6 Tax Time Terms You Need to Know

Tax time can be stressful. If all of the laws and numbers weren’t enough to keep up with, there are also a number of terms that tax experts may use that are confusing to the rest of us. Take a moment to learn some of these terms and arm yourself against the considerable stresses of tax season.

Adjusted Gross Income (AGI)

Image via Flickr by Alan Cleaver

Adjusted gross income describes the amount of money a taxpayer has earned during the tax year, reduced by certain amounts such as IRA contributions and student loan interest payments. Your AGI is calculated before your standard or itemized deductions.

After-Tax Contributions

After-tax contributions refer to money that is invested or contributed to an account once taxes have already been paid. Certain types of IRAs and other retirement accounts require taxpayers to contribute money after taxes are already paid on it.

Before-Tax Contributions

Before-tax contributions are contributions to an account with money that has not yet been taxed. A 401(k) is a common account that includes pre-tax (or before-tax) contributions. If you deposit money into such an account before taxes, the returns usually are taxed when they are withdrawn.

Filing Status

Filing status describes your life situation that determines how the tax you pay will be calculated. Filing statuses include Single, Head of Household, Married Filing Jointly, and Married Filing Separately. It is important to make sure that you choose the right filing status for your tax situation.

Independent Contractor

With the growth of the gig economy, more and more people are becoming independent contractors — many of them without realizing it. Being an independent contractor means that you are not a typical employee, and as such, your employer does not provide benefits or tax withholding. It is important to know whether you are an independent contractor because it changes the way that your taxes are calculated. Independent contractors receive a 1099 form at the end of the fiscal year instead of the W-2 that employees receive to report income earned during the year.

IRS Debt Settlement

At the end of a tax year, you may find that you will owe taxes rather than receive a refund — this is especially likely if you are an independent contractor rather than a W-2 employee and your taxes have not been withheld throughout the year. The amount of taxes you owe is your IRS debt, and it can be quite a burden on many taxpayers. However, there are options for settling your IRS debt that you may qualify for. For taxpayers who are struggling with tax issues, a professional may be able to help you reach a better outcome. A tax professional or IRS tax advocate can help you find a settlement option that is right for you.

By educating yourself and managing your expectations during tax season, you can hope for a relatively painless tax filing process. These definitions should help you get started on your path to navigating the hurdles of the IRS. However, if you still have questions or concerns about your tax situation, it may be valuable to enlist the help of a professional to guide you along the way.

 

 

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