Ready to dive into your 1040? Of course you’re not, who is? While preparing tax forms and pouring over tax law may seem fun for an accountant or a tax law attorney, it can be downright confusing for the rest of us. Here are a few commonly used terms you’ll encounter throughout the process. Hopefully they help take some of the headache out of tax season.
There are a few different filing statuses to choose from. If you are a single person, you will be filing as a single person, unless you help pay for more than 50% of another household’s cost. If you’re married, you and your spouse need to decide if you’ll file jointly or if you’ll file two separate returns. Some tax software can determine which is a better deal for your family. If you don’t want to spend the money on software, it may be a good idea to complete a few forms to see which filing status is more advantageous.
Other filing statuses include Head of Household or as a Widow(er) with a qualifying child. To determine if you can file as a Head of Household or as a Widow(er), it is important to work through the questions on the instructions for the 1040.
Your gross income includes all of your income, whether from interest, a W-4, a 1099, or tips. Your adjusted gross income (AGI) is the income number that will be used to determine what you owe. It is your gross income adjusted by subtracting certain deductions like student loan interest, alimony, and IRA deductions. This number doesn’t just show up on federal returns. You may be asked for it on your state and local returns as well.
Credits, Deductions, and Exemptions
We love credits! Credits are tax reductions, essentially cutting down your tax bill. The Earned Income Tax Credit is neglected frequently. Take a moment and see if you qualify! Other notable credits include the Child Tax Credit and the Child and Dependant Care Tax Credit.
Deductions are subtracted from your taxable income. Deductions can be itemized and will include payments for health care and donations to charity. Alternatively, you can select the standardized deductions rather than filling out another form.
“Exemptions” is essentially a funny word to call you and your family. As long as you are not claimed as a dependent on someone else’s taxes, you can claim yourself, a spouse, and any dependent children as your exemptions. You’ll be able to subtract $4,000 off your AGI for every exemption this year.
If you’ve found yourself in hot water with the IRS, whether it’s due to not filing returns or offshore accounting practices, speak with a tax attorney immediately. The IRS communicates solely through snail mail and uses their official seal on all their correspondence. Any letter that requires a response will feature a deadline, whether it’s for more information or for an appeal of a decision. Because of this, it is imperative to contact a tax attorney as soon as you receive a notice from the IRS. A knowledgeable tax law firm can help you understand what the IRS is asking of you and inform you of your options.