At KA Tax and Consulting, we strive to help families and business owners feel educated and empowered about their financial situation. We’ve compiled this list of tax terms to help you easily understand some basic terms you might hear when discussing your taxes.
Capital Gains and Losses: A capital gain or loss occurs when you sell an asset that’s been held for investment (such as real estate, stocks, or bonds). The amount of taxes you pay depends on how long you have owned your capital asset - if you have owned your capital asset for one year or less, your gains are taxed at your ordinary income tax rate, but if you have owned your capital asset for longer than a year, your gains are taxed at capital gain tax rates, which are lower.
Dependents: A dependent is someone who relies on you for financial support, such as a child or other family member. If you can claim someone as a dependent, you may benefit from tax deductions and credits at the federal, state, and local levels.
Depreciation: A process for spreading out the cost of an item used in your business (such as furniture, equipment, or real estate) that you plan to use for a long time. Each type of item has its own set “tax life” that is determined by the Internal Revenue Service, and the cost of the item should be spread out over that time frame.
Estimated Tax Payments: These are quarterly payments that many taxpayers make throughout the year to cover their tax liability. If you expect to owe $1,000 or more when you file your tax return, you should speak with a tax professional about making estimated tax payments to avoid penalties when you go to file.
Extension: All taxpayers (including both individuals and businesses) can file for a six-month extension on their tax return, giving them more time to get the information in order. It is important to note that an extension only extends the amount of time you have to file a tax return, it does not extend the amount of time you have to pay any taxes that are due for the year.
Hobby: An activity that might generate you some income, but is generally pursued for personal pleasure rather than for profit. It is important to distinguish a hobby from a business, since they are treated differently for tax purposes.
Independent contractor: An independent contractor is someone who is self-employed and provides services to others. Generally, an independent contractor sets their own hours, pays for their own tools and supplies, and assists multiple clients throughout the year. Income earned as an independent contractor is subject to self-employment taxes.
Marginal Tax Rate: The amount of additional tax paid for every additional dollar of taxable income. Under the federal tax system, a taxpayers income is divided up into “buckets” and each amount is subject to a different tax rate. Knowing your expected marginal tax rate is key to being able to predict how much you will owe in taxes for the year.
Self-Employment Income: This is the income you earn from selling goods and services to others outside of W-2 employment. When you are self-employed, you are responsible for keeping track of both income and expenses and will be required to pay self-employment taxes on the net amount.
Withholding: If you work a W-2 job, you are probably familiar with your employer withholding taxes from each of your pay checks. By having taxes withheld in small amounts throughout the year, taxpayers are better able to manage the amount they owe when they file their tax return. If your employer withheld more than your total tax liability, you will receive a refund.
Bonus Term – Tax Professional: someone who can take the complexity and headache out of filing your tax return, and help you plan for future tax years. If you’re looking for assistance, contact us today at kataxandconsulting@gmail.com
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