Getting familiarized with the tax terms can be quite difficult and confusing. Knowing your basic tax terminology is the first step toward saving money on your taxes. When you know the terms and the rules, you will be able to avoid overpaying on your taxes while maximizing your refund. Tax forms can seem like a foreign language and can be harder to decipher if you are relatively new to the world of tax practices. And hence we have made a list of ten important tax terms you should know.
It is the part of your paycheck that your employer sends directly to the government each pay period as partial payment of your income tax. The number of allowances you claim on your W-4 determines the withholding amount. Claiming too many allowances may lead to you owing money at tax time and also if you significantly underpay your taxes during the year, you might get hit with a penalty when you file your tax return.
2. Filing Status
Your relationship status determines how you file and what, depending on whether you are single or married. If any, tax breaks you are entitled to such as the amount of your standard deduction. Some of the most common filing status options are “Single”, “Married Filing Jointly” and “Head of Household” and you will be offered a handy cheat sheet by the IRS to help you determine the appropriate filing status for you. The IRS also makes it easy to choose the correct filing status when you use IRS e-file, which also happens to be one of the fastest ways to get your refund.
3. Gross Income
There are plenty of disgusting jobs out there we wouldn’t prefer to do such as maggot farmers to chimney sweepers. Luckily that has nothing to do with gross income. Technically Gross Income is your total income before accounting for deductions and taxes. Salary, wages, tips, capital gains, interests, and dividends are some of the sources of gross income.
4. Capital Gains
This is a type of earning that counts toward your gross income. When the sale price of an asset is higher than the initial purchase price, you earn capital gains. And as said above, Capital Gains are considered a form of income. For instance, if you bought a vintage vehicle for $2,500, spent $1,500, and sold it for $5,000. You have made $1,000 of profit, which is basically the capital gains on that sale. And also, the same principle applies if you buy stock for $4,000 and sell it for $5,000.
The expenses or items that are subtracted from your income to reduce the amount of income that is subject to being taxed are called Deductions. It depends on several factors that determine whether or not a tax-deductible expense ultimately reduces the income tax you owe. Whether a taxpayer decides to take the standard deduction or to itemize their deductions is probably one of the biggest differentiators in tax deductions.
If taxpayers would keep an account of every possible deductible expense in a year, itemized deductions could become easier to file and claim as it is limited to a certain threshold when compared to the gross income.
You may be better off itemizing if you find yourself frequently spending significant amounts on medical care, donations, or other deductible expenses. Although, tax law may set certain thresholds in spending that must be exceeded before deductions can be made. Taking a standard deduction would be an apt option for taxpayers who choose not to itemize deductions on their tax returns. Your filing status, age, and whether or not you’re claimed as a dependent on someone else’s tax return, affect the amount of deduction.
6. Charitable Contribution
This is a type of itemized deduction. When you donate to a qualifying non-profit organization, charity, or private foundation, charitable contributions can earn you an itemized tax deduction. Contributions are usually made in the form of cash, but can also include real estate, clothing, appreciated securities, or other assets.
Refer to the IRS’s Exempt Organizations Select Check tool, to determine if the organization that you have contributed to qualifies for income tax deduction purposes.
7. Adjusted Gross Income
Neglecting certain types of deductions noted above, the Adjusted Gross Income or AGI, is all the personal income you receive over the course of the year. Retirement plan contributions, some unreimbursed business expenses, moving costs, and alimony payments are some of the things included in AGI.
8. Taxable Income
By taking your adjusted gross income or AGI and subtracting your total exemptions and itemized deductions, you can calculate your Taxable income. It determines your tax liability before tax credits.
The specific amounts that reduce how much of your income is taxable are called Tax exemptions. Assuming you are married, you can claim one exemption for yourself and one for your spouse. You can also claim one exemption for each dependent, although your spouse is never considered your dependent.
10. Tax Credit
A dollar-for-dollar reduction of the amount you owe is Tax Credit. For instance, you may be eligible for the Plug-in Drive Vehicle credit, between $2,500 & $7,500, if you purchased a car that draws energy from a battery with at least 4-kilowatt hours, was purchased in or after 2010, and began driving it in the year in which you’re claiming the credit. So, these credits are specially designed to reward behaviors that the government deems important.
If you are looking for assistance related to tax filing, tax planning or investments, do get in touch with us. We assure you that we won’t disappoint you. To know more visit-UBOS (United Business Owners Solutions).