Common Tax Jargon

EP 39 -  Common Tax Jargon

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Let me peak your curiosity with a teaser question.

Do you often find yourself baffled by common tax jargon? Such as adjusted gross income or tax brackets.

If so, fear not. In today's episode, we will demystify these terms and provide you with concrete examples. To help you navigate the tax landscape with ease. So, without further ado, let's get started.

Welcome to another informative episode of the ask Ralph podcast, how to master your finances. Lower your taxes, grow your business, and find personal success. I'm your esteemed host Ralph Estep, Jr.

And I am thrilled to have you join me today. Whether you're a seasoned entrepreneur, a small business owner, or an individual with a passion for personal finance. This podcast aims to provide you with the knowledge and tools you need to achieve. Your financial goals.

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Our first jargon term for today is adjusted gross income, or AGI. AGI is a crucial figure used by the internal revenue service or commonly called the (IRS) to calculate your tax liability accurately. So, what exactly is AGI?

Let me simplify it for you. Suppose you're self-employed individual who earned a hundred thousand dollars last year. However, you are eligible. For deductions related to your business expenses, retirement contributions, and student loan interest, totaling $20,000. In this case, your AGI would be 80,000. [00:02:00] That's the a hundred thousand dollars gross minus the deductions. AGI helps determine various tax aspects. Such as eligibility for certain deductions and credits. So it's essential to understand and calculate it correctly.

Let's move on to our next term.

Let's delve into the term itemized deductions.

Itemized deductions are specific expenses. that taxpayers can deduct from their income. Thereby reducing their taxable income. For example. Let's say you paid $10,000 in medical expenses, $5,000 in mortgage interest, and $3,000 in charitable contributions throughout the year. These amounts can be itemized and deducted from your income. Reducing your taxable income by $18,000.

So you asked how did I come up with that? Well, the $18,000 is a combination of the ($10,000 in medical expenses. $5,000 in mortgage interest and $3,000). in charitable contributions.

Itemized deductions can be beneficial if your total deductions exceed the [00:03:00] standard deduction.

And we'll talk about that a little later in the program, allowing you to lower your tax liability even further.

Well, now, let's tackle the concept of tax brackets.

Tax brackets referred to the range of income levels at which different tax rates apply. In the United States, we have what's called a progressive tax system. Meaning that as your income increases.

So does your tax rate. You pay tax as a percentage of your income in layers, these layers are called tax brackets. As your income goes up, the tax rate on the next layer of income is higher.

When your income jumps to a higher tax bracket, you don't pay the higher rate on your entire income.

You just pay the higher rate on the part of the income that's in the new tax bracket.

Now this confuses people sometimes. So let's talk about what those tax brackets look like. So in 2023, and I'm going to only talk about the single tax brackets. There's different tax brackets for single, for married filing joint and head of household, but let's talk about the single tax rates.

So basically [00:04:00] the way it would work. Is on your first $10,275 with the income you would pay 10% tax. On the next layer of income. That's the $10,276 to $40,175. You would pay 12%. You hit the 22% tax rate at $41,776. Then you move on to the 24% tax bracket at $89,076. You reached a 32% tax bracket at $171,051. The 35% tax bracket at $215,591 and you reach the maximum 37% tax bracket once your income reaches $539,981. So you can see the add up as your income increases.

Now let's talk about tax credits.

Tax credits are a valuable tool for directly reducing your tax liability.

Unlike deductions that reduce your taxable income, tax credits are subtracted [00:05:00] directly from the amount you owe in taxes.

So let's say you qualify for the child tax credit. Which is worth up to $2,000 per child. as of this moment. If you have two eligible children, you'll be able to reduce your tax liability by $4,000.

That's $2,000 per child. Other examples of tax credits include the earned income tax credit for low- to moderate income individuals and families,

and the American opportunity credit for qualified educational expenses. I did a podcast about those credits about a week ago. If you want to go listen to those. These credits can make a significant difference in lowering your overall tax bill.

Well now, let's explore the intriguing concept of tax shelters. And this isn't a dirty word.

Folks. Tax shelters are perfectly acceptable. We're not talking about tax evasion. That's the kind of thing that will put you in jail. So tax shelters are lawful strategies or investments utilized by individuals or businesses to minimize their tax liability. That's the whole goal. One commonly known tax [00:06:00] shelter is the individual retirement account or (IRA). By contributing to an IRA. You can deduct the amount from your taxable income, reducing your tax liability.

So let's look at a simple example, of this. If you contribute $5,000 to your traditional IRA and fall into the 22% tax bracket, you'll save $1,100 in taxes. So, what I say to clients is basically. You're able to put $5,000 into your retirement. And it's only costing you $3,900 to do it.

That's a huge tax savings and an immediate return on your investment. It's critical to work with a qualified tax professional. To ensure you're utilizing tax shelters appropriately. And in accordance with federal tax laws. And that's important because there are some. Situations that need to be looked at.

It's not as simple as saying, well, let me just make an IRA contribution.

And lastly, let's talk about the standard deduction. A few minutes ago, we talked about itemized deductions. So let's talk about the standard deduction.

The standard deduction [00:07:00] has a predetermined dollar amount that reduces your taxable income. It's a fixed amount based on your filing status.

The standard deduction is $13,850 for single filers. And those married filing separately. It's $27,700. For those married filing jointly. And $20,800 for those claiming head of household. It is claimed on your tax returns filed by April, 2024. However, always consider your specific situation and consult with a tax professional, determine the best options for you.

And there you have it. My friends! we've explored common tax jargon and provide a concrete examples to enhance your understanding of these terms. armed with this knowledge, you can navigate the tax landscape confidently. Making informed decisions and maximizing your financial wellbeing.

Before we bid farewell, don't forget to visit our podcastPage@askralphpodcast.com.

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Thank you for joining me today on the Ask Ralph podcast.

How to master your finances, lower your taxes, grow your business, and find personal success.

I deeply appreciate your listenership and dedication to your financial growth. Remember, God bless you.

And as I always say, stay financially savvy.

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