As you meet with your tax preparer this spring, you will hear a lot of tax terms that most people aren't familiar with. But understanding them and what they mean can help you plan for future taxes better and maintain control of your financial situation. 

So, to get you started, here are a few basic tax items that are important to your bottom line. 

Adjusted Gross Income

Your adjusted gross income is generally the income amount listed at the bottom of the first page of Form 1040. The adjusted gross income is simply your gross income minus a few 'adjustments' for things like student loan interest or IRA contributions.

This is a number that is generally used for many non-tax purposes like determining credits for health insurance subsidies or getting a mortgage loan. 

Taxable vs. Nontaxable Income

Not all income is taxable. Generally, if you only receive Social Security benefits as your source of income, it is not taxable. But if you have other sources of income, some of the benefits will be subject to tax. This is reflected on line 20 of your Form 1040.

If you get income from an IRA or pension, you may also see that the gross (total) amount you received is not the same as the taxable portion on lines 15 or 16. Rollovers, for example, should never be included as taxable amounts. 

Refundable Credits

Tax credits come in two varieties: refundable and nonrefundable. Nonrefundable credits lower the amount of tax due, but they cannot lower it to create a refund. Examples of these are the Child Tax Credit, the Lifetime Learning Credit, and currently the adoption credit. 

Refundable credits, on the other hand, can create a refund even if you owe no tax. These are the more valuable kind if you have little tax liability due to your income. They include the Additional Child Tax Credit, the Earned Income Tax Credit, and the American Opportunity (education) Credit.

Due Diligence

The idea of 'due diligence' is what your tax preparer is required to inquire about in order to determine if they are completing your taxes correctly. For some tax credits, the preparer can be subject to a fine if they do not make sufficient inquiries. 

Some questions that your preparer should ask include information on your living arrangements and who pays the costs of the home, whether anyone else can claim your dependents, and if your income is supplemented by other assistance. These questions are routine and required. Keep in mind that you should have backup documentation to prove any of these items if the tax agency ever inquires.

As you meet with your tax preparer, you can make the process smoother and more productive for yourself by understanding these few basic parts of your income tax forms. And you'll impress the preparer with your financial savvy! Contact a company like The Callen Accounting Group, PLLC to learn more.