Filing for the First Time? A Guide to Important Tax Terms to Know

Do you find filing taxes a “pain in the neck”? You're not alone.

The IRS estimates that the typical person works on their taxes for 12 hours per year and spends $230 on filing fees. This is a big reason so many people struggle to file their taxes correctly.

There are many complicated tax codes that people need to be aware of to file appropriately. However, you don’t have to be an expert on the tax terminology to file your taxes.

Take a deep breath and look at some tax terms you can use like a pro.

Adjusted Gross Income or AGI

Adjusted Gross Income (AGI) is the total income you make from all sources before the amount of taxes you’ve already paid is deducted. To calculate AGI, you start with your total income and subtract deductions, including contributions to retirement plans, alimony payments, and qualified moving or work-related expenses. 

For example, if an individual’s AGI is above certain thresholds, he or she may not be eligible to take certain deductions or credits. As such, it is important for first-time filers to get familiar with AGI and how it affects the amount of taxes owed or refunded. Check out Start An Exchange for more tax information.

Taxable Income

Taxable income is the amount of money someone earns during a particular time (called a “taxable period”) that can be taxed. Generally, the amount of taxable income is calculated after any deductions are taken into account. The Internal Revenue Service has many specific rules and regulations that determine taxable income, so it is essential to understand them before filing your taxes.

Standard Deduction and Itemized Deductions

The standard deduction is a fixed amount you can use to reduce your taxable income, with different amounts available depending on your filing status. On the other hand, itemized deductions are individual expenses you must list out, such as charitable donations, mortgage payments, and state and local taxes you paid during the year. It allows you to reduce your income even more, but you must provide evidence for each expense.

Being familiar with the difference between standard deduction and itemized deductions can help you make an informed decision. When filing taxes, you should generally choose either the standard deduction or itemized deductions - whichever one gives you the bigger reduction in taxable income.

Tax Credits

A tax credit is a reduction in the final amount of tax paid to the government. For example, if you are eligible for a tax credit of $1,000, your total tax bill will be reduced by $1,000. Tax credits can be claimed on income taxes, property taxes, and other types of taxes, depending on the individual’s situation.

Master These Basic Tax Terms

Filing taxes can be stressful and confusing, especially when filing for the first time. It’s important to understand these tax terms and jargon associated with the tax process: Adjusted Gross Income (AGI), Taxable Income, Standard Deduction and Itemized Deductions, and Tax Credits. Knowing all there is to know can save you time and potential tax headaches down the road.

With the right guidance and a few helpful tools, you can be confident in filing your taxes correctly. Be sure to check out our blog for more tips and tricks on filing and paying taxes!