Tax Terms Everyone Should Know

Here is a list of the most common tax terms and what they mean.

How many did you already know?

Form W-4: This form tells your employer how much to withhold from your paycheck for federal income taxes. Most individuals fill this form out when they start a new job. Keep in mind, it is a good idea to update this form when you have a child, get married, anytime your tax situation changes. 

Withholding: The part of your paycheck that your employer puts towards federal income taxes. This amount varies depending on how you filled out Form W-4.

Form W-2: This form reports wages paid and taxes withheld from an employer. Employers complete a W-2 for each employee that they pay a salary or wage to. Your W-2 also reports the amounts of federal, state, and other taxes withheld from your paycheck. 

Form 1099: There are multiple different types of 1099’s. The most common is Form 1099-MISC. If you are self-employed or an independent contractor who is paid more than $600 in the course of a fiscal year for services done, you will likely receive a 1099-MISC for your work done.

Other types of 1099’s include:

*1099-DIV: reports dividends or other distributions you received during the year

*1099-INT: investments that pay interest payments rather than dividends

*1099-G: reports any government compensation (gambling winnings over $600) or unemployment compensation

*1099-R: reports total withdraws from retirement accounts

*1099-C: reports when a creditor cancels a portion of withstanding debt

Tax Return: A tax return is a form that is filed with the IRS to report income, expenses, or other pertinent tax information. A tax return helps taxpayers calculate their tax liability, schedule any tax payments, or request refunds for the overpayment of taxes. Tax returns must be filed annually for individuals or businesses with reportable income.

Form 1040: This form is one of the official documents that taxpayers can use to file their annual income tax returns. Form 1040 is one of the most common ways to file income taxes. This form shows all your personal information such as where you live, what your income is, how many dependents you have, and your filing status (individual, married filing jointly, married filing separate, etc.) 

Adjusted Gross Income (AGI): This is your gross total of income for the year minus certain payments. This helps determine how much of your income is taxable. Your AGI directly influences taxpayer’s eligibility to claim any credits or deductions on their tax return. 

Dependent: Anyone you financially support. Usually, dependents are children or your spouse. In some instances, a dependent can be a retired parent that lives with you and you financially support. Dependents are useful for tax deductions and credits. 

Tax Credit: An amount you can subtract from the taxes you owe because you did something the government likes. Think: saving for retirement, investing in your education, having a kid, installing solar panels, etc. A tax credit reduces your overall tax bill. 

Tax Deduction: When the government cuts you a break and lets you subtract some costs from your taxable income. Choose between the standard (flat-rate) discount or itemized one, where you add up all of your expenses and hope it is higher than the standard deduction. A tax deduction reduces your taxable income. 

Tax Refund: Money that the government pays you back for paying more taxes than you needed to.