Income Tax Terms

Income Tax Terms

Even if you’re hiring someone else to handle your taxes, it pays-sometimes literally-to know important tax terms. You can help yourself by brushing up on income tax terms before heading to the accountant. Learning the definitions of tax terms for 2012 can help make an often confusing exercise less stressful while building a solid base of knowledge for future years’ tax returns. Here are a few important tax terms to know before you head to the accountant this year:

Tax credits. These are exactly what they sound like-a chunk of change that will reduce the amount of money you must pay to the government. Make sure you know all the tax credits for which you qualify before you begin the filing process. Who knows? Pile up enough credits and you might end up with a refund even if you initially believe you’ll have to pay taxes.

AGI. Of all the income tax terms to know, this is the most important and essential. AGI stands for adjusted gross income and accounts for all the income someone makes over the year as well as any expenses. The income can range from wages, dividends, interest and capital gains while the expenses are standard items such as business expenses and IRA contributions as well as less-routine expenses such as alimony payments and moving costs. In order to begin figuring out what you owe in federal income tax, you must know your AGI.

Standard deduction. None of the important tax terms change definitions yearly quite like the standard deduction, which varies based on inflation. The three individual tax forms you’ll use this year all include the 2011 standard deduction levels. Like tax credits, the definition of standard deduction is pretty self-explanatory: It is the amount all taxpayers can deduct from their income.

Taxable income: The last of the income tax terms to arm yourself with, at least chronologically. Once you know the amount of taxable income you made in 2011, you can figure out how much you’ll owe in taxes. Taxable income is defined as your overall income minus all the exemptions, deductions and adjustments for which you qualified.

Withholding: This is one of the important tax terms that can make filing much easier. Withholding means taxes are automatically taken out of your paycheck before you receive it. That means less money up front, obviously, but it also means you don’t have to figure out what you owe come tax time. In addition, and more importantly, you are credited on your return for any taxes that were withheld during the preceding year.

The preceding five phrases are just the proverbial tip of the iceberg when it comes to income tax terms to know. The more terms you know, the better off you’ll be this year and for years to come. Meet with your accountant early, and show how much tax knowledge you’ve acquired this year!