Unfortunately, basic lessons on how to be an adult, like calculating your income and property taxes, aren’t taught in schools (but we surely know the formula of the Pythagorean Theorem). That is why most people, including myself, get lost in the real world after they move out of their parents’ nest. We are forced to handle finances on our own and learn these intimidating lingos, especially the ones concerning our wages and taxation.
When we were kids, we don’t care about money matters, including the concept of taxes. But now that we’re adults and we’re seeing a large chunk of our salary going to taxes, we really want to get involved and learn how the field works. So if you’re someone who tends to get a bit overwhelmed with tax jargons, we’ve laid out some basic terms you might want to get familiar with.
Adjusted Gross Income (AGI)
AGI refers to the overall income you earn over the course of the year after making certain adjustments including your wages. interests, dividends, and capital gain, and excluding your retirement account contributions, business expenses, alimony payments, and moving costs.
The AGI is the first step in computing your final federal income tax bill and will also determine the limit on permissible medical and casualty deductions.
Capital gain | Capital loss
It refers to the profit/loss on the sale of a property or of an investment.
Carryback | Carryover
It refers to an accounting technique by which a company transfers one year’s deductions, losses, or credits backward (carryback) or forward (carryover) to another tax year to reduce tax liabilities.
Casualty loss
It is a type of tax loss that results from unexpected causes like fire, storm, theft, or shipwreck. Damage or loss from progressive deterioration of a property is not considered as a casualty loss.
Depreciable asset
It refers to a property used in business or income production whose value and cost can be reduced with the passage of time. The cost of depreciable assets can be recovered as deductions from income over their useful life.
Depreciation Schedule
It refers to a document that determines the amount of value left in an investment property over the passage of time and outlines the deductions available on the property for the purposes of maximizing cash return.
Dividend
A dividend is a sum of money that a company gives to its shareholders regularly (often quarterly) out of its earnings. Dividends, which can be considered as “rewards”, can be issued as cash payments, shares of stock, or other property.
Exemption
It refers to a monetary privilege which reduces taxable income and provides relief from taxes, reduced rates, or removal from taxation of a particular item.
Progressive taxation
A system in which higher tax rates are applied as levels of income increase. Usually, the government tax system uses progressive taxation with tax brackets starting at 10 percent and rising to 39 percent (for wealthy taxpayers).
Standard Taxation
It is a tax jargon that refers to the fixed amount taxpayers can subtract from their income.
Tangible property and Intangible property
It refers to movable assets including vehicles, equipment, and machinery, furniture and fittings, and structural improvements.
Intangible property, on the other hand, refers to a property that entitles an individual or corporation to specific rights.
Tax credits
A tax credit is an offset against your tax liability. It is basically an amount of money you are able to subtract from the taxes you owe to the government.
Tax credits are different from tax deductions. Tax credits directly cut the amount of tax you owe while tax deductions reduce the amount of your taxed income.
Tax deduction
A tax deduction is basically the reduction of taxable income. It refers to the expenses the tax authority allows you to subtract from your AGI to arrive at your taxable income. It is also associated with itemized deductions taxpayers can claim upon filing a schedule.
Tax return
A tax return is a form taxpayers use to report income and file income taxes with taxation authorities. It allows taxpayers to calculate their tax liability and request return of the excess amounts of income tax (tax refund).
Taxable income
Generally described as gross income, taxable income is the final amount of income which is used to calculate an individual’s or a company’s income tax due. It is an overall income reduced by all allowable adjustments, exemptions, and deductions.
Withholding
It is also known as “pay as you earn” taxation. The withholding method allows your taxes to be taken out of your wages as you earn it before you can even receive your paycheck. The withheld taxes are deposited to the internal revenue service and you are credited for the amount when you file for tax refunds.Taxes can also be withheld from other forms of income like dividends and interests.
Author Bio:
Carmina Natividad is a savvy writer for Depreciator, an Australian-based business specializing in Tax Depreciation Schedules. Being an enthusiast of pursuing financial security herself, she writes and shares self-help articles focused on personal finance, tax planning, and property investing.
February 27, 2017