The Tax Terms You Need to Know Now
July 20 2016
As a taxpayer, you have probably noticed the world of taxes and its surrounding entities have a language of their own. It’s important to become familiar with its terms in order to prepare for and file your taxes correctly each year, and therefore have a sound financial organization to plan for the future. Start with these basic tax terms you should know.
Tax Terms You Need to Know
Standard deduction
The reduction of taxable income as an alternative to itemizing deductions on their tax return. The amount can range from $6,200 for single taxpayers to $12,400 for married couples filing jointly (2014). Taxpayers 65 and older and the blind have larger deductions. About 2/3 of taxpayers choose the standard deduction.
Exemptions
The amount a taxpayer can claim for themselves, spouse, and eligible dependents. You will subtract the total exemption from your AGI, then calculate the tax on the remaining taxable income.
Filing status
You may file under the status single, married filing jointly, married filing separately, head of household, or widow/widower. Your filing status determines your standard deduction and the tax rates that apply to your taxable income.
AGI (Adjusted Gross Income)
The resulting number that represents your income after deductions are subtracted. You will use this amount to calculate your tax liability, as it determines your tax bracket and eligibility for tax benefits.
Tax bracket
Each bracket includes a range of incomes that are taxed at a certain rate, which runs from 10 to 35 percent. The IRS does not tax your income in full by this percentage; an amount can be taxed by 10, 15, and so on, while they don’t tax other totals at all, such as income protected by exemptions and deductions.
Dependent
A person you support, whom you may claim an exemption for on your tax return. For each dependent, subtract a standard amount from your taxable income.
Taxable Interest Income
The taxpayer receives this type of income in the form of interest, such as from an investment or financial instrument. Taxes do not apply to some of this interest, while they do to some interest, such as interest accrued in a savings account.
Additional Tax Terms
Withholding
The amount removed from your work wages for income and Social Security taxes. This amount is based on your salary and what you claimed on your W-4.
Capital gain or loss
Profit or loss from the sale of property. If the gain from a sale of property that was owned for less than 12 months, the IRS will tax it in the top tax bracket, like salary. The IRS taxes most other assets at 0, 15, or 20 percent. You can use losses to offset capital gains, then up to $3,000 excess can be deducted against other income.
Basis
The value of an asset used to calculate gain or loss when sold, for tax purposes.
Defined benefit/contribution plan
A defined benefit plan is a traditional pension plan. It ensures a set monthly benefit at retirement based on salary, age, and number of years worked. A defined contribution plan is currently more common. It includes contributions from the employee and/or the employer. The value of the account changes based on potentially fluctuating contributions as well as the value and performance of investments in the plan. Common types of contribution plans include 401(k) plans, employee stock ownership plans, and profit-sharing plans.
Tax credit
A monetary amount subtracted from tax owed. There are a variety of tax credits for individuals, businesses, classifications, and industries.
Apply Your Knowledge of Tax Terms
These terms are just the beginning; as you start to understand your financial standing and how it fluctuates each year, more concepts and rules become relevant. Check back for more resources – in the meantime, read up on how to get your tax return as fast as possible.
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