Yahoo Finance Before You File Your Taxes, Here Are 21 Tax Terms You Need To Know
If you’ve ever completed your own taxes, you know that tax forms can be filled with confusing words that you have no idea what they mean. To help you avoid a potential mistake, we’ve compiled a list of 21 tax terms you should know this year before filing your taxes.
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Above-the-Line Deductions
Above-the-line deductions are a way to reduce the amount you owe on your taxes. You can take these regardless of whether you itemize or take the standard deduction. A couple of examples of above-the-line deductions would be student loan interest and contributions made to a health savings account.
Adjusted Gross Income (AGI)
Adjusted gross income is a person’s income minus any deductions they may be allowed to take. Your AGI is used to determine eligibility for certain tax credits and deductions. It’s also used to determine the tax bracket you fall into.
Amended Return
You will file an amended return if you make a mistake on a previous tax return. This would allow you to correct the mistake and resubmit an accurate tax return. To file an amended return, you would use IRS Form 1040-X, which must be filed within three years of filing the original return or within two years of when you paid any tax due, whichever comes last.
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Below-the-Line Deductions
Below-the-line deductions are tax deductions you can take to lower your tax liability. These can only be used if you itemize your tax return instead of taking the standard deduction. Examples of below-the-line deductions would be mortgage interest and medical expenses.
Capital Gains
Capital gains happen when you sell an investment for a profit. Capital gains are broken down into long-term and short-term capital gains. Each of these is taxed at a different rate. Long-term capital gains, investments held for over a year, are taxed at 0%, 10% or 20%, depending on your taxable income. Short-term capital gains, investments held for less than one year, are taxed at your individual tax rate.
Capital Losses
You would assume a capital loss if you sell an investment for less than you purchased. If you have capital losses greater than your capital gains in a calendar year, you can deduct up to $3,000 of those losses on your tax return. If you have losses above $3,000, those can be rolled over and claimed on future years’ tax returns.
Child and Dependent Care Credit
If you use child care to watch your children or dependents while at work or looking for work, you can claim the child and dependent care credit. The exact credit amount would depend on the total child care expense you incur during the year compared to your AGI. The maximum credit would be $3,000 for one dependent or $6,000 for two or more dependents.
Dependents would include either of the following:
Child or dependent under age 13
Any adult-aged dependent who is unable to care for themselves
Child Tax Credit
Any families with children can benefit from the child tax credit. The credit amount is $2,000 for each child in your family. Children born during the tax year would qualify for the credit.
Cost Basis
The amount you pay for an investment is the cost basis. For example, if you purchased an investment property for $300,000, that purchase price would be your cost basis.
Energy Credits
If you complete home improvement projects that help make your home more energy efficient, you can take energy credits on your tax return.
There are two main types of energy tax credits: the energy efficient home improvement credit, and the residential clean energy credit, said Armine Alajian, founder, Alajian Group Inc.
“The Energy Efficient Home Improvement Credit, is for things that make your home more efficient, such as insulation. The Residential Clean Energy Credit is for clean energy technologies, such as solar or heat pumps.
“The Residential Clean Energy Credit is 30% applied to the cost of things like solar panel installation, or wind turbines. These credits allow homeowners to ‘double-dip’ — not only do you get a one-time tax credit, but these technologies may also reduce your heating and power bills, saving you money year after year,” Alajian continued.
Estimated Taxes
If you earn income during the year that did not have taxes withheld, you must make quarterly estimated tax payments. Below is the estimated tax schedule for income earned in 2024.
Payment | Income Earned Dates | Payment Due Day |
1st Payment | Jan. 1, 2024-March 31, 2024 | April 16, 2024 |
2nd Payment | April 1, 2024-May 31, 2024 | June 17, 2024 |
3rd Payment | June 1, 2024-Aug. 31, 2024 | Sept. 16, 2024 |
4th Payment | Sept. 1, 2024-Dec. 31, 2024 | Jan. 15, 2025 |
Earned Income Tax Credit
The earned income tax credit (EITC) was designed to help lower-income families. You can qualify for the EITC if your earned income in 2023 was less than $63,398 (married filing jointly) or $56,838 (single or head of household). The exact credit you will receive is based on your total annual earned income.
Filing Status
When filing your taxes, you can choose between five different filing statuses. Your filing status helps to determine your tax rate, eligibility for certain deductions and tax credits, and the tax forms you’ll use. The tax filing statuses include:
Single
Head of Household
Married Filing Separate
Married Filing Jointly
Qualifying widow or widower with a dependent child
“Choosing a filing status is usually very straightforward unless you are married,” said Moira Corcoran, CPA and tax expert on JustAnswer. “Married filing jointly usually has a greater benefit than separately since there are higher income thresholds for certain deductions.”
Gift Tax
If you give another individual money or something else of value and receive nothing in return, you may be responsible for paying a gift tax. In 2024, you can gift up to $18,000 per person ($36,000 for a married couple) without triggering the gift tax.
There are a few situations where the gift tax wouldn’t apply. These include the following:
Education expenses for someone else
Medical expenses for someone else
Gift to a spouse
Donation to a political organization
Itemized Deduction
Itemized deductions enable you to reduce your taxable income on your tax return. Itemized deductions include medical expenses, real estate taxes, state income taxes and charitable donations.
Modified Adjusted Gross Income (MAGI)
MAGI is your adjusted gross income plus any exempt or excluded income and certain deductions. Your MAGI is used to determine eligibility for tax benefits or additional taxes.
Nontaxable Income
Nontaxable income is any income you receive that you’re not required to pay taxes on. This could include child support payments or gifts.
Self-Employment Income
Self-employment income is any income you earn by providing services to others. For example, if you drive for a ride-share company, you would be classified as an independent contractor earning self-employment income.
Self-Employment Tax
W-2 employees automatically have Social Security and Medicare subtracted from their paychecks. This isn’t the case if you are self-employed. Instead, you must pay self-employment taxes, including Social Security and Medicare payments.
Standard Deduction
If you decide against itemizing your deductions on your tax return, you’ll take the standard deduction. This will help reduce your taxable income. The standard deduction amount depends on your filing status, and the amount for the 2024 filing season is below:
Filing Status | Standard Deduction |
Single or married filing separately | $14,600 |
Head of household | $21,900 |
Married filing jointly or widow(er) | $29,200 |
Tax Withholding
If you receive a paycheck as an employee, your employer withholds a portion of your wages to cover things like Social Security, Medicare and income taxes.
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This article originally appeared on GOBankingRates.com: Before You File Your Taxes, Here Are 21 Tax Terms You Need To Know
