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ACCOUNTING AND TAX SERVICES
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TAX FACTS
Adjusted Gross Income
Adjusted gross income, or AGI, is all the income you receive over the course of the year, including wages, interest, dividends and capital gains, minus things such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. AGI is the first step in calculating your final federal income tax bill.
Tax Credits
Tax credits are much like credits you get from a store. After you calculate your tax bill, you can use the credit to reduce the amount of the check you must write to the government. Tax credits are more valuable than tax deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income.
Tax Deductions
Tax deductions are expenses the IRS allows you to subtract from you adjusted gross income to arrive at your taxable income. In most cases, the lower your income, the lower your tax bill. The IRS offers all filers a standard deduction amount.
Exemption
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This is an amount the IRS lets you subtract from your income to reflect all the people who count on your income. You can claim as tax exemptions yourself, your spouse and your dependents. The IRS allows a set amount for each exmption and, as with deductions, this total is subtracted from your adjusted gross income to come up with your final, lower earning amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any tax deductions, either standard or itemized, that you claim.
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Taxable Income
Taxable income is your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions. It is the final amount of income you use to calculate how much you owe in taxes.
Withholding
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Also known as pay-as-you-earn taxation, the withholding method enables taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck. These withheld taxes are deposited in an IRS account and you are credited for the amount when you file your return. In some cases, taxes also may be withheld from other income such as dividends and interest.
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