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Filling out your tax form can be like stepping into a foreign language. What is adjusted gross income? What is the difference between an above-the-line deduction and a below-the-line deduction?
To help you out, we’ve created this glossary of tax terms to help you fully understand common tax terms you may encounter when filing your taxes.
1. Deductions above the line
A deduction above the line is an amount that you can deduct from your taxes and that reduces the amount of tax you owe. You can claim deductions above the line whether or not you choose to itemize your deductions.
Some examples of above-line deductions are educator expenses, the interest deduction on student loans, contributions to a health savings account, and amounts paid for tuition and fees.
You can claim deductions above the line by completing Schedule 1 and attaching it to your federal income tax return.
2. Adjusted gross income (AGI)
Your Adjusted Gross Income (AGI) is your taxable income less certain deductions. This is an important number because the IRS uses your AGI to calculate whether you qualify for other tax credits or deductions.
Additionally, the IRS may require you to provide last year’s AGI to file your tax return electronically.
3. Deductions below the line
Below the line, deductions are amounts you can claim to reduce your overall taxes. Typically, there are two types of below-the-line deductions, including itemized deductions and standard deduction. However, many people don’t generally refer to the standard deduction as a below-the-line deduction. You can choose the deduction that reduces your tax bill the most.
4. Capital gains
A capital gain occurs when you sell a capital asset, such as real estate, stocks or bonds, for more than what you paid. The amount of taxes you pay depends on how long you hold your fixed asset.
If you hold your capital asset for less than a year, your earnings are taxed at the ordinary income tax rate of up to 37% for 2022. If you hold your capital asset for more than a year, your earnings are taxed at capital gains tax rate, which are lower. For 2022, the maximum capital gains tax rate is 20%.
5. Capital losses
You can experience a capital loss when you sell an asset for less than what you paid. For example, if you buy stocks for $ 2,000 in 2018 and sell them for $ 1,500 in 2021, your capital loss is $ 500.
When your total capital losses exceed your capital gains in a year, you can deduct a total loss of up to $ 3,000 to reduce your taxable income. The IRS allows you to claim any unused loss in subsequent tax years.
6. Credit for child care and dependents
The Child and Dependent Care Credit is a tax credit available to families who pay for the care of a loved one while working or looking for work.
The credit amount is a percentage of the amount you paid for care up to a maximum amount. For 2022, you can deduct expenses up to $ 4,000 for one qualifying person and up to $ 8,000 for two or more people.
An eligible person must meet one of the following requirements:
- Your dependent under the age of 13
- Your spouse or dependent who is unable to support himself and lives with you for more than half of the year
7. Child tax credit
The Child Tax Credit provides a financial benefit to families with eligible children. For the 2021 tax year, the IRS allows you to claim up to $ 3,600 per child under age 6 ($ 3,000 per child age 6 to 17). The credit reduces the amount you owe in taxes and is fully refundable, which means you can expect a tax refund even if you don’t owe taxes.
Your child must meet the following conditions to apply for the credit:
- You must declare your child as a dependent on your income tax return and he is related to you
- Your child must be 17 or under and be a U.S. citizen, national, or resident alien
- Your child must have a valid social security number and live with you for at least half of the year
- You must provide at least half of their financial support
8. Cost basis
The base cost is the initial amount paid for an asset. For example, if you buy stocks for $ 1,000 on January 1, 2021, the initial cost of $ 1,000 is your base price.
9. Cryptocurrency tax rate
Typically, the IRS taxes cryptocurrency the same way as capital gains. Therefore, the amount of taxes you will pay on your crypto depends on how long you hold the cryptocurrency before you sell or use it. If you hold it for more than one year, any earnings are taxed at the capital gain rate, up to 20% for 2022. Otherwise, if you hold it for one year or less, your earnings are taxed at the rate. ordinary income tax up to 37% for 2022.
A dependent is a person who depends on the taxpayer for financial support. For tax purposes, the IRS allows you to claim a dependent, which may qualify you for tax breaks.
11. Estimated tax payments
You have to pay federal income taxes when you receive income throughout the year. Generally, if you are an employee, your employer will withhold federal income tax and pay taxes on your behalf. However, if you own a business, you have to make estimated tax payments throughout the year.
Here are the estimated tax payment due dates for 2022:
Estimated due dates for tax payments in 2022
|For the period||Due date|
|First shift||January 1 to March 31||April 15, 2022|
|Second quarter||April 1 to May 31||June 15, 2022|
|Third quarter||June 1 to August 31||September 15, 2022|
|Fourth trimester||Sept. 1 to Dec. 31||January 17, 2023 *|
12. Income tax credit (EITC)
The Working Income Tax Credit (EITC) is designed to provide financial assistance to taxpayers who earn low to moderate income (defined up to $ 57,414 for 2021). The EITC is a refundable tax credit, which means it can reduce the amount of taxes you owe and generate a refund.
The EITC is based on a percentage of the income you earned during the year, including wages, tips, and self-employment income. However, unemployment income, alimony, child support, or interest is not considered earned income.
For the 2021 ITSC, you can claim up to $ 1,502 if you have no children and up to $ 6,728 with three or more eligible children.
13. Filing status
Your filing status is an IRS classification usually based on your marital status. It is used for your reporting obligations, the standard deduction, the possibility of benefiting from certain tax breaks and the amount of your tax. There are five filing statuses:
- Head of household
- Marriage filed separately
- Married spouse filing
- Eligible widower
14. Itemized deductions
Itemized deductions are expenses that you can deduct on your federal income tax return to reduce your taxes. Some examples are medical and dental expenses, charitable donations, state income taxes, and loss of damages. When choosing to itemize your deductions or opt for the standard deduction, use the higher amount.
15. Non-taxable income
Non-taxable income is any income you receive that you don’t have to pay taxes on. Some examples of tax-free income are child support payments, gifts, and cash back.
16. Personal exemptions
A personal exemption was a dollar amount that you could deduct from your taxable income, which would reduce your taxable income. However, from 2018 to 2025, the personal exemption does not apply due to changes in tax legislation by the Tax Reductions and Employment Act (TCJA).
Prior to the TCJA, the 2017 personal exemption amount was $ 4,050, which taxpayers could claim for themselves, dependents and their spouses.
17. Income from self-employment
Self-employment income is money or goods received for the services you provide. Typically, a self-employed person is a sole proprietor, a freelance writer, or an independent contractor.
18. Sole proprietor
A sole proprietor is someone who owns a business on their own. They report their share of income and expenses on Form 1040, Schedule C.
19. Standard deduction
A standard deduction is a standard amount that the IRS allows you to reduce your taxes based on your filing status. The IRS allows you to choose between deducting your itemized deductions or the applicable standard deduction. Choose the deduction method that reduces your tax bill the most.
2021 flat-rate deduction
|Single and married deposit separately||$ 12,550|
|Married declaring eligible spouse and widower (s)||$ 25,100|
|Head of household||$ 18,800|
2022 flat-rate deduction
|Single and married deposit separately||$ 12,950|
|Married declaring eligible spouse and widower (s)||$ 25,900|
|Head of household||$ 19,400|
20. Tax deduction
A tax deduction is an amount that reduces the amount of your income that can be taxed, thereby lowering your tax bill. Examples of tax deductions are standard deductions, itemized deductions, or above-line deductions.