Common Tax Terms Explained
Whether it is personal finance or looking into the finances of a company, there are a few tax terms that generally crop up. Advisors at Meyer Asset Management Ltd Tokyo believe that filing taxes is as important as making investments, and thus equipping yourself with knowledge becomes necessary. While most of us would be familiar with the common tax terms used; however, understanding these terms becomes all the more critical for new investors, so that they are able to make informed decisions and understand how their returns are put together, comments Meyer Asset Management Ltd Tokyo.
The first and easiest term to understand is AGI or Adjusted Gross Income. Advisors at Meyer Asset Management Ltd Tokyo explain that the adjusted gross income is arrived at after taking into account the amount of money you made during the year and subtracting from it allowable deductions, business expenses as well as credits, according to the tax laws of your country. The AGI does not factor standard deductions, as those are dealt with at a later stage. Your adjusted gross income not only includes your paychecks, but also takes into account any interest earned as well as investment gains during the year.
Advisors at Meyer Asset Management Ltd Tokyo mention that the next two commonly confused terms are tax deduction and tax credit. While accounting for either of these proves to be advantageous for you, understanding the difference will help you identify which one will leave you ecstatic. A tax deduction basically reduces your taxable income. For instance, if your AGI came up to $100,000 and your deductions total to $2,000, then your income subject to taxes will be $98,000. However, Meyer Asset Management Ltd Tokyo explains that if you receive a tax credit of $2,000 then your final tax bill will be reduced by a full $2,000 and not a fraction of it as in the case of a deduction.
The next term relates to the next step in the process which is the Standard Deduction. Advisors at Meyer Asset Management Ltd Tokyo explain that a standard deduction is offered to all taxpayers and varies according to the unique laws of each country. The standard deduction is available as a set amount to taxpayers, instead of having to take into account small, small deductions. Another common tax term, an exemption applies to that portion of your income that should be excluded from your final taxable income, since it is spent on your dependants such as spouse and children.
Advisors at Meyer Asset Management Ltd Tokyo explain that one should always discuss at length the various deductions and exemptions available to them in order to reduce their final taxable income, rather than look to avoid paying taxes.