Understanding Taxes: Everything You Need to Know

Taxes are a major revenue source for federal and state governments and a necessary part of life for everyone in the workforce. No one wants to spend a lot of time on their taxes, so in order to file as accurately and efficiently as possible it’s helpful to have at least a basic understand of the process as a whole.

11 Key Tax Terms to Know

1. Dependent: Someone who relies on the taxpayer for financial support. Each qualified dependent claimed on your taxes entitles you to tax breaks.
   
2. Filing status: This determines what tax form(s) to file and is based on a few factors, including marital status and number of children. The five filing statuses you can choose from are:
   1. Single
   2. Married filing jointly
   3. Married filing separately,
   4. Head of household,
   5. Qualifying widow(er) with dependent child
      
3. Deductions: This is an amount that you subtract from your income when you file, thus lowering taxes owed. Deductions can be taken in two ways:
   1. Itemized: A deduction amount that varies per taxpayer and is calculated based on things such as charitable deductions, medical expenses and home mortgage insurance.
   2. Standard: By contrast, a standard deduction is a flat rate that can be used in the event you don’t want to save expense receipts or don’t have eligible expenses for itemizing
      
      1. Which type of deduction is best is entirely dependent on your situation and needs. As a general rule, however, choose whichever amount is more. A greater deduction means less income to be taxed.
         
4. Tax bracket: A tiered system dependent on taxable income that determines the taxation rate you must follow. Here’s the 2023 tax brackets for taxes filed in 2024.
   
   
5. Tax return: The document sent to the Internal Revenue Service by a taxpayer that includes personal and financial information, such as annual income, expenses and how much is owed in additional taxes, if any.
   
6. Tax refund: This is any amount due back to the taxpayer by either the state or federal government after an overpayment.
   1. If you owe an excessive amount to the government at tax-time, or you have an excessive refund issued, you may want to consider adjusting your withholdings throughout the year.
      
7. Tax credit: An incentive issued to businesses and individuals that meet certain criteria that is subtracting from what the taxpayer owes.
   1. Common tax credits include those for students, parents, HSA contributions, qualifying energy efficiency programs and more.
      
8. Independent contractor: A tax qualification for someone that is identified as self-employed.
   1. Self-employed taxpayers are subject to self-employment taxes and have unique tax obligations.
   2. If you’re self-employed and need an account dedicated to your tax withholdings, explore OMB’s full account offering lineup.
      
9. Levy: A legal seizure of property taken to satisfy a tax debt.
   1. Levies are often the next step after a lien goes unpaid and can be avoided by paying your taxes on time and in full.
      
10. Tax identification number: A nine-digit number assigned by the government unique to businesses and individuals.
    1. This can either be an Employer Identification Number issued by the IRS or a Social Security Number assigned by the Social Security Administration.
       
11. Audit: An examination done by the IRS of an organization or individual’s tax and financial information to verify that information was reported correctly according to the law and to verify the reported tax amount is accurate.
    1. Depending on the findings of a tax audit, penalties can range from civil monetary penalties to criminal charges. This is why it’s imperative to double-check your taxes for accuracy and involve a reputable tax preparation professional when needed.
       

Basic Tax Forms

W2: A document that employers are required to send to each employee at the end of the year to assist with completing a tax return. W2s detail annual wages as well as taxes withheld and information about the employer.

W4: A document completed by employees and turned in to their employers that specifies how much money you authorize to be withheld from your paychecks for federal taxes. These can often be amended when desired, so speak to your employer or human resources department if you would like to adjust your withholdings.

1040: The standard U.S. Individual Income Tax Return that gets sent to the IRS. Oftentimes, taxpayers with a straightforward tax filing situation can file the standard Form 1040 alone. However, in some cases, you may need to attach additional forms, known as schedules, to submit as well.

Important 2024 Tax Deadlines

• January 31: Due date for employers to send W2s to employees
  • This can include electronic and paper delivery, so this does not always mean you will get your W2s by this date - just that they must be postmarked.

• April 1: Last day to take required minimum distribution
  • If you turned 73 or greater in 2023, you must take your RMD from your qualified retirement account for the year by this date.

• April 15: Tax Day
  • This is the last day to file taxes without incurring penalties and late fees unless you filed for an extension.
• April 15: Last day to make IRA/HSA contributions
  • Since it’s Tax Day, this is also the last day you can make contributions to your IRA or HSA for the 2023 tax year.
• October 15: Extension due date
  • If you filed for an extension on your taxes, this is the due date for filing your tax return.
• December 31: RMD requirement
  • If you turned 73 in 2023, after taking your first RMD for 2023 by April 1, you also need to take your 2024 RMD by the end of the year. This is also the deadline if you are otherwise required to take an RMD for 2024.

Additional Resources

There are lots of additional resources for all things tax-related, whether you’re running a business or an individual. The IRS has an entire page dedicated to various contacts and websites for everything from tax preparation services to tax dispute resolutions and filling software. You can check it out here.

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.