Below are some important terms regarding Federal Tax Returns that we believe are critical for individuals and business owners to understand when it comes to their tax returns.
AGI ? Adjusted gross income, or AGI, is found by subtracting those specific deductions allowed from all the income received during the year. Wages, interest, dividends, business income, income from real estate, pensions and capital gains are examples of income. Deductions can include moving expenses, alimony, IRA deductions, student loan interest, and others. Calculating adjusted gross income is one of the first steps taxpayers take to calculate their final federal income tax bill.
MAGI ? Modified adjusted gross income is increasingly being used by Congress to limit a tax deduction or credit to individuals below certain income levels. It can create confusion because the term has different meanings depending on the specific tax credit or deduction. Modified adjusted gross income is used in calculating the following tax benefits: the phase out for education loan interest; the income portion of U.S. bonds redeemed for education expenses; adoption tax credits; education tax credits; and in determining the portion of social security benefits taxable as income.
AMT ? The alternative minimum tax, or AMT, was created by Congress in 1969 to make sure wealthy taxpayers pay federal taxes even if they qualify for enough deductions to eliminate their federal tax bill. Taxpayers find out if they have to pay higher taxes under the AMT rules, which do not allow taxpayers to use certain tax deductions and credits, by recalculating their taxes using the AMT worksheet. Because the law does not index the exemption to inflation, the AMT has ensnared many middle-income taxpayers in recent years.
Credits ? Tax credits are the best tax break you can get. They are subtracted from the amount of tax you owe dollar for dollar. If you owe $1,500 in federal taxes and are eligible for a $500 credit, your tax bill is $1,000 after the credit is applied. Tax credits are available for such things as education and energy conservation expenses. Some credits are limited to the tax you owe, but other credits are refundable, meaning you get a refund even if the credit is greater than the tax you owe, and some may be carried forward to be used in future years.
These are only a few of the terms and processes that are vitally important to a Federal Tax Return. If you find that you, or your company, are in need of Federal Tax Return Assistance please contact our office at 734-469-4406.