much income you take home. Before you start, it’s important to know some of the basic tax terms to help you get going.
7 Essential Tax Terms to Help You File
- Tax deduction– a tax deduction is an amount of money that you can subtract from your gross income to calculate how much income tax you owe for the year. Deductions lower your tax liability by reducing your taxable income. With enough deductions, you may even drop into a lower income tax bracket.
- Standard deduction- The standard deduction is a fixed deductible that all taxpayers are eligible to take. The amount of the deduction depends on your filing status. If you are single, the deduction is now $12,000. If you are married filing jointly, the deduction is $24,000. And if you file as head of household, the deduction is $18,000.
- Itemized deduction- When you file your tax return, the IRS allows you to deduct a portion of your qualified expenses for the year in place of the standard deduction. For example, you are able to deduct $10,000 for state and local taxes as an itemized deduction. Charitable donations and mortgage loan interest are other examples of itemized deductions. Some taxpayers find they can reduce their taxable income by more than the value of the standard deduction through itemizing. You can take the standard deduction, or you can itemize, but you can’t do both.
- Tax credit– Unlike a deduction, which reduces your taxable income, a tax credit reduces the amount of tax you owe. It is granted for specific expenses or to certain groups of individuals.
- Example: The Child Tax Credit says that taxpayers can receive $2,000 in tax credit for each qualifying dependent. Say your tax bill is $2,000 but you have one qualifying dependent. After you apply the Child Tax Credit, you owe the IRS $0. If your bill is $2,500, then you only owe $500.
- Tax Cuts and Jobs Act– Also known as tax reform, the TCJA was signed into law in December 2017. It is the first major reform to the U.S. tax code in 30 years. It changed several tax laws, including the standard deduction, personal exemptions, SALT, mortgage interest deduction, alternative minimum tax, estate tax, and the Affordable Care Act. Get more detail here. (link tax law changes page)
- Filing status- Your filing status is used to determine which tax forms you fill out and how much you can claim for certain tax deductions. You can only choose one status, and your options depend on your marital status and whether or not you have dependents. The possible filing statuses are: single, married filing jointly, married filing separately, head of household, and qualifying widow(er).
- E-file- Instead of mailing a physical copy of your tax return to the IRS, you can now submit it online through companies like TaxSlayer. E-filing allows you to save your information from year to year so you can spend less time on taxes and more time on doing what you want.
- Dependent- A dependent is a qualifying child or relative who meets certain requirements by the IRS. There are several questions you should ask when determining if the person you are trying to claim is a dependent, such as “Are they a citizen or resident?” and “Are they related to you?” When you claim a dependent, you are entitled to certain tax breaks.
- Extension- If you can’t file your taxes by the April due date, you may request more time from the IRS. You’ll still need to submit a request for an extension by the April deadline, but your tax return won’t be due until October of that year.
Now that you know all these tax terms, go slay your taxes with TaxSlayer.
This article is up to date and accounts for tax law changes for tax year 2018 (tax returns filed in 2019). Learn more about tax reform enacted under the Tax Cuts and Jobs Act here.