10 US Tax Terms You Should Know

Many people do not like filing taxes as they do not understand how it works. You need to learn some US tax terms and know if you want to file taxes to the IRS. If you have no clue how all of these things work, you must find a professional tax preparer. 

It is best to know the terminology that is common in the world of taxes. Here are a few of them for your reference:

Withholding

It refers to the portion of the money that an employer withholds and does not pay to an employee. The number of allowances that you claim on the W-4 form determines the amount of money the employer can withhold. 

When you claim too many allowances, you might end up owing some money when the time comes to pay your taxes. And on the flip side, you might face a penalty if you underpay the taxes in a particular year.  

Gross Income

In a nutshell, gross income is nothing but the total amount a person earns before taxes or deductions. The income sources that this term covers are salary, capital gains, dividends, tips, and interests. 

Deductions

It is one thing many people love because it helps lower the amount you pay towards the taxes. Deductions can help in reducing the total liability of the amount you pay towards the tax. Your tax bill is going to decrease significantly. Keeping track of expenses might be the right thing to do if you plan to make an itemized deduction. 

Adjusted Gross Income

It refers to all the personal income that you receive apart from the deductions you make in a year. For example, moving costs, unreimbursed business expenses, payments towards alimony, and retirement plan contributions fall under this section. 

 US tax terms

Taxable Income

The amount of money you need to pay in taxes after removing the adjusted gross income, deductions, and the total exemptions is taxable income. 

Exemption

An exemption is a specific amount that you can deduce to the total taxable amount because of a qualifying reason. If you do not apply for an exemption, you will have to pay the total taxable amount.

Tax Credit

Government rewards taxpayers for some behaviors that it feels are crucial. For example, one might be eligible to apply for Plug-in Drive Vehicle credit. The amount of money they can save could range between $2500 to $7500, especially if a person did purchase a car that gets energy from a battery that has a capacity of more than 5 kilowatts per hour. And who in the world would not like to get a credit. 

Capital Gains

Any profit you make on an asset’s sale would be capital gain, especially if you got the same asset for a lesser price before. For example, if you bought a car for $5000 and remodeled it for $2000 and sold it for $10,000, the amount of profit you made is capital gain. You have to pay tax on the profit. 

Filing Status

Filing status depends on the marital status of the person filing the taxes. You can file tax as a single, married person or as the head of a household. You may have to check the IRS cheat sheet to pick the best status that is apt for you.  

Charitable Contribution

Any amount that you pay to a qualifying charitable organization falls qualifies for a tax deduction. If you want to be eligible for this deduction, take time to research organizations that fall under IRS’s Exempt Organizations.

If learning and remembering the US tax terms is difficult, you must plan on using a tax preparer’s services.