When I first entered into this world of tax payment, things were not working out that well for me. It was mainly because I was not quite accustomed with the terms and implications related to federal tax for non residents. At that time, one of my friends suggested to get to the basic federal tax terms and learn the real meaning behind them. I followed her advice and it was not long when I become a taxpayer pro. I understood that federal taxes are quite important for living a legal life. So I would recommend you to learn about these terms by yourself too.
1. The First Term I Came Across
The first term that hit me right in my face is the AGI or the adjusted gross income. It is primarily defined to be the amount of money you can make after you have already factored in selected credits, deductions and focusing on some of the business expenses. The AGI will not add on with the itemized or the standard deductions.
2. Tax Credit
I got a video namely Taxes 101 (Tax Basics 1/3) talking about these terms well. Here, I came across tax credit, which is applied directly to the present tax bill. Unlike the field of deduction, you will receive full credit back in the majority of cases even when you don’t own any tax.
3. Deductions
On the other hand, you have tax deduction, which will reduce the taxable income. In case you have $1000 deduction on $50,000, the taxable income will be $49000. It does not mean that you will receive full $1000. You might receive less than that. You better be sure of the difference between these two before making a move.
Related Post: Federal Tax Rules for us Citizens Living Abroad
4. Standard deductions
No matter whatever the tax status is, the IRS offers standard deduction to the payers. Without going through process of deducting some smaller amounts, IRS will offer set amount. This amount will change based on filing status and rate of inflation.
5. Exemption
Exemption can be anybody who relies on income for basic needs. It can be you, your children, spouse or even any dependent in question. Once you get to the AGI, exemption will be applied to that number for calculating taxable income.
6. Taxable income
It is often stated to be the final income once all the deductions are thoroughly made and credits are applied as well. This number is mainly figured out for calculating the final tax bill over here.
7. Withholding
For assuring that you can always pay tax bill at end of the year, IRS needs employers to withhold a portion of the check. This money will be placed right on deposit with IRS. After you have completed paying for the taxes, it will be added to tax bill, leaving that refundable amount.
You better be sure to learn more about these seven terms and in no time you can start working on the federal taxes on your own.
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