A Simple Explanation of Tax Terms You Need to Know in 2021
The proverb says: in life, only death and taxes are inevitable. This statement is dated 1716, and the word "tax" itself has a centuries-old history and means "the amount of money required by the government." The word comes from the Latin taxare: "censure, accrual" and dates back to about the XNUMXth century. Since then, taxes have caused fear in most people. If you feel uncomfortable now, you are not alone in this, writes Dictionary.
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 2021.
The key form required to complete the annual tax return is Form 1040, which is sometimes referred to simply as 1040. Additional forms may be added to this core document, depending on the situation.
If you only have one job with one paycheck and there are no detailed deductions (more on this below), you can file Form 1040-EZ (EZ stands for “easy”). If you have a more complex situation, you may need to use the typical 1040 form.
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 loans. But, essentially, there is a list of things you can deduct from your gross income before you even end up in any of the benefit 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 earned $ 50 per year before taxes, spent $ 000 on a class this year and deposited $ 250 in your savings account, your AGI would be $ 750 - $ 50 - $ 000 = $ 250.
If you are allowed to do something in your daily life, you are usually grateful for this little leeway. When it comes to taxes, allowances - discounts - 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 withheld, and vice versa - the fewer discounts, the more funds will be retained. You have one type of discount for yourself, one for one spouse and one for each child (the taxpayer does not have to use all of them).
But be careful here. If you ask for too many discounts, you may find yourself in trouble filing your tax returns because your employer hasn't withheld enough money from your paycheck and now you need to pay extra out of your pocket. You can change the amount of discounts you receive at any time - you just need to fill out a new W-4 form and give it to your employer.
On the subject: How to file a tax return yourself: step-by-step instructions
“Subtract” means “take away or reduce” - it is about subtracting a certain amount from the amount of taxes that 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 than 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.
The detailed deductions are also a list. But instead of listing the contents of the bag, this is a list of what you can deduct from taxes. There are many things to add to the detailed deduction list, and they change every year. This is often, for example, 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
To encourage certain behaviors, such as investing in green energy or helping certain sections of the population, the government offers tax incentives. In accounting, a loan means the amount of money received. Basically, tax breaks are like the government is giving you a check.
The most common US credit is the earned income tax credit, also known as 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 make money, you don’t get the EIC. If you make some money, you will receive an EIC based on how much you earned and how many dependents (such as children) you have. 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 statement of income other than wages. There are various types of 1099 Forms, but they all include income, such as contractual income or income from rental property. Unlike W-2, which is mandatory sent by an employer to an employee, you may or may not receive a Form 1099 from the employer, but you can always ask for it if you need it.
Form 1098 is a statement that you can use for detailed deductions (optional). 1098 is a report of how much money you paid in interest on your mortgage. Likewise, application 1098-E are 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 will receive a refund. When you have paid more taxes in a year than you owed, then you will receive a refund / refund - a word dating back to the XNUMXth century and meaning “to give back”.
If you haven't paid enough taxes in a year, you will be liable. Liability is a bit of a fancy word meaning "what you owe." If you receive a large tax liability when filing 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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