Doing your taxes for the first time can seem intimidating. The biggest roadblock that keeps most twenty-somethings and beyond from filling them out for the first time is the amount of unfamiliar tax terms. If it’s your first time doing taxes and you’re scratching your head at a lot of the words, you’re not alone. With that in mind, here’s what you need to know about all the most basic tax vocabulary.
Must Know Jargon for Your First Time Doing Taxes
- Withholding allowances – Each time you get your paycheck, you don’t get the full amount you’ve earned. Your employer withholds some of your earnings to pay the IRS the taxes you owe on your income. When you fill out your W-4 form for an employer, you control how much they subtract from your paycheck based on your withholding allowances.
- Tax bracket – More money, more taxes. That’s basically what tax brackets mean. The IRS has several tax brackets based on annual income ranges. The amount of taxes you pay increases as your annual earnings do. This is because the tax rate, the percentage of your earnings that you owe in taxes, increases with these factors, as well. Simple.
- Marginal tax rate – But maybe not so simple. Just because you fall under a certain tax bracket doesn’t mean that the IRS will tax all your earnings at the same rate. Let’s say you make $25,000 and the 15 percent tax bracket is from $17,001 to $70,000. You’re only going to be taxed at that rate for your income over $17,000 (so $8,000). For that first $17,000, the IRS will tax you at the lower, first bracket rate. Which is great.
- Tax exemptions – There are three categories of earnings that the IRS does not tax. They’re classified as tax exemptions, tax deductions, and tax credits. An exemption is a specified amount you automatically take away from your taxable income. Exemptions come in two types, personal and dependent.
- Tax deductions – The government allows you to subtract certain expenses, such as student interest loans, from your taxable income. You can utilize tax deductions by either taking the standard deduction, as determined by Congress, or by adding up your own itemized deduction.
- Tax credits – These are tax breaks that are taken directly from the taxes you owe, as opposed to from your taxable income.
This was by no means a full crash course on doing your taxes. It should, however, prove useful if you’re brand new to the exciting game of filing your own taxes.
Washington D.C. bankruptcy attorney Kevin D. Judd represents clients in bankruptcy court throughout the District and Maryland.