Learn the basics for filing season

During the first few months of the year, individuals may be busy collecting the information they need to claim certain benefits or are sifting through mailed documents they will need to file certain forms. Tax codes, benefits and rules and regulations associated with filing income taxes can seem like a maze for individuals. While tax preparers are well-equipped to help individuals file their forms, claim deductions and credits and handle more complicated issues, having a basic working knowledge of different terms and scenarios can be helpful in the months leading up to filing season.

One of the most frequent terms individuals are likely to come across - especially when claiming credits and deductions - is adjusted gross income, or AGI. An individual's AGI is all the income they received during the year, such as wages, dividends and interest and minus certain reductions. AGI can be reduced by a several different items, such as alimony payments, health savings plans, contributions to qualified individual retirement funds, business expenses and some college tuition, fees and interest.

Exemptions are another aspect of filing that will impact how much an individual pays in taxes. Taxpayers may claim exemptions up to a certain amount that is defined by the IRS for themselves as well as dependents and spouse.

Tax deductions and credits also serve an important purpose when it comes to calculating how much an individual will owe or receive back during filing season. Credits serve to reduce the amount of taxes an individual pays to the IRS. For example, individuals who owe a $3,000 tax bill and have a credit of $1,000 will see the amount they owe the IRS slashed to $2,000. In some cases, certain credits are also refundable, meaning that individuals who do not owe any taxes may receive the credit back in the form of a refund.

Deductions, in contrast, reduce individuals' taxable income by the amount of the benefit. For example, workers who have a taxable income amount of $50,000 with $10,000 in deductions will only be taxed on $40,000. There are two ways to write off allowable expenses: take a standard deduction or itemize them. Standard deductions refer to a specific amount calculated by the IRS based on filing status. Itemized deductions allow filers to calculate their deductions separately and reduce their taxable income by this amount. Certain expenses must be itemized in order to be claimed, such as medical expenses, charitable contributions and mortgage interest.

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Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

About Liberty Tax Service 
Liberty Tax Service is the fastest -growing retail tax preparation company in the industry’s history.  Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service has prepared over 8,000,000 individual income tax returns.  With 42 years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service.   

Liberty Tax Service is the only tax franchise on the Forbes “Top 20 Franchises to Start,” and ranks #1 of the tax franchises on the Entrepreneur “Franchise 500.” Each office provides computerized income tax preparation, electronic filing, and online filing through eSmart Tax.
Posted To: Tax Ranger's Blog By: Tax Ranger On: Wednesday, January 11, 2012
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