Understanding the Basic Individual Tax Form
You don’t have to pay someone to do your taxes for you. You can prepare and file your taxes for free with just a little bit of preparation and knowledge of basic tax principles. This is especially true if your financials aren’t complex. Most people can understand the basic tax form so there’s no reason why they shouldn’t be able to fill out their own tax forms. Let’s take a look at what’s involved in preparing your own taxes.
The Basic Individual Federal Tax Form
Here are a few terms you should know before we begin calculating your taxes.
- Gross Income
- Deductions
- Credits
What’s an Individual tax return? It’s a tax form filled out by a person, not a corporation, not an estate, not a trust, or a partnership.
The Basic Tax Formula
What determines whether you get an IRS refund or you owe money? Let’s look at the basic tax formula. Well take a look at your paycheck. Each time you get paid you also give some of your pay to the IRS. The IRS takes the money and holds it for when at the end of the year you have to pay taxes, you’ve already been contributing. As we work, we pay. It’s called withholding.
At the end of the year, we take a look at how much we made. That’s called Gross Income. That’s the starting point for figuring your tax. All your income is included in this figure. You can make that amount smaller by adjusting it. Use credits and deductions to adjust your income. This is called the Adjusted Gross Income. The less you end up with in your AGI, the less taxes you have to pay.
Deductions
The IRS gives everyone a freebie deduction…the standard deductions. You can lop off a good chunk of your AGI with the standard deduction. You can also do the long form and add up your deductions to charity, etc yourself. This is called figuring your itemized deductions. Whichever one is higher: the standard deduction or your itemized deductions, you use that.
Exemptions
You can take out more money if you qualify. Examples are if you have children or if you are the head of household.
Taxable Income
Take your AGI, subtract your deductions and exemptions, and you arrive at your taxable income. This is the figure you use when you look up your tax on the IRS tax tables.
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