Important tax terms you need to know in 2024 - ForumDaily
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Important tax terms to know in 2024

The proverb says: the only inevitable things in life are death and taxes. This saying dates back to 1716, and the word “tax” itself has a long history and means “a sum of money required by the government.” The word comes from the Latin taxare: “blame, charge” and dates back to around the XNUMXth century. Taxes have been a source of fear for most people ever since. If you feel uneasy right now, you are not alone, writes Dictionary.

Photo: Shutterstock

The United States has a unique tax system with its own vocabulary, according to which residents and citizens must navigate each year, from the beginning of January to April 15 (Tax Day). To make this process a little less terrible, the publication clarified what these or other tax terms mean, which you most likely will have to face in 2024.

Form 1040

The key form required to complete your annual tax return is Form 1040, sometimes simply called 1040. Additional forms may be added to this basic document, depending on your situation.

If you have only one job with one paycheck and no itemized deductions (more on that in a minute), you can file Form 1040-EZ (EZ stands for "easy"). If you have a more complex situation, you may have to use a typical Form 1040.

Each year, the IRS releases a new version of Form 1040.

Adjusted Gross Income (AGI)

One of the most important metrics in your 1040 form is your adjusted gross income. The word gross does not mean disgusting, although that would be a good joke. In business, this means "the amount of salary or profit before deductions or expenses." So, your gross income refers to how much money you earned before taxes and other deductions.

As for adjusted, everything is a little more complicated. The Internal Revenue Service (IRS) has a complex system of benefits and credits. But essentially, there's a list of things you can deduct from your gross income before you even end up in any of the exemption categories.

For example, if you are a teacher, you can deduct from your gross income up to $ 250 spent out of pocket on class expenses. There are other adjustments, including healthcare savings accounts (HSAs), self-employed health insurance premiums, and IRA deposits.

So if you are a teacher who made $50 a year before taxes, spent $000 on a class this year, and put $250 into your savings account, your AGI would be $750 - $50 - $000 = $250.

Tax allowances

If you are allowed to do something in your daily life, you are usually grateful for that little leeway. When it comes to taxes, allowances should also make your life easier (in theory).

If you are an employee, you must have completed a W-4 when you took a job with the company. In W-4, you indicate how many discounts you would like (and are entitled to) receive. This determines how much money the employer will withhold from your salary for taxes.

The more discounts, the less money will be retained, and vice versa - the fewer discounts, the more funds will be retained. You have one type of discount for yourself, one for each spouse, and one for each child (the taxpayer is not required to use all).

But here it is worth being careful. If you claim too many rebates, you may find yourself in trouble when filing your taxes because your employer didn't withhold enough money from your paycheck and now you have to pay extra out of pocket. You can change the number of rebates you receive at any time—you just need to fill out a new Form W-4 and give it to your employer.

On the subject: How to file a tax return yourself: step-by-step instructions

Deductions

“Deduct” means “to take away or reduce”—it’s about subtracting a certain amount from the tax figure you owe. This word may make you wonder how Sherlock Holmes solves riddles (remember the method of deduction?), but it has less to do with logic and more to do with simple mathematics.

There are two types of deductions you can make: standard and detailed. These are different from the gross income adjustments we mentioned earlier because these deductions are taken from your adjusted gross income, not your gross income.

  • Standard deduction (Standard deduction)

Each year, the IRS sets amounts known as standard deductions. There are different sizes of standard deductions depending on whether you are filing tax returns alone, married, or the head of household. This deduction is not related to your expenses in any way, it is just a standard amount depending on how you filed the return.

  • Itemized deductions

If you value accuracy, you probably like the detailed listings. Your best friend may say that her bag contains “cosmetics and more,” but you will be happy to provide her with a detailed list of all the items that she has: two lipsticks, lip balm, wipes, dental floss and three mint chewing gums.

Itemized deductions are also a list. But instead of a list of the contents of the bag, it's a list of what you can deduct on your taxes. There are many things that can be itemized deductions, and they change every year. Often these include medical and dental expenses and charitable contributions. The amount of these deductions directly depends on your expenses for certain needs.

When submitting form 1040, you must select standard or detailed deductions. As a rule, if you don’t donate a lot of money to charity, it’s more profitable to take a standard deduction. Your deductions are made from your AGI.

Non-taxable assets and income (Tax-exempt)

Certain assets or income are considered non-taxable. Exempt means to be free from obligations or duties. If something is not taxed, you are exempted from the obligation to pay it from this asset or income.

One common example of tax-free income is the interest earned on municipal bonds. Everything that is not taxed is yours.

On the subject: 8 unexpected things that are taxed in the USA

Credits

To encourage certain behaviors, such as investing in green energy or helping certain segments of the population, the government offers tax incentives. In accounting, credit means the amount of money received. Essentially, a tax break is like the government giving you a check.

The most common credit in the United States is the earned income tax credit, also known as the EIC or EITC. The EIC, one of the largest economic support programs in the United States, is a sliding scale loan. If you don't earn money, you don't get EIC. If you earn some money, you will receive an EIC depending on how much you earned and how many dependents you have (such as children). If you earn more than a certain amount, you will no longer receive an EIC.

W-2, W-4 or W-9

Confusing due to their similarity of names, these forms seriously complicate the filing of the annual tax return. Take W-2, W-4 and W-9 for example.

If you are an employee when you first start working, you complete W-4. In this form, you indicate how many discounts you want.

At the end of the year, usually by the end of January of next year, your employer will issue you with a W-2. In it, you will find information about how much you were paid this year and how much was deducted for taxes. This information is critical to completing Form 1040.

If you are a freelancer or contractor, such as an Uber driver, you completed the W-9 when you first started working with the company. You won't get a W-2 at the end of the year, but you can get 1099. Not sure what it is? Read on.

1098 or 1099

Form 1099 is a report of non-wage income. There are different types of 1099 forms, but they all include income, such as contract income or income from rental property. Unlike a W-2, which is required to be sent by the employer to the employee, you may or may not receive a Form 1099 from the employer, but you can always request one if you need it.

Form 1098 is a statement you can use to itemize deductions (optional). A 1098 is a statement of how much money you paid in interest on your mortgage. Similarly, the 1098-E statement is used for student loans and so on.

Refund or liability

After you collect all your paperwork and complete Form 1040, you are left with one of two options: a tax refund or a tax liability.

If you're lucky, you'll get a refund. When you have paid more taxes in a year than you should have, you will receive a refund - a word dating back to the 15th century and meaning "to give back."

If you haven't paid enough taxes during the year, you will have a liability. Liability is a slightly fancy word that means “what you owe.” If you end up with a large tax liability when you file your taxes, don't be discouraged. Contact the IRS. They will work with you to create a payment plan so you can pay off your obligations.

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