Do you and your tax preparer speak the same language? Test yourself and see if you know what following eight terms and phrases mean.
Gross Income
Your gross income is all your income (and your spouse’s, if you are married and file your tax return together). Examples are wages, unemployment payments, interest from your bank, gambling and lottery winnings, business income, and alimony received. Gross income does not include child support payments received.
AGI (Adjusted Gross Income)
Your adjusted gross income is your gross income less certain deductions such as alimony paid, certain contributions to qualified retirement accounts, moving expenses, interest paid on student loans, and qualified tuition paid.
Standard Deduction
Everyone who files a tax return is allowed a standard amount that is deducted from the adjusted gross income. The amount of the standard deduction depends on your filing status (single or married filing jointly, for example). For 2014, the standard deduction ranges from $6,200 to $12,400. If you can be claimed as a dependent on another’s return, the standard deduction is limited. There are additional standard deductions if you are blind or over age 65.
Itemized Deductions
There are some personal expenditures that are allowed to be deducted from adjusted gross income. Examples would be certain medical expenses, interest on home mortgages, state income taxes, and charitable contributions. If the itemized deductions, when added together, are greater than the standard deduction, you may want to use the itemized deductions rather than the standard deduction.
Personal and Dependent Exemptions
For 2014, you are allowed an exemption of $3,950 for yourself, your spouse (if married) and each of your dependents.
Taxable Income
Taxable Income is your AGI less deductions. Examples of deductions are personal and dependent exemptions, standard deduction (or itemized deductions), credit for child and dependent care expenses, and education credits.
Earned Income Credit
If your AGI is below the phase-out limit and you have one or more qualifying children, you may qualify for the earned income credit.
Tax Credits
Tax credits are subtracted from your income tax. Examples of tax credits are credit for child and dependent care expenses, education credits, child tax credit, and earned income credit.
Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.
