Basic Concepts of Income Tax Exemptions & Deductions

10 Basic Tax Terms You Should Know

This is because each employer is required to withhold the tax, but no taxpayer has to pay the full tax on more than the annual limits. If wages from two jobs pushes you over the limit, too much tax will be withheld. You get a credit for the excess when you file your tax return for the year. This credit is for low-income taxpayers age 65 or older at the end of the year, or those who are retired on permanent and total disability. If you receive a settlement in a damage suit that includes money for future medical expenses, the amount is not taxable.

10 Basic Tax Terms You Should Know

Federal income tax is the money collected by the government and the IRS that’s applied to all earnings made by each citizen in the U.S. Receive a refund for the overpayment of taxes throughout the year. Are expenses the IRS allows you to subtract from your AGI to arrive at your taxable income. They are items or expenses subtracted from your income to reduce the amount. Withheld taxes are deposited in an Internal Revenue Service account, and you are credited for the amount when you file your return.

Types of Income Tax

The best way to see what you can deduct is to use the IRS’s Sales Tax Calculator. Keep in mind, the total of your itemized deductions for all of your state and local taxes is limited to $10,000 per year.

  • The deduction for assets owned one year or less is limited to your tax basis, which is generally what you paid for the property.
  • A write-off for business interest expense may be restricted by certain IRS stipulations, such as the amount of business interest income or to 30% of adjustable taxable income.
  • A copy of the required approval from the DHCD must be attached to Form 502 for those individuals, electing to use Form 502CR.
  • Education that qualifies you for a new trade or business, such as law school, is not eligible for this deduction, but may be eligible for the American Opportunity or Lifetime Learning tax credit.
  • Funds channeled through the account escape federal income and Social Security taxes and state income taxes as well.
  • A film production entity will not receive more credit than the amount certified by DOC.

Sales tax rates can have a significant impact on where consumers choose to shop, but the sales tax base—what is and is not subject to sales tax—also matters. Tax experts recommend that sales taxes apply to all goods and services that consumers purchase but not to those that businesses purchase when producing their own goods. When applied to profits earned from stocks, capital gains taxes result in the same dollar being taxed twice, also known as double taxation.

Taxation for freelancers vs. salaried employees

Calculating the bigger standard deduction is made easier with Form 1040-SR, “U.S. And for those who still use paper forms — electronic filing is highly 10 Basic Tax Terms You Should Know recommended for speed and security — the 1040-SR form is much easier to read than the standard 1040, thanks to a larger font size for the text.

These payments can be for tuition, books, and supplies for a course you’re taking. But, you can’t claim these expenses for any other deduction or credit, including the Lifetime Learning Credit. For a winery or a vineyard to claim a tax credit, an individual or corporation on behalf of the winery or vineyard must apply to and be certified by the Maryland Department of Commerce . The winery or vineyard must submit an application to DOC by September 15th following the tax year in which the qualified capital expenses were incurred.

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