Friday, February 27, 2009

10 Tax Terms You Need to Know

Post by YiLin Zhu on Feb.27 2009
By Mary Beth Franklin

Does preparing your income-tax return remind you of taking a final exam in a foreign language that you don't understand? We can help. Think of Kiplinger as your Berlitz guide to taxes. We've translated key words so that you can understand not only what they mean but also how they can help you lower your tax bill.

Start with adjusted gross income. AGI includes your total income from all taxable sources (such as wages, interest, dividends, and self-employment and rental income) minus certain adjustments (see below). AGI is the key to determining your eligibility for certain tax benefits -- or, if it is too high, your exclusion from them.

Some of those adjustments to income, also known as above-the-line deductions, include deductible contributions to IRAs and Health Savings Accounts, student loan interest, travel expenses for military reservists, job-related moving expenses, and out-of-pocket expenses for teachers who purchase classroom supplies. You can claim these tax breaks whether or not you itemize your deductions (see below) and use them to reduce your AGI.
You can also deduct a personal exemption, worth $3,500 apiece in 2008, for yourself, your spouse and each of your dependents. So a family of four could deduct $14,000 in personal exemptions from their taxable income on their 2008 tax return.. (The value of exemptions is partially phased out at higher income levels.)

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