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Basic Tax Terms for Individuals

Joshua V. Azran, partner/owner of Azran Financial (www.azranfinancial.com) gives basic tax terms for individuals. Make sure you know these tax hints to be ready for tax season.

  1. Gross income- receipts & gains from all sources
  2. AGI- gross income less specific adjustments
  3. Taxable income- AGI less deductions & expenses
  4. Tax due on income- calculated tax less any received credits

One of the most basic things that individuals get confused with when preparing their taxes is the different types of income and it’s broken up on the front page and second page of your tax return but most people don’t understand what makes up these numbers.

So we’re going to walk you through what makes up gross income. Then of course from there, adjusted gross income, finally, your taxable income and then we’ll look at what calculates your tax due on income.

Let’s start off at the beginning with gross income. Gross income is going to represent all receipts and gains from all sources and then the US, we’re of course, are taxed on worldwide income which will include things like wages and salaries, interest and dividends or any capital gains. Once you have your entire gross income, we’re going to make some adjustments and these adjustments are going to help us to arrive at adjusted gross income.

And adjusted gross income very simply is gross income less some specific adjustments. Some of these adjustments include the IRA deduction, the student loan interest deduction, tuition and fees deductions, et cetera. Now, very important to remember is that adjusted gross income is not only a figure on the tax return for calculation purposes but also, it’s going to be used to calculate some additional taxes later on.

Moving down from adjusted gross income, we have to of course calculate our taxable income. Taxable income is going to be defined as your adjusted gross income less deductions and expenses.

Now as far as deductions, we’re either going to have what we refer to as our standard deduction or some taxpayers if they choose to and if they have enough of these types of expenses will choose to itemize and therefore have an itemized deduction. In addition to this, each person and their spouse in which case and/or their children in those cases will also be able to receive an exemption so the taxable income is going to be your AGI less these deductions – either the standard or itemized depending on your tax situation – and those exemptions due to you and your family.

Finally, from taxable income, we can calculate what we call tax due on income and this is going to be a function both of the taxable income and also somewhat influenced by your AGI.

This is getting to a bit more complex issues so we won’t touch on them right here but what we should think of is tax due on income is going to be the tax due that’s calculated less any credits that you may receive and these credits will of course reduce the amount of tax due or increase, in some cases, your refund.

Remember, just to recap, we have a few different things starting off with gross income, we’ll move through after certain deductions to adjusted gross income finally reaching taxable income, being able to calculate our tax and then determine what our actual tax due is or tax refund is based upon those additional credit which may apply.