The information in this article is up to date through tax year 2019 (taxes filed in 2020).
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.
What is a tax deduction?
A tax deduction is an amount that you can subtract from your gross income when you are calculating how much tax you owe for the year. Deductions lower your tax liability by reducing your taxable income.
What is the standard deduction?
The standard deduction is a fixed amount that the IRS says you can deduct from your taxable income if you decide not to itemize your deductions. The amount is based on your filing status. All taxpayers are eligible to take the standard deduction. You can take the standard deduction, or you can itemize, but you can’t do both.
What is an itemized deduction?
When you file your tax return, you have the option to deduct certain expenses for the year instead of taking 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 through itemizing than they can get with the standard deduction.
What is a tax credit?
Unlike a deduction, which reduces your taxable income, a tax credit reduces the amount of tax you owe. Sometimes a tax credit is refundable, which means some or all of it can be added to your tax refund.
Example: The Child Tax Credit says that taxpayers can receive $2,000 in tax credit for each qualifying dependent. Let’s say you have one qualifying dependent, so you get to claim the $2,000 Child Tax Credit. If you also owe taxes, you can apply that $2,000 to your tax bill, so you don’t have to pay as much.
What is a filing status?
Your filing status is used to determine which tax forms you fill out, how much you are required to pay for taxes, and how much you can claim for certain tax deductions. Your tax filing status will depend on your marital status and whether you have dependents. The filing status options are:
- single
- married filing jointly
- married filing separately
- head of household
- qualifying widow(er)
What does dependent mean for taxes?
A dependent is a qualifying child or relative who meets certain requirements set by the IRS. The requirements involve the individual’s citizenship, your relation to the individual, etc. When you claim a dependent, you are entitled to certain tax breaks. For more information, read Who Can I Claim As a Dependent?
What is a tax extension?
If you can’t file your tax return before the filing deadline, you can ask the IRS for extra time by filing Form 4868. A tax extension gives you six extra months to gather your documents and submit your completed tax return. Learn more.
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