Personal Insights

Gearing up for tax season? Know your tax terms

Understanding how your taxes are calculated can help you avoid unpleasant surprises. A good place to start is by learning some common tax terms. This can help you fill out your tax return and/or make conversations with your tax accountant easier.

For some, the thought of tax preparation means countless hours spent shuffling through papers. Understanding how your taxes are calculated can help you avoid an unexpected tax bill. A good place to start is by learning some common tax terms, which can help you fill out your tax return or make conversations with your tax accountant easier.

Gross income

Generally, this is the full amount of money, goods, services, and property you receive and must report in a year, which includes wages, stock sales, interest income, IRA distributions, rental income, unemployment income and possibly portions of social security income. It may also include scholarships and other types of income.

Adjusted gross income

Adjusted gross income is gross income less "above the line" adjustments. General "above the line" adjustments include IRA contributions qualifying Educator expenses, certain Health Savings Account contributions, certain retirement contributions and student loan interest paid. There are other examples of adjustments.

Tip: If you are self-employed, you may be able to take adjustments and deductions based on your self-employment costs such as health insurance, business expenses, and part of your self-employment tax. These adjustments reduce your business income included in your adjusted gross income.

Deductions

Deductions can lower the amount of tax you ultimately pay. There are two categories of deductions: standard and itemized. Standard deductions let you deduct a fixed amount from your taxable income based on criteria like your age and filing status. With itemized deductions, you list out expenses that qualify for a possible deduction, such as mortgage interest, medical expenses, state taxes, local taxes, charitable gifts, and more.

The IRS provides forms that help you translate those expenses into deductions, which you then subtract from your taxable income. Generally, you want to choose the greater of the Standard deduction or the allowed amount of itemized deductions. These deductions can vary by year as the tax code is adjusted, so it’s a good idea to check IRS.gov for the most up-to-date criteria.

Exemptions

Previously, taxpayers were eligible for personal and dependent tax exemptions (a set amount available to each person and their dependents to reduce their taxable income). However, the "One Big Beautiful Bill Act" solidified the Tax Cuts and Jobs Act's repeal of personal exemptions, so, going forward, they will no longer be available.

Credits

Tax credits are different from deductions because they reduce your tax due dollar for dollar (as opposed to reducing your taxable income, which only reduces it by the percentage that you pay in tax). If certain tax credits reduce your tax below zero, you may even receive a tax refund.

Because expenses and life changes that could affect your tax liability come at different times of year, consider planning your taxes early and avoid waiting until tax time to meet with a tax professional. That way, you’ll have advance notice if you need to make any changes during the year.

Tax laws and regulations are very complicated and can be confusing. You should involve a tax professional or do careful research to understand your individual situation.