Tackling taxes can feel like a maze. Be it the numbers, forms, or jargon - they can leave you scratching your head.
However, understanding tax terminology is key if you want to stay aware, updated, and confident in managing your finances, as well as, making the most out of tax benefits. Which is why, in this blog, we'll breeze through 20 essential tax terms, breaking them down into bite-sized, easy-to-understand pieces.
Whether you're a seasoned taxpayer or diving into the world of taxes for the first time, this guide will empower you to make informed decisions and ensure you're on the right track when it comes to handling your taxes.
Here are the 20 tax terms to know
1. Above-the-Line Deductions
These deductions are like special discounts on your taxes, reducing the total amount you owe. You don’t need to itemize all your expenses to claim these deductions; they help lower your taxes directly.
2. Adjusted Gross Income (AGI)
AGI is like the starting point for figuring out how much of your income the government can tax. It’s your total income after subtracting specific deductions like residency loan interest or contributions to retirement plans.
3. Below-the-Line Deductions
These deductions, like itemized or standard deductions, directly lower your taxable income. Itemized deductions include things like medical expenses, charitable donations, and property taxes. They help reduce the amount of money the government considers taxable.
4. Capital Gains
When you sell something like stocks or property for more than you bought it, that extra profit is called a capital gain
Short-term gains are from selling something you’ve owned for a year or less, and they’re taxed at higher rates
Long-term gains come from selling something owned for more than a year, and they’re taxed at lower rates
5. Capital Losses
If you sell something for less than what you paid, it’s a capital loss, which can help reduce your taxable income. You can offset gains with losses. For example, if you made a profit on one investment but lost money on another, these can balance each other out for tax purposes.
The IRS will let you deduct up to $3,000 of capital losses (or up to $1,500 if you and your spouse are filing separate tax returns). If you have any leftover losses, you can carry the amount forward and claim it on a future tax return.
6. Child and Dependent Care Credit
This credit gives back a portion of the money spent on child or dependent care expenses while parents work or look for work. It can cover costs like daycare, after-school programs, or care for a disabled dependent.
7. Child Tax Credit
Families get a credit for each qualifying child, reducing the taxes they owe. For each child, the credit can be up to a certain amount, and part of it can even be refunded to the family.
8. Cost Basis
It’s the amount of money you initially spent to buy things like stocks, property, or investments. This number is important when calculating how much profit or loss you made when selling those assets.
9. Dependents
Dependents are individuals you provide financial support for, like children, relatives, or even some elderly family members. Claiming dependents can lead to tax breaks, like credits or deductions, which can lower the amount of taxes you owe.
10. Estimated Tax Payments
If you’re self-employed or have income that isn’t subject to tax withholding, you might need to make estimated tax payments quarterly. These payments help ensure you’re paying enough tax throughout the year to avoid penalties.
11. Earned Income Tax Credit (EITC)
This credit is for working people with lower to moderate incomes.It’s designed to help boost their income by reducing the taxes they owe and, in some cases, even getting a refund.
12. Filing Status
Your filing status single, married filing jointly, married filing separately, head of household, or qualifying widow(er) impacts your tax rate and the deductions you can claim.
13. Itemized Deductions
These deductions are specific expenses that you can list individually on your tax return. They include things like medical expenses, charitable donations, mortgage interest, and state taxes.
14. Nontaxable Income
Some types of income, like child support, gifts, or certain disability benefits, aren’t considered taxable income. These earnings don’t increase the amount of taxes you owe.
15. Personal Exemptions
Personal exemptions used to be deductions for yourself, dependents, and spouses, reducing taxable income. However, recent tax changes have eliminated this deduction until 2026.
16. Self-Employment Income
If you work for yourself as a freelancer, contractor, or have your own business, the money you earn is considered self-employment income. You're responsible for paying taxes on this income, including both income and self-employment taxes.
17. Sole Proprietor
As a sole proprietor, you're the only owner of your business, and you report business income and expenses on your personal tax return using Schedule C.
18. Standard Deduction
The standard deduction is a fixed amount set by the government that you can subtract from your income before calculating your taxes. It’s an option available to you and helps reduce taxable income without needing to itemize deductions.
19. Tax Deduction
Tax deductions reduce your taxable income, meaning you’ll pay tax on a smaller portion of your earnings. They come in various forms, like standard or itemized deductions, and help lower the overall amount of tax you owe.
20. Marginal Tax Rate
This refers to the percentage of tax applied to your income for each tax bracket in which you qualify. It's essential because it determines the rate at which your income will be taxed at different levels.
Conclusion:
This glossary might not be “everything” to get your tax game up, but we hope these 20 terms simplify your understanding of taxes, helping you manage your money without extra stress, and equipping you to make informed decisions and navigate the sometimes complex realm of finances with confidence.
Remember, when you know common tax definitions and how they apply to your situation, you can avoid making errors on your tax return and find more deductions to maximize your refund. Additionally, you should always consult a qualified tax advisor regarding your personal tax situation
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