Since the thought of paying taxes isn’t always welcome, many Americans rush through their tax preparation with one eye open. But even if you’re reluctant about complying with this yearly ritual, you should still be familiar with the general process. After all, having a better understanding of how to file your return can help you avoid costly mistakes and could potentially increase your refund amount. To help you boost your knowledge, here are five essential tax terms to know.  

5 Crucial Tax Preparation Terms & Their Definitions

1. Adjusted Gross Income

Adjusted Gross Income (AGI) is the total amount of funds you’ve earned over the year—including those that have been withheld from your paycheck. This number will provide the starting point to calculate your taxable income.

2. Exemptions

If you’re the head of a household, people that live with you and depend on you can be claimed as exemptions. For example, every child you care for in your home who is 17 or under can be claimed as a dependent—which is equivalent to a single exemption. Each exemption you have allows you to reduce your total liability, so you won’t owe the IRS as much as you would if you were single.

3. Standard Deduction

Every taxpayer can apply the standard deduction to lower their taxable income. This amount can change from year to year. For the 2019 tax year, the standard deduction for single filers was increased to $12,200, while the amount for those married-filing-jointly increased to $22,400.

4. Itemized Deductions

Instead of taking the standard deduction, you may opt to itemize all the tax-deductible expenses you’ve incurred over the year—such as student loan interest payments and charitable contributions. If the total amount of these expenses is higher than your standard deduction, itemizing will help lower the amount you owe to the IRS.

5. Taxable Income

Once you’ve processed exemptions and deductions from your AGI, you’ll have your taxable income. You will apply your tax rate to this figure to determine how much you owe to the IRS—or how much they owe you.  

When you have questions about fulfilling your obligations with the IRS, turn to the professionals at Simplified Tax. Providing comprehensive accounting services in Sparta, WI, these specialists will deliver the clear answers you need and streamline your tax preparation process. In addition to making sure your return is completed accurately, this team will introduce you to legal strategies to lower your liability—such as by applying deductions and credits you may not yet know about. Call the firm at (608) 269-2633 to learn more about these capabilities or schedule a convenient tax consultation with a local expert.