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Trusted by 1L+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
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Retirement
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Dream Home
Dream Wedding
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Retirement
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Trusted by 3 Crore+ Indians
Want to Achieve any of the below
Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below
Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Understanding Essential Tax Terms
Understanding Essential Tax Terms
Navigating the world of tax terminology can often feel like learning a new language. Terms like “adjusted gross income” and “above-the-line deductions” may appear cryptic, but understanding them is crucial for effective tax management. To aid you in mastering these terms, we have compiled an extensive glossary of essential tax concepts that you may encounter while filing your taxes. This guide is designed to clarify these terms and help you make informed decisions about your tax filings.
1. Above-the-Line Deductions
Above-the-line deductions are specific deductions that taxpayers can claim to reduce their taxable income. These deductions are advantageous because they can be claimed regardless of whether you choose to itemize your deductions. Some common examples of above-the-line deductions include:
Educator Expenses: For teachers who spend their own money on classroom supplies.
Student Loan Interest Deduction: For interest paid on student loans.
Health Savings Account Contributions: For contributions made to a Health Savings Account (HSA).
Tuition and Fees: For amounts paid towards education.
To claim these deductions, you must complete Schedule 1 and attach it to your federal income tax return.
2. Adjusted Gross Income (AGI)
Adjusted Gross Income (AGI) is a critical figure on your tax return. It represents your gross income after adjusting for specific deductions. AGI is essential because it affects your eligibility for various tax credits and deductions. Additionally, the IRS may require your AGI from the previous year to verify your identity when filing electronically.
3. Below-the-Line Deductions
Below-the-line deductions, also known as itemized deductions, are expenses that can be deducted from your taxable income to reduce your overall tax liability. Typically, these deductions are categorized into two main types:
Itemized Deductions: These include expenses such as medical expenses, charitable donations, mortgage interest, and state taxes paid.
Standard Deduction: The IRS provides a standard deduction amount that taxpayers can use instead of itemizing. The choice between itemizing and taking the standard deduction depends on which option results in a lower tax bill.
4. Capital Gains
Capital gains are the profits earned from selling a capital asset, such as real estate, stocks, or bonds, for more than its purchase price. The tax rate on capital gains depends on how long you hold the asset before selling it:
Short-Term Capital Gains: If you sell an asset held for one year or less, the gains are taxed at ordinary income tax rates, which can be as high as 37% for the 2022 tax year.
Long-Term Capital Gains: For assets held longer than one year, gains are taxed at reduced rates. In 2022, the maximum long-term capital gain rate is 20%.
5. Capital Losses
Capital losses occur when you sell an asset for less than its purchase price. For example, if you bought stock for $2,000 and sold it for $1,500, you incur a $500 capital loss. You can use capital losses to offset capital gains, and if your total capital losses exceed your capital gains, you can deduct up to $3,000 from your taxable income. Any remaining losses can be carried forward to future years.
6. Child and Dependent Care Credit
The Child and Dependent Care Credit is a tax credit available to taxpayers who incur expenses for the care of dependents while they are working or looking for work. The credit is based on a percentage of the care expenses, with a maximum claim amount of:
$4,000 for one qualifying person.
$8,000 for two or more qualifying people.
Qualifying individuals may include children under 13 or dependents who are unable to care for themselves and live with you for more than half of the year.
7. Child Tax Credit
The Child Tax Credit provides financial assistance to families with qualifying children. For the 2022 tax year, you can claim up to $2,000 per child under the age of 17. The credit directly reduces your tax liability, and up to $1,500 of this amount is refundable, meaning you could receive a refund even if you owe no taxes.
To qualify for the Child Tax Credit:
Your child must be under 17 at the end of the tax year.
They must be a U.S. citizen, national, or resident alien.
They need a valid Social Security number and must live with you for at least half of the year.
You must provide at least half of their financial support.
8. Cost Basis
The cost basis refers to the original amount paid for an asset. For instance, if you purchased a stock for $1,000, that amount is your cost basis. This figure is crucial for calculating capital gains or losses when you sell the asset.
9. Cryptocurrency Tax Rate
Cryptocurrency is generally taxed in a manner similar to capital gains. The tax rate depends on the holding period:
Short-Term Gains: If you sell cryptocurrency held for one year or less, the gains are taxed at ordinary income rates, up to 37% for 2022.
Long-Term Gains: For cryptocurrencies held for more than one year, gains are taxed at the long-term capital gains rate, up to 20% for 2022.
10. Dependents
A dependent is someone who relies on the taxpayer for financial support. Claiming a dependent on your tax return can entitle you to various tax benefits and credits. Dependents typically include children or other relatives who meet specific criteria set by the IRS.
11. Estimated Tax Payments
Estimated tax payments are required for individuals who do not have sufficient taxes withheld from their income, such as self-employed individuals or business owners. These payments must be made quarterly based on your expected income. The due dates for 2022 estimated tax payments are:
First Quarter: January 1 to March 31 — Due April 15, 2022
Second Quarter: April 1 to May 31 — Due June 15, 2022
Third Quarter: June 1 to August 31 — Due September 15, 2022
Fourth Quarter: September 1 to December 31 — Due January 17, 2023
12. Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is designed to assist low- to moderate-income taxpayers. This refundable credit reduces the amount of taxes owed and can result in a refund. For 2022, the maximum EITC amounts are:
Up to $560 for taxpayers without children.
Up to $6,935 for taxpayers with three or more qualifying children.
The credit is based on earned income, including wages and self-employment income, but does not include unemployment compensation, alimony, or child support.
13. Filing Status
Filing status is a classification used by the IRS to determine your tax rate and eligibility for various deductions and credits. The five filing statuses are:
Single: For individuals who are not married or legally separated.
Head of Household: For unmarried individuals who provide a home for qualifying dependents.
Married Filing Separately: For married individuals who choose to file separate returns.
Married Filing Jointly: For married couples who file a joint return.
Qualifying Widow(er): For widows or widowers who meet specific criteria and have dependent children.
14. Itemized Deductions
Itemized deductions are expenses that can be claimed on your tax return to reduce taxable income. Examples include:
Medical and Dental Expenses: Costs that exceed a certain percentage of your AGI.
Charitable Contributions: Donations to qualified organizations.
State and Local Taxes: Taxes paid to state and local governments.
Casualty Losses: Losses from theft, fire, or natural disasters.
Choosing between itemizing and taking the standard deduction depends on which option results in a lower tax liability.
15. Nontaxable Income
Nontaxable income refers to money or benefits received that are not subject to federal income tax. Examples include:
Child Support Payments: Money received from a former spouse for child support.
Gifts: Personal gifts not related to services rendered.
Cash Rebates: Refunds or discounts received on purchases.
16. Personal Exemptions
Personal exemptions allowed taxpayers to deduct a set amount from their taxable income for themselves and dependents. However, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated personal exemptions from 2018 through 2025. Prior to this change, the personal exemption amount for 2017 was $4,050.
17. Self-Employment Income
Self-employment income includes earnings from activities where you are not an employee but rather work for yourself. This includes income from freelancing, consulting, or running a business. Self-employed individuals must report their earnings and pay self-employment taxes using Schedule C.
18. Sole Proprietor
A sole proprietor is an individual who owns and operates a business alone. Sole proprietors report their business income and expenses on Form 1040, Schedule C. This business structure does not require formal incorporation and is the simplest form of business ownership.
19. Standard Deduction
The standard deduction is a fixed amount that the IRS allows you to deduct from your taxable income based on your filing status. It simplifies the tax filing process by eliminating the need to itemize deductions. For 2022, the standard deduction amounts are:
Single and Married Filing Separately: $12,950
Married Filing Jointly and Qualifying Widow(er): $25,900
Head of Household: $19,400
For 2023, these amounts are adjusted to:
Single and Married Filing Separately: $13,850
Married Filing Jointly and Qualifying Widow(er): $27,700
Head of Household: $20,800
20. Tax Deduction
A tax deduction is an expense that reduces your taxable income, thereby lowering your tax liability. Deductions can be classified as:
Standard Deduction: A flat amount provided by the IRS.
Itemized Deductions: Specific expenses you can deduct if they exceed the standard deduction.
Above-the-Line Deductions: Deductions that reduce your AGI, regardless of whether you itemize.
Understanding these tax terms can significantly impact your ability to manage your taxes effectively and take advantage of available tax benefits. By familiarizing yourself with these concepts, you can make more informed decisions and potentially reduce your overall tax liability.
Navigating the world of tax terminology can often feel like learning a new language. Terms like “adjusted gross income” and “above-the-line deductions” may appear cryptic, but understanding them is crucial for effective tax management. To aid you in mastering these terms, we have compiled an extensive glossary of essential tax concepts that you may encounter while filing your taxes. This guide is designed to clarify these terms and help you make informed decisions about your tax filings.
1. Above-the-Line Deductions
Above-the-line deductions are specific deductions that taxpayers can claim to reduce their taxable income. These deductions are advantageous because they can be claimed regardless of whether you choose to itemize your deductions. Some common examples of above-the-line deductions include:
Educator Expenses: For teachers who spend their own money on classroom supplies.
Student Loan Interest Deduction: For interest paid on student loans.
Health Savings Account Contributions: For contributions made to a Health Savings Account (HSA).
Tuition and Fees: For amounts paid towards education.
To claim these deductions, you must complete Schedule 1 and attach it to your federal income tax return.
2. Adjusted Gross Income (AGI)
Adjusted Gross Income (AGI) is a critical figure on your tax return. It represents your gross income after adjusting for specific deductions. AGI is essential because it affects your eligibility for various tax credits and deductions. Additionally, the IRS may require your AGI from the previous year to verify your identity when filing electronically.
3. Below-the-Line Deductions
Below-the-line deductions, also known as itemized deductions, are expenses that can be deducted from your taxable income to reduce your overall tax liability. Typically, these deductions are categorized into two main types:
Itemized Deductions: These include expenses such as medical expenses, charitable donations, mortgage interest, and state taxes paid.
Standard Deduction: The IRS provides a standard deduction amount that taxpayers can use instead of itemizing. The choice between itemizing and taking the standard deduction depends on which option results in a lower tax bill.
4. Capital Gains
Capital gains are the profits earned from selling a capital asset, such as real estate, stocks, or bonds, for more than its purchase price. The tax rate on capital gains depends on how long you hold the asset before selling it:
Short-Term Capital Gains: If you sell an asset held for one year or less, the gains are taxed at ordinary income tax rates, which can be as high as 37% for the 2022 tax year.
Long-Term Capital Gains: For assets held longer than one year, gains are taxed at reduced rates. In 2022, the maximum long-term capital gain rate is 20%.
5. Capital Losses
Capital losses occur when you sell an asset for less than its purchase price. For example, if you bought stock for $2,000 and sold it for $1,500, you incur a $500 capital loss. You can use capital losses to offset capital gains, and if your total capital losses exceed your capital gains, you can deduct up to $3,000 from your taxable income. Any remaining losses can be carried forward to future years.
6. Child and Dependent Care Credit
The Child and Dependent Care Credit is a tax credit available to taxpayers who incur expenses for the care of dependents while they are working or looking for work. The credit is based on a percentage of the care expenses, with a maximum claim amount of:
$4,000 for one qualifying person.
$8,000 for two or more qualifying people.
Qualifying individuals may include children under 13 or dependents who are unable to care for themselves and live with you for more than half of the year.
7. Child Tax Credit
The Child Tax Credit provides financial assistance to families with qualifying children. For the 2022 tax year, you can claim up to $2,000 per child under the age of 17. The credit directly reduces your tax liability, and up to $1,500 of this amount is refundable, meaning you could receive a refund even if you owe no taxes.
To qualify for the Child Tax Credit:
Your child must be under 17 at the end of the tax year.
They must be a U.S. citizen, national, or resident alien.
They need a valid Social Security number and must live with you for at least half of the year.
You must provide at least half of their financial support.
8. Cost Basis
The cost basis refers to the original amount paid for an asset. For instance, if you purchased a stock for $1,000, that amount is your cost basis. This figure is crucial for calculating capital gains or losses when you sell the asset.
9. Cryptocurrency Tax Rate
Cryptocurrency is generally taxed in a manner similar to capital gains. The tax rate depends on the holding period:
Short-Term Gains: If you sell cryptocurrency held for one year or less, the gains are taxed at ordinary income rates, up to 37% for 2022.
Long-Term Gains: For cryptocurrencies held for more than one year, gains are taxed at the long-term capital gains rate, up to 20% for 2022.
10. Dependents
A dependent is someone who relies on the taxpayer for financial support. Claiming a dependent on your tax return can entitle you to various tax benefits and credits. Dependents typically include children or other relatives who meet specific criteria set by the IRS.
11. Estimated Tax Payments
Estimated tax payments are required for individuals who do not have sufficient taxes withheld from their income, such as self-employed individuals or business owners. These payments must be made quarterly based on your expected income. The due dates for 2022 estimated tax payments are:
First Quarter: January 1 to March 31 — Due April 15, 2022
Second Quarter: April 1 to May 31 — Due June 15, 2022
Third Quarter: June 1 to August 31 — Due September 15, 2022
Fourth Quarter: September 1 to December 31 — Due January 17, 2023
12. Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is designed to assist low- to moderate-income taxpayers. This refundable credit reduces the amount of taxes owed and can result in a refund. For 2022, the maximum EITC amounts are:
Up to $560 for taxpayers without children.
Up to $6,935 for taxpayers with three or more qualifying children.
The credit is based on earned income, including wages and self-employment income, but does not include unemployment compensation, alimony, or child support.
13. Filing Status
Filing status is a classification used by the IRS to determine your tax rate and eligibility for various deductions and credits. The five filing statuses are:
Single: For individuals who are not married or legally separated.
Head of Household: For unmarried individuals who provide a home for qualifying dependents.
Married Filing Separately: For married individuals who choose to file separate returns.
Married Filing Jointly: For married couples who file a joint return.
Qualifying Widow(er): For widows or widowers who meet specific criteria and have dependent children.
14. Itemized Deductions
Itemized deductions are expenses that can be claimed on your tax return to reduce taxable income. Examples include:
Medical and Dental Expenses: Costs that exceed a certain percentage of your AGI.
Charitable Contributions: Donations to qualified organizations.
State and Local Taxes: Taxes paid to state and local governments.
Casualty Losses: Losses from theft, fire, or natural disasters.
Choosing between itemizing and taking the standard deduction depends on which option results in a lower tax liability.
15. Nontaxable Income
Nontaxable income refers to money or benefits received that are not subject to federal income tax. Examples include:
Child Support Payments: Money received from a former spouse for child support.
Gifts: Personal gifts not related to services rendered.
Cash Rebates: Refunds or discounts received on purchases.
16. Personal Exemptions
Personal exemptions allowed taxpayers to deduct a set amount from their taxable income for themselves and dependents. However, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated personal exemptions from 2018 through 2025. Prior to this change, the personal exemption amount for 2017 was $4,050.
17. Self-Employment Income
Self-employment income includes earnings from activities where you are not an employee but rather work for yourself. This includes income from freelancing, consulting, or running a business. Self-employed individuals must report their earnings and pay self-employment taxes using Schedule C.
18. Sole Proprietor
A sole proprietor is an individual who owns and operates a business alone. Sole proprietors report their business income and expenses on Form 1040, Schedule C. This business structure does not require formal incorporation and is the simplest form of business ownership.
19. Standard Deduction
The standard deduction is a fixed amount that the IRS allows you to deduct from your taxable income based on your filing status. It simplifies the tax filing process by eliminating the need to itemize deductions. For 2022, the standard deduction amounts are:
Single and Married Filing Separately: $12,950
Married Filing Jointly and Qualifying Widow(er): $25,900
Head of Household: $19,400
For 2023, these amounts are adjusted to:
Single and Married Filing Separately: $13,850
Married Filing Jointly and Qualifying Widow(er): $27,700
Head of Household: $20,800
20. Tax Deduction
A tax deduction is an expense that reduces your taxable income, thereby lowering your tax liability. Deductions can be classified as:
Standard Deduction: A flat amount provided by the IRS.
Itemized Deductions: Specific expenses you can deduct if they exceed the standard deduction.
Above-the-Line Deductions: Deductions that reduce your AGI, regardless of whether you itemize.
Understanding these tax terms can significantly impact your ability to manage your taxes effectively and take advantage of available tax benefits. By familiarizing yourself with these concepts, you can make more informed decisions and potentially reduce your overall tax liability.
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