The word TAX scares me and I wanted to learn more but the first step is to learn the terminology and meaning of “Tax Talk” Here is a list of some of the terms often used when dealing with taxes.
Understanding Tax Talk:
Audit – As if you didn’t know, this is a review of your tax return by the IRS, during which you are asked to prove that you have correctly reported your income and deductions. Most audits are done by mail and involve specific issues, not the entire return
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Capital expenditure – The cost of a permanent improvement to property. Such expenses, such as adding central air conditioning or an addition to your home, increase the property’s adjusted tax basis.
Capital gain – The profit from the sale of such property as stocks, mutual-fund shares and real estate. Gains from the sale of assets owned for 12 months or less are “short-term capital gains” and are taxed in your top tax bracket, just like salary. For most assets owned more than 12 months, profits are considered “long-term capital gains” and are taxed at 0, 15, or 20 percent. Taxpayers who otherwise fall in the 10 percent or 15 percent bracket get an even better deal. Their rate on long-term gains is 0% percent. The special rates for long-term gains do not, however, apply to all gains from investment real estate. To the extent that gain results from depreciation (depreciation deductions reduce your basis in the property and therefore increase gain dollar for dollar upon sale), a 25 percent maximum rate applies (unless you are in the 10 percent or 12 percent bracket, in which case that rate applies) to this “recaptured” depreciation. Also, long term-gains from the sale of collectibles are taxed at a maximum rate of 28 percent.
Capital loss – The loss from the sale of assets such as stocks, bonds, mutual funds and real estate. Such losses are first used to offset capital gains and then up to $3,000 of excess losses can be deducted against other income, such as your salary. Long- and short-term losses (distinguished by whether the property was held for more than one year or a shorter period of time) are first used to offset gains of a similar nature. Any excess first offsets the other kind of gain, then other types of income.
Capital-loss carryover – Capital losses can be used to offset capital gains, and up to $3,000 of any net capital loss can be deducted against other income, such as your salary or bank account interest. Net capital losses not currently deductible because of the $3,000 limit can be carried over to future years.
Charitable contribution –A gift of cash or property to a qualified charity for which a tax deduction is allowed. You must have either a receipt or a bank record (such as a cancelled check) to back up any donation of cash, regardless of the amount. Donations of $250 or more must have an acknowledgement from the charity.
Child tax credit- This credit is $1,000 for 2017 and $2,000 for 2018 and later years, for each child under age 17 you claim as a dependent on your return. The right to this credit is phased out as adjusted gross income rises. For 2022 the Child Tax Credit is up to $2,000 per eligible child for those under 17 years old.
Deductions – Write-offs you are permitted to subtract from your gross income to calculate your taxable income. All taxpayers may claim a standard deduction, which is determined by the IRS. If your qualifying expenses exceed your standard deduction, you may claim the higher amount by itemizing your deductions. Although no records are needed to back up your right to the standard deduction, you must maintain records of qualifying expenditures if you itemize. For higher income taxpayers, the amount of their otherwise allowable itemized deductions will be reduced when adjusted gross income (AGI) exceeds a threshold amount. The reduction and threshold amounts can vary each year.
Dependent – Someone you support and for whom you can claim a dependent on your tax return. Generally, for each dependent you claim, you are eligible for a dependent credit that directly reduces your tax. Other tax breaks (such as the child tax credit) may also be available for dependents.
Depreciation – A deduction to reflect the gradual loss of value of business property as it wears out. The law assigns a tax life to various types of property, and your basis in such property is deducted over that period of time. See also Accelerated Depreciation.
Earned income – Compensation, such as salary, commissions and tips, you receive for your personal services. This is distinguished from “unearned” income such as interest, dividends and capital gains.
Educator expenses – This deduction is allowed for kindergarten through 12th grade teachers for what they spend for classroom supplies. This is an “adjustment to income,” which means you get this benefit even if you claim the standard deduction rather than itemizing.
Gross income – All of your income from taxable sources, before subtracting any adjustments, deductions or exemptions.
Home office expenses – If you use part of your home regularly and exclusively as the principal place of your business or the place you meet with clients, patients or customers, you can qualify to deduct certain expenses that are otherwise nondeductible personal expenses. Examples include a portion of your utilities, homeowner’s insurance premiums and depreciation (if you own your home) or part of your rent (if you are a renter).
Personal interest – Basically, this is interest that doesn’t qualify as mortgage, business, student loan or investment interest. Included is interest you pay on credit cards, car loans, life insurance loans and any other personal borrowing not secured by your home. Personal interest cannot be deducted.
Sales taxes – State and local general sales taxes you pay may be deductible if you itemize. But you must choose between deduction sales taxes or deducting city and state income taxes. If you live in a state that does not impose an income tax, claim the sales tax deduction. You don’t need to keep all your receipts, either. The IRS has a handy table with estimates based on your income, family size and where you live. You can add to the table amount sales taxes paid on cars, boats, aircraft and other big ticket items. Purchase of such items could lead some taxpayers in income-tax states to pay more sales tax than income tax. You can choose whichever deduction is most valuable to you.
Social Security Tax, excess withheld – If you hold more than one job during the year—either at the same time or successively—too much Social Security could be withheld from your pay. If this happens, you are entitled to a refund of the excess withholding.
Taxable income – This can mean different things. It can refer to income that is taxable (such as wages, interest and dividends) rather than tax-exempt (such as the interest on municipal bonds). On tax returns, “taxable income” is your income after subtracting all adjustments, deductions and exemptions—that is, the amount on which your tax bill is computed.
Tax-free income – All sorts of income can potentially be tax-free, including: Auto rebates; child-support payments; combat pay; damages in lawsuits for physical injury; disability payments, if you paid the premiums for the policy; dividends on a life insurance policy, up to the total of premiums paid; Education Savings Account withdrawals used for qualifying expenses; gifts; Health Savings Account withdrawals used for qualifying payments; inheritances; life insurance proceeds; municipal bond interest; policy officer survivor payments; profits from the sale of a home, up to $250,000 if you’re single or $500,000 if you’re married; qualified Roth IRA and Roth 401(k) withdrawals; scholarships and fellowship grants; Social Security benefits (between 15 percent and 100 percent are tax-free); veterans benefits; and workers’ compensation.
Withholding – The amount held back from your wages each payday to pay your income and Social Security taxes for the year. The amount withheld is based on the size of your salary and the W-4 form you file with your employer
The information above was from Turbotax. Click HERE to see more Tax Terms
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