ITC - Breaking Down Tax Terms to make them Easy for you
Hello fellow Tax Payers,
Every year, we all have to do the same thing - file our Tax Returns and pay “the man”.
Even though we all do this every year (or at least most of us), we still have trouble remembering what exactly some of the most basic Tax Terms mean. Some of them are relatively simple, however, they seem to confuse us at the same time.
We here at ITC wanted to make sure that this year, you know exactly what you’re talking about. So we have listed some of these basic definitions below, if you already know them, excellent, if not, now you and you’re friends know where to look.
Tax Credit: There are two types of “credits” that you need to worry about, Refundable & Non-Refundable.
First of all, a Tax Credit is something that will allow you to reduce the amount of money you owe in taxes, Dollar for Dollar.
* A Refundable Tax Credit will allow you to apply the credit even though that credit may produce a “refund” over and above any taxes that you owe.
* A Non-Refundable Tax Credit WILL NOT allow you to receive a refund for excess “credit”. These credits can only be applied to reduce your tax liability (amount owed) up to the amount that you actually owe.
Tax Deduction: there are generally two types - Itemized Deductions and Standard Deductions.
* Standard deductions are traditionally thought of as donations & gifts, expenses (employee or Business operation), etc. Now, these things can only be applied to your Tax Return in order to lower the amount of money you owe. Often times, you will not receive a dollar for dollar decrease as well. For example, if you spend $10,000 in Entertainment Expenses for your business, you are only permitted to deduct $5,000 (50%) off of the amount of tax money you owe.
- Itemized Deductions are ONLY used when it is possible to decrease your tax liability even further than simply using the Standard Deduction method mentioned below.
* Above-the-line deductions or Standard Deductions – the opposite of Itemized Deductions. These deductions are granted to tax payers automatically and the amount granted will depend on your filing status (married, single, etc.)
- Married couples filing Jointly will receive a higher Standard Deduction amount.
Withholding Exemptions & Allowances:
* Allowances - the amount of Tax you owe; and diversely, the amount of money you make in each paycheck are directly affected by the Allowances you claim.
- Many people claim Zero (0) allowances in order to have the most amount of money withheld from their paychecks. Therefore, you will make less in your check.
- Most people claim at least One (1) allowance for themselves and additional allowances for anyone they may claim as a dependent (kids).
- The more allowances that you claim will result in more “take-home” pay; or more money in every one of your checks.
* Exemption - this is selected by people who WILL NOT have any taxes withheld from the paychecks; therefore resulting in receiving the most money possible in your checks.
- Typically, this is only done by people like children or students, OR - anyone who DID NOT owe any federal taxes the previous year. If you anticipate that you will not owe any federal taxes again the following year, then you have the option of claiming an exemption from withholding on your W-4,
- KEEP IN MIND - If you claim an exemption from withholding and no taxes were deducted, when in reality they should have been throughout the year because you owe, you WILL have a tax liability bill (money owed to the Feds) as well as a possible penalty for the mistake that will be due when filing your tax return for the year.
We hope that this makes things a little more easier to understand when filing your taxes this year.
Good Luck from the ITC.
Until next time…