Decode Your CPA: An Incomplete List of Tax Jargon
Understanding taxes and finances can be quite a feat, especially when much of what you hear is jargon (language used by a specific profession). Below is an incomplete list of some common terms you may hear your CPA use.
Adjusted Gross Income (AGI): Your total income from all sources minus specific deductions such as student loan interest, alimony payments, and certain retirement contributions.
Taxable Income: The portion of your income that is subject to taxation after accounting for deductions and exemptions.
Deductions: Expenses that can be subtracted from your income to reduce your taxable income. Common deductions include mortgage interest, medical expenses, and donations to charities. Learn more about Federal deductions here.
Itemized Deductions: Listing and totaling individual eligible expenses, such as medical costs, state and local taxes, and mortgage interest, to reduce your taxable income. Learn more about Federal deductions here.
Standard Deduction: A fixed amount that you can subtract from your taxable income, usually chosen if your itemized deductions are less than the standard deduction. Learn more about Federal deductions here.
Tax Credit: A direct reduction of the tax you owe. It's often based on specific circumstances, such as having children (Child Tax Credit) or investing in renewable energy (Renewable Energy Tax Credit). Learn more about Federal tax credits here.
Exemption: An amount that can be subtracted from your taxable income for each eligible person on your tax return (such as yourself, your spouse, and dependents).
Tax Liability: Tax bill that you owe to the federal, state, or local government.
Tax Bracket: The range of income levels subject to a specific tax rate. The more you earn, the higher the tax rate applied to the income in that bracket. Learn more about the 2023 Federal Tax brackets here.
Tax Withholding: The amount of money your employer deducts from your paycheck and sends to the government on your behalf to cover your expected annual tax liability.
Estimated Tax Payments: Tax payments made to the government during the tax year to cover your expected annual tax liability. Often, this is required for taxpayers whose tax liability is not covered by tax withholding. These are commonly referred to as quarterly tax payments.
Capital Gains: Profits made from selling assets such as stocks, real estate, or other investments.
Capital Losses: Losses incurred from selling assets for less than their original purchase price.
Tax Shelter: A legal means of reducing taxable income, often through investments or financial strategies.
Tax Avoidance: Legally minimizing tax liability through strategies like deductions and credits. Learn more about tax avoidance vs. tax evasion here.
Tax Evasion: Illegally avoiding paying taxes through fraudulent means, which is a criminal offense. Learn more about tax avoidance vs. tax evasion here.
Form 1040: The standard individual income tax return form used to report your income, deductions, and tax liability. You can review the Form 1040 here.
Form W-2: A statement from your employer that provides information about your annual earnings and tax withholdings. Learn more about W-2 here.
Form 1099: A series of forms that report various types of income, such as freelance earnings or interest earned from a bank. Learn more about Form 1099 here.
Keep in mind that tax laws and regulations can change, so it's a good idea to consult a tax professional if you have questions or concerns about these terms in regards to your specific situation.