Tax Terms You Should Understand

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We do not want you to look at the jargons associated with filling of tax returns and think however are you going to understand all of the important and basic tax terms. Instead, we want to prepare you to file your tax returns with ease without getting intimidated. Even though the tax terms might be complex in nature, they are not as difficult to comprehend, especially now, since you have this book to refer to when tax season rolls around.

After a while, assuming that your visit to the United States is a permanent one, you will only have to rack through your brain to remember the meaning behind each one. However, for now, it is pertinent that you have a clear and comprehensive understanding of the tax terms, at least the important one that you should remember and know by heart. Here is the list of the following tax terms you need to know:

TermDefinition
1040 FormThe basic IRS form that people needs to submit their income tax return. 1040A and 1040EZ are two other names for this form.


 

Adjusted Gross Income or AGIThis is taxable income, which consists of gross income from chargeable sources minus allowable adjustments.


 

Alternative Minimum Tax or AMTA tax computation that includes items labeled for tax-deductible items into the adjusted gross income. If the alternative minimum tax is higher than the regular tax liability for that year, the regular tax and the amount exceeding it are payable. The reason behind the creation of the alternative minimum tax was to force taxpayers to pay their tax liability.


 

Capital GainWhen the value of a capital asset increases such as a type of investment, the price of the property, in this instance, increases. The owner will earn more money when it is time to sell it, as the price increased from the original buying price. Taxpayers can classify this type of capital gain as a short-term or long-term and must clam it on their next income tax return.


 

Child Tax CreditTaxpayers can claim taxes on children who are dependent on them and are under the age of seventeen at the end of the tax season.


 

DeductionTaxpayers need to subtract all expenditures and allowable items from the adjusted gross income. In doing so, it decreases the amount of income that qualifies for taxation.


 

DependentDependent is a spouse, parent, child, or a relative to whom a taxpayer provides for with a large chunk of their salary going towards their care.


 

Earned IncomeThe taxpayer earns income thorough his/her business or trade, and this includes salary, wages, commissions, bonuses, and tips.


 

Earned Income CreditTaxpayers can refund earned income credit. For people who only earn a meager or low-income, the earned income credit decrease and at times, eliminate their taxes. Sometimes, earned income credit acts as a wage subsidy, allowing the taxpayer to pay a decreased amount of tax owed.


 

Estate TaxAn estate tax is the amount of levied tax on a person who has passed away but has left behind taxable assets. The value in estate tax is set above the exemption total of the gross estate minus allowable deductions. However, the deceased individual’s spouse, if alive, will not be subject to pay estate tax.


 

ExemptionThe tax law defines exemption as a deduction used to decrease the entire amount of payable income. However, an exemption to decrease payable income is only granted by looking at the circumstances and status of the taxpayer.


 

Filing StatusFiling status consists of five categories, single, married, but filing individually, married and filing together, head of the house, widow or widower with a dependent child.


 

Itemized DeductionItemized deduction is subtracted from a taxpayer’s adjusted gross income. It consists of money spend on particular services and good that year. The IRS has outlined specific deductions a taxpayer is qualified to ask for include deductions on local and state taxes, interest on a mortgage, medical expenses, and gift tax. You can find them in the FORM 1040 Schedule A.


 

Non-Refundable Tax CreditA non-refundable tax credit cannot decrease the amount of tax an individual owes to less than a zero. In the event, the amount of tax the taxpayer owes could lower to less than a zero; the IRS would need to pay them.


 

Passive IncomePassive income is classified as earnings acquired from a limited partnership, rental property, or an enterprise in which the taxpayer does not play an active role in the activities.


 

Property TaxLocal government bodies evaluate the property of the taxpayer, assessing its value along with the value of the land it sits upon. On the basis of their evaluation, the taxpayer will be required to property tax.


 

Self-Employment TaxTaxpayers who work for themselves, meaning they run their own business, will have to pay self-employment tax, as this is the only way for them to receive social security benefits when they retire. However, the amount they are required to pay may be decreased if they pay Medicare and Social Security Taxes thorough another individual.


 

Standard DeductionThe standard deduction is referred to as the base value of the income, which is not taxable. The taxpayer can use the base value to reduce their taxes, specifically reduce their adjusted gross income, but only if he/she does not select the itemized deduction technique of computing taxable income. The taxpayer’s status, disability, age, or if he/she is dependent on another taxpayer for support is taken into account when computing the value of the standard deduction.


 

Tax CreditThe tax credit reduces the actual amount owed taxes.


 

Taxable IncomeTaxable income is the value of the net income—deductions, gross income without all the adjustments, and exemptions—used to compute the amount of income tax a taxpayer owes.


 

 

Whenever you see a term you do not know the definition of, at least you will not have to search the entire web for it, as they will be right here in this book. Immigrants who are coming to the United States to start a new life will not have trouble understanding the terms and concepts related to taxes in the country. However, your lesson of learning all about the United States tax laws is not over yet. So, keep reading!


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