Word of the week: a simple explanation of the tax terms that you need to know in 2020

The proverb says: life is inevitable but death and taxes. This statement is dated 1716 and the word “tax” has a long history and means “the amount of money required by the government.” The word comes from the Latin taxare: “censure, charge” and dates back to around the XIII century. Since taxes cause fear in most people. If you’re uncomfortable, you’re not alone, says Dictionary.

Слова недели: простое объяснение налоговых терминов, которые нужно знать в 2020 году

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In the United States has a unique tax system with its own dictionary, in which the inhabitants and citizens need to be guided every year in the period from early January to April 15th (tax Day). To make this process slightly less awful, the publication explained the meaning of those or other tax terms that you will likely have to face in 2020.

Form 1040

The key shape required to fill the annual tax return is Form 1040, which is sometimes called just — 1040. To this basic document can be added for additional forms, depending on the situation.

If you only have one job with one salary and no itemized deductions (more on this below), you can file form 1040-EZ (EZ means “easy”). If you have a more complex situation, you may have to use a typical form 1040.

Every year the IRS releases a new version of the form 1040.

Adjusted gross income (adjusted gross income, AGI)

One of the most important figures on your form 1040 is your adjusted gross income. The word gross does not mean “disgusting”, although it would be a good joke. In business it means “the sum of wage or profit before deductions or expenses.” So, your gross income refers to how much money you earned before taxes and other deductions.

With regard to adjusted — it’s a little more complicated. IRS (IRS) has a complex system of benefits and credits. But, in fact, there is a list of things you can deduct from your gross income before you do find yourself in any of the privileged categories.

For example, if you are a teacher, you can deduct it from gross income up to $ 250 spent out of pocket for expenses in the classroom. There are other adjustments, including savings accounts in health care (HSAs), insurance contributions for health insurance for the self employed and IRA deposits.

So if you are a teacher who earned $ 50,000 a year before taxes, spent $ 250 for the class this year and put 750 dollars into your savings account, your AGI will be $50 000 — $250 — $750 = $49 000.

Benefits (allowances)

If you are allowed to do something in daily life, you tend to be grateful for the little freedom of action. When it comes to taxes, allowances — benefits — also need to make your life easier (theoretically).

If you are an employee, you had to fill out form W-4 when he got a job at the company. W-4, you note how many benefits you would like to obtain. This determines how much money your employer will withhold from your wages for taxes.

The more exemptions, the less money will hold, and Vice versa — the fewer exemptions, the more money keep. You have one form of benefits for themselves, one on one spouse and one for each child.

But here we must use caution. If you request too many privileges, you can face the fact that when submitting tax returns, problems may arise because the employer did not keep enough money from your paycheck. You can change the number receiving benefits at any time — you just need to fill out a new form W-4 and send it to your employer.

Deductions (deductions)

“Subtract” means “to take away or decrease” — it is about deducting a certain amount from the figures of taxes that you owe. This can make you ponder how Sherlock Holmes solves mysteries (remember the method of deduction?), but it is connected not so much with logic, but with simple math.

There are two kinds of deductions that you can do: standard and detailed. They differ from the adjustments that we mentioned earlier because these deductions are taken from your adjusted gross income, not your gross income.

  • Standard deduction (Standard deduction)

Every year the IRS sets amount, known as the standard deductions. There are various sizes of standard deductions depending on whether the fed tax return you alone, are married or are heads of families.

  • Itemized deductions (Itemized deductions)

If you value accuracy, then you probably like detailed lists. Your best friend can tell what’s in her bag “cosmetics and stuff”, but you will be happy to provide a detailed list of all items that it has two lipstick, lip balm, tissues, dental floss, and three peppermint chewing gum.

Itemized deductions is also a list. But instead of a list of the contents of the bags, this is a list of what you can deduct from taxes. There are many things that can be considered itemized deductions, and they change every year. Often, for example, medical and dental expenses and charitable contributions.

When filing form 1040 you must choose standard or itemized deductions. As a rule, if you don’t donate much money to charity, it is better to take the standard deduction. Your deductions are made from your AGI.

Non-taxable assets and income (Tax-exempt)

Certain assets or income are considered non-taxable. Exempt means “to be free from obligations or duties”. If something is tax exempt, you are exempt from the obligations of their payment from the asset or income.

One common example of non-taxable income is the interest earned on municipal bonds. All that is not taxable is up to you.

Credits (Credits)

To encourage certain forms of behaviour, such as investing in green energy or helping a particular segment of the population, the government offers tax incentives. In accounting, credit means the amount of the money. In fact, tax relief is as if the government gives you a check.

The most common loan in the US is the tax credit for earned income — earned income tax credit also known as EIC or EITC. EIC, one of the largest programs of economic support in the United States, is a loan on a sliding scale. If you don’t make money, you don’t get EIC. If you earn little money, you will receive EIC depending on how much you earned and how much you have dependents (e.g. children). If you earn more than a certain amount, you do not get EIC.

W-2, W-4 or W-9

Confusing because of its similarity of the name forms seriously complicate the filing of annual tax returns. Take, for example, W-2, W-4 and W-9.

If you are an employee, when you first started work you fill out a W-4. In this form, you note how many benefits you want.

At the end of the year, usually until the end of January, your employer will issue you form W-2. In it you will find information about how much you were paid this year and how much has been deducted from taxes. This information is critical for filling the form 1040.

If you are a freelancer or contractor, for example, the driver of Uber, you fill out W-9 when I first started working with the company. You will not receive a W-2 at the end of the year, but you can get a 1099. Don’t know what it is? Read on.

1098 or 1099

Form 1099 is a report about income in addition to wages. There are different types of 1099 forms, but they all include the income, for example, contractual income, or income from rented property. Unlike W-2, you may receive or not receive a form 1099, although you can always request it.

Form 1098 is the statement that you can use for itemized deductions (optional). 1098 is a report about how much money was paid in interest for a mortgage loan. Similarly, the statement 1098-E is used for student loans.

Return (refund) or obligation (liability)

After you collect all your documents and fill out the form 1040 and other documents, you will have one of two options: tax refund or tax liability.

If you are lucky, you will get a refund. When you pay more than you owe in taxes, you will receive a refund/refund — refund — word, Dating back to XV century and means “to give back”. This return includes the tax benefits to which you are entitled.

If you did not pay enough tax during the year, you will bear the obligation. Liability is a bit of a fancy word meaning “something you have”. If when filing taxes you receive a large tax liability, do not worry. Contact the IRS. They will work with you to create a payment plan so you can repay its obligations.

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