Delving into tax terminology can feel like learning a new language. Terms such as “adjusted gross income” and “above-the-line deductions” may seem perplexing, yet understanding them is key to effective tax management. This comprehensive glossary demystifies essential tax concepts you’ll encounter when filing taxes, ensuring you make informed decisions.

1. Above-the-Line Deductions

These deductions help reduce taxable income irrespective of itemizing deductions. Examples include:

• Educator Expenses for self-financed classroom supplies.
• Student Loan Interest Deduction for paid interest on loans.
• Health Savings Account Contributions to an HSA.
• Tuition and Fees for educational payments.

Claim them by completing Schedule 1 and attaching it to your federal tax return.

2. Adjusted Gross Income (AGI)

AGI is your gross income minus specific deductions, crucial for determining eligibility for tax credits and deductions. The IRS may require the prior year’s AGI for identity verification when e-filing.

3. Below-the-Line Deductions

Known as itemized deductions, these reduce taxable income:

• Itemized Deductions: Include medical expenses, charitable donations, mortgage interest, and state taxes.
• Standard Deduction: A set amount by the IRS, the choice depends on which yields a lower tax bill.

4. Capital Gains

Profits from selling assets like stocks or real estate. Tax rates depend on holding periods:

• Short-Term: Assets held for a year or less, taxed as ordinary income.
• Long-Term: Held over a year, taxed at reduced rates.

5. Capital Losses

These occur when selling an asset for less than its purchase price. Use losses to offset gains, up to $3,000 deductible from taxable income, with excess carried forward.

6. Child and Dependent Care Credit

Aids taxpayers who pay for dependent care while working or job-hunting. Maximum claims are:

• $4,000 for one qualifying person.
• $8,000 for two or more.

Eligible individuals are typically under 13 or unable to self-care for over half the year.

7. Child Tax Credit

Aids families with children, offering up to $2,000 per child under 17 for the 2022 tax year. Reduces tax liability, with up to $1,500 refundable.

• Child must be under 17 at year-end, a U.S. citizen, and reside with you for at least half the year.
• Provide over half their financial support.

8. Cost Basis

The original asset purchase amount, essential for calculating capital gains/losses upon sale.

9. Cryptocurrency Tax Rate

Similar to capital gains, rates depend on holding period. Short-term gains tax as ordinary income, long-term gains tax up to 20%.

10. Dependents

A dependent relies on your financial support, qualifying you for tax benefits and credits. Often children or qualifying relatives as per IRS criteria.

11. Estimated Tax Payments

Essential for self-employed or those with insufficient withheld taxes. Payments are quarterly based on expected income:

• First Quarter: Due April 15, 2022
• Second Quarter: Due June 15, 2022
• Third Quarter: Due September 15, 2022
• Fourth Quarter: Due January 17, 2023

12. Earned Income Tax Credit (EITC)

A refundable credit aiding low to moderate-income taxpayers, reducing taxes owed, potentially resulting in a refund. For 2022, max amounts are:

• $560 without children.
• $6,935 with three or more children.

Based on earned wages including self-employment, excluding unemployment, alimony, child support.

13. Filing Status

Classifications determining tax rates and eligibility for deductions, credits:

• Single: Not married or legally separated.
• Head of Household: Unmarried, supports qualifying dependents.
• Married Filing Separately/Jointly: Choose separate or joint returns.
• Qualifying Widow(er): Meets criteria, has dependent children.

14. Itemized Deductions

Expenses that reduce taxable income:

• Exceed a percentage of AGI.
• Contributions to qualified charities.
• State, local taxes paid.
• Casualty losses from theft, disasters.

15. Nontaxable Income

Monetary benefits not subject to federal tax:

• Child Support: Received from a former spouse.
• Gifts: Personal, unrelated to services.
• Cash Rebates: Purchase refunds or discounts.

16. Personal Exemptions

Previously reduced taxable income for taxpayers and dependents, eliminated by the Tax Cuts and Jobs Act from 2018-2025.

17. Self-Employment Income

Includes earnings from freelancing or business ownership. Reported on Schedule C, subject to self-employment taxes.

18. Sole Proprietor

An individual owner and operator of a business, reports income and expenses on Form 1040, Schedule C. Simplicity over formal incorporation.

19. Standard Deduction

A simplifies tax filing, offering a fixed deduction based on filing status. For 2022:

• Single/Married Separately: $12,950
• Married Jointly/Qualifying Widow(er): $25,900
• Head of Household: $19,400

For 2023: Modified amounts.

20. Tax Deduction

Reduces taxable income, thereby tax liability:

• Standard Deduction: Fixed amount.
• Itemized: Specific expenses exceeding standard deduction.
• Above-the-Line: Reduce AGI regardless of itemizing.

Understanding these tax terms significantly impacts your ability to manage taxes effectively, taking advantage of tax benefits. Familiarity with these concepts aids in making informed decisions, potentially reducing tax liabilities.