The Professional Expert

Taxes - Some definitions

Disclaimer: This is entry not intended to offer official tax advice. Please see www.irs.gov or contact a certified tax professional with any questions or for specific instructions. 

Before we go any farther, let’s define some commonly used terms related to income taxes:

Filing status – The category the individual will use to file the income tax. Your filing status determines your tax bracket, standard deduction, and other factors for determining your taxes. There are 5 different categories.

Single – not married and without dependents

Head of household – not married but with dependents (children or disabled parents) living in the house.  Head of household pays for more than half of living expenses for household.

Married filing jointly – a married couple which files a single combined tax return, combining their income and deductions onto one form.  This is designed to provide a better situation than filing separately.

Married filing separately – this is when a married couple decides to each file their taxes separately – this is usually worse than filing jointly, but is available for situations where filing jointly is not possible. 

For the purposes of the IRS you can file as married if you were married at the end of 2007 or if you were married during the year and your spouse died before the end of the year.

Qualifying Widow(er) – Can be used for two years after the year of the spouse’s death as long as the widow(er) has not remarried before the end of the tax year, had the right to file a joint return in the year of your spouse’s death, and has a dependent child in the home and has paid more than half the cost of maintaining the home for the dependent. This allows the widow(er) to use the same rates as if filing jointly.

Dependants- a relative (child, parent, niece, nephew, uncle, aunt, grandparent) that you pay more than half of the living expenses for, includes foster and adopted children that lived with you for more than half of the year.

Earned income refers to wages, salary, tips, bonuses, and commissions – essentially money you worked for

Unearned income refers to dividends, interest, capital gains – essentially, investment income – income you didn’t “work” for.

The alternative minimum tax is a provision of the tax code that applies to individuals that benefit from certain deductions and credits and may have enough deductions and tax credits that they qualify to pay no tax. This sets in place a minimum tax that they pay, regardless of their deductions.  This is designed to assure that the “very rich” don’t end up paying no tax; instead they pay this “minimum” tax.

Deductions are used to offset the amount of income you have, reducing “taxable income” and thereby reducing the amount of tax you owe.

Tax credits offset the tax you owe.  After you figure out how much tax you owe based on your taxable income, you subtract “tax credits” to calculate your tax owed.

Retirement funds such as IRA, 401K and 403B are usually deductible.  In many cases you can deduct the amount you invest in these accounts from your income.  Roth IRAs are not deductible.  Go to www.irs.gov for specific details on these accounts.

FICA stands for Federal Insurance Contributions Act.  This is the social security tax. 

“Itemizing” is when you list out your tax deductions.  There is a standard deduction you are entitled to depending on your filing status (single, married filing separately, married filing jointly, head of household, or qualified widow(er))  You would want to itemize if you have tax deductions that would add up to more than the standard deduction. This applies if you are paying mortgage interest, large medical bills not covered by insurance, or gave a lot to charity.

No Comments yet »

RSS feed for comments on this post. TrackBack URI

Leave a comment