Simplifying Tax Jargon: Terms You Need to Know

Understanding Tax Terms: A First Step Towards Tax Literacy

In the world of tax, it can be easy to become lost in complex terms and phrases. As Brightside Tax Relief, a nationwide tax relief company, we understand how important it is for taxpayers to have a thorough understanding of some of the most common tax-related terms. We are dedicated to simplifying tax jargon and enhancing your tax literacy. Through this piece, we will demystify and simplify some of the fundamental tax terms you need to know.

Federal Income Tax

This is the tax levied by the federal government and it is the primary source of its revenue. The income tax is based on an individual’s earnings (salary, wages, commissions) or an organization’s profits. This tax is progressive, meaning as your income increases, your tax rate also does.

State and Local Tax (SALT)

Apart from federal taxes, taxpayers are also subjected to state and local taxes. State and local taxes cover income, sales, and property. However, the type and amount of tax will differ based on the respective state’s tax laws.

Gross Income

This refers to all income received in cash, goods, property, and services without deductions. It can include wages, salary, interests, dividends, rental income, estate and trust income. In simple terms, gross income is your total income before tax deductions and exemptions.

Tax Deduction

A tax deduction is an expense that you can subtract from your taxable income. It lowers your taxable income and subsequently, your tax burden. Some common tax deductions include student loan interest, home mortgage interest, and charitable donations.

Standard Deduction vs Itemized Deduction

Standard deduction is a fixed amount determined by the IRS that reduces your taxable income. On the other hand, itemized deductions are specific expenses that taxpayers can use instead of the standard deduction. Medical expenses, state and local taxes, mortgage interest, and charitable contributions can be included under itemized deductions.

Using standard deductions is easier but itemizing gives you a chance to save more on taxes if you have significant deductions. Making the right decision between the two requires considering your total eligible deductions.

Tax Credit

A tax credit is an amount that directly reduces your tax liability. Unlike deductions, which reduce your taxable income, tax credits reduce the actual taxes you owe. There are refundable and non-refundable tax credits. Refundable tax credits mean you can get a refund, even if it reduces your liability below zero.

Earned Income Tax Credit (EITC)

This is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. The amount of EITC depends on your income and the number of dependents.

Taxable Income

Taxable income is the portion of your gross income that’s subject to taxes after you subtract deductions and exemptions. It includes salaries, wages, tips, capital gains, interest, dividends, pensions, rental income, and more.

Tax Bracket

A tax bracket refers to a range of incomes taxed at a given rate. In progressive tax systems, like the U.S., incomes are divided into blocks (brackets) taxed at progressively higher rates. Your tax bracket depends on your taxable income and filing status.

Withholding

This is the amount of an employee’s pay withheld by an employer and sent directly to the government. The amount is a means to prepay the income tax liability of the employees.

We hope this briefing has clarified and untangled some of the fundamental tax terms that every taxpayer should be aware of. Tax language doesn’t have to be incomprehensible or intimidating. Empower yourself through tax literacy and navigate the tax maze with confidence. For a more comprehensive list of tax terms, reference the IRS’s website here.

Fostering Confidence Through Tax Literacy

At Brightside Tax Relief, our commitment is centered around providing easy-to-understand, jargon-free information that brings value to you, the reader. Demystifying tax jargon is one crucial step towards fostering greater tax literacy and, ultimately, empowering taxpayers to be more confident and informed regarding their tax obligations. Together, we can navigate the complexity of the tax world, one term at a time.