18 Tax Terms You Should Know

Anyone with a good understanding of tax terminology can better navigate filing their taxes come January.

Our quick-reference guide helps you get a good understanding of the basic tax terms you’ll need to know if you want to avoid mistakes and maximize your tax-saving efforts. We’ve broken up the terms into sections for your benefit. For further tax advice, like tax planning, see our list of articles and resources.

Understand these 18 Terms

Basic Tax Terms

1. Taxable Income: Money you receive from a job, rental properties, or self-employment is taxable income. The sum of all income sources (including investments) is your gross income.
2. Adjusted Gross Income: Your total income (gross income) minus federal adjustments including investment contributions, student loan interest, and more. Once calculated, the AGI is your baseline for calculating taxes owed. 
3. Modified Adjusted Gross Income (MAGI): This is your AGI with deductions added in. This amount will determine which tax bracket your income falls in and the credits available to you. 
4. Tax bracket: Tax rates follow a progressive system. The more you earn, the higher your tax rate.
5. Filing Status: The five federal filing statuses are: single, married filing separately, married filing jointly, head of household, and widower with a dependent child. When filing taxes, your status determines the forms you need to fill out and which credits and deductions are available to you. Your filing status and MAGI are the first things to determine when filing taxes. 
6. Dependents: Those in your household that rely on your income and support. Children or relatives under 24 and in college or 19 years old. Dependents with disabilities do not need to meet this age limit. 
7. Deductions: Both standard deduction and itemized deductions serve to minimize your taxable income. The standard deduction is the baseline federal income deduction that every taxpayer receives.
8. Credits: Credits also lower the taxes you owe but do so differently than deductions. Tax credits are subtracted directly from what you owe, rather than lowering the amount of money that is taxed. Some tax credits have limitations. You can find all available tax credits and deductions on the IRS website.

Investments & Contributions

9. IRA & 401(k): IRAs and 401(k)s are retirement accounts that have specific tax rules around contributions and withdrawals. These accounts can minimize your taxable income.
10. Charitable Contributions: Contributing to charities is one method of minimizing taxes owed. Claiming these contributions requires receipts for filing, and typically only make a difference when you itemize your deductions.
11. Tax-deferred contributions: Contributions to some retirement accounts or other investments (stocks, bonds, etc.) are not taxed until the owner makes a withdrawal from the account.
12. Health Spending Accounts (HAS): Health Spending Accounts are tax-free accounts provided by an employer that can only be used for health care costs and is deductible. Using an HSA is one way to minimize taxable income when you plan on paying for medical expenses throughout the year.
13. Capital Gains or Losses: Capital gains tax is the tax on income from investments like real estate and stocks. Any losses in these investments are called capital losses. You can report capital losses to offset income and minimize your tax rate.

Essential Tax Forms

14. 1040: Form 1040 is the annual tax filing paperwork for most taxpayers. There are a couple of alternate 1040 forms for sole-proprietorships and seniors. 
15. W-4: W-4s allow employers to withhold income directly from an employee’s paycheck. When your tax bill is higher or lower than expected, it may be because your W-2 withholdings are inaccurate.
16. W-2: Employers provide W-2s to employees and contractors to report wage information to the IRS. Around tax season, employers give a copy of the W-2 to their employees, which shows their salary and payments to state and federal programs. 
17. 1099: The 1099 form is the reported income for sole-proprietors and contractors. It’s like the W-2 for sole-proprietors, showing how much the contractor was paid.
18. 1095: employers provide the 1095 form to prove that you received healthcare from the marketplace. It’s proof of insurance that is required for your annual filing. 

Any terms we missed? Anything you want to be clarified? Reach out to us!