Filing taxes is a complicated task for anyone. Understanding some of the key terminology used by the IRS can help clear up confusion when it is time to file taxes.
A tax deduction is the amount of money that you can subtract or deduct from your taxable gross income. Deductions vary from person to person but can sometimes include costly medical expenses or charitable donations.
A tax credit is essentially a reduction on taxes owed, so it is similar to a deduction, but it usually requires some behavior or situation to qualify. Examples of credits include the earned income tax credit or the child tax credit. Credits are divided into two types: refundable tax credits that increase your refund and non-refundable tax credits that reduce tax liability.
When filling out the 1040 tax form, after you have entered your gross income, everything after that line will be an adjustment. Next you will enter information on deductions to your taxable income. After you have entered this information, subtract the deductions and find your total number.
After you find your adjusted gross income, subtract any other itemized deductions that you may have. You should then compute a dependent exemption deduction based on the figures in the far left column of the 1040 form and multiply that by the number of dependents.
Next, total your refundable credits. After your refundable credits are entered on the form, enter your non-refundable credits into the next line. This should complete your tax form. If you need more help, consider hiring a tax preparer or CPA to assist you.
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