10 common tax terms explained

10 Common Tax Terms Explained

If discussing taxes tends to leave you confused and overwhelmed, you are not alone. The tax industry comes with it’s own language, including an array of terminology and jargon that is not used in day-to-day life. Without understanding these terms, filling for taxes may feel like an impossible task. That is why at Bennett CPA, simplicity is one of my core values. As a premier certified public accountant, I know firsthand how confusing taxes can be. That is why I am committed to simplifying the complexities of taxes to help you better understand and be prepared for your taxes. With my personalized tax services, I will partner with you through informative one-on-one consultations to ease any confusion, and allow you to be a part of the tax planning process.

If you are preparing to have a tax consultation, or simply wish to expand your knowledge on taxes, you may want to know a few common tax terms. Each of these terms are regularly used in tax documents and by the IRS. Understanding the meaning behind each one will help you ensure all of your taxes are filed correctly. In order to assist you in your tax planning and tax filing, I have created a list of 10 key tax terms that are important to know.

1. Certified Public Accountant (CPA)

A certified public accountant is an individual who has earned their CPA license. In order to receive this license, they must receive an extensive education in accounting and pass a rigorous 4-part exam. Those granted with the title of CPA work to assist individuals and families with their financial welfare and taxes.

2. Taxable Income

Taxable income refers to the amount of money left over after all deductions and exemptions have been applied. Taxable income is what is used to calculate the amount of tax money owed yearly.

3. Gross Income

A gross income (or profit, if you are a business owner) refers to the total amount of money you have received over the year. This includes salary, tips, capital gains, and interests. While filing to pay taxes, this number will be reduced with deductions and exemptions, which means your gross income is not fully taxed.

4. Audit

A financial audit happens when the Internal Revenue Service, IRS, evaluates your individual or business tax return. They will examine your financial information to ensure it has been correctly reported according to the tax laws, and verify the reported tax payments are correct.

5. Depreciation

Tax depreciation refers to the lowered value of a tangible asset that can be claimed by a taxpayer on a tax return. Numerous assets depreciate in value over time including property, homes, and cars. Fortunately, depreciation can be claimed as a tax deduction to reduce the amount of taxable income.

6. Withholding

If you are employed, then you are most likely familiar with the portion of your paycheck that is sent directly to the IRS by your employer on your behalf. Withholding refers to this portion of your paycheck that goes towards paying your income taxes. The amount taken from each paycheck is determined by the number of allowances you claim on your W-4.

7. Filing Status

A filing status can be defined more easily as your relationship status. Whether you are head of household or married will make a difference in the type of taxes you file, as well as the deductions you are able to receive.

8. Capital Gains

Capital gains refers to the money earned when an asset in your possession goes up in value. Whether it is a home in a booming real estate market, or a refurbished car, when an item is sold for more than it was purchased, capital gains are earned. While these gains are a great way to make money, they need to be added to your taxable income. Properly filing all capital gains is essential to correctly paying taxes.

9. Deduction

Tax deductions allow you to lessen the amount you will owe on your taxes. Deductions can be taken from a variety of items and expenses that are accumulated throughout the tax year. Deductions can either be filed by accepting the standard deduction offered, or by keeping an itemized list of tax-deductible purchases and expenses.

10. Exemption

Tax exemptions allow you to reduce the amount of taxes imposed on your taxable income. Exemptions are given for a variety of reasons and can vary depending on which state you live in, but a common way to earn an exemption in Colorado is by claiming your retirement pension.

Personalized Tax Service | Bennett CPA

At Bennett CPA, I am more than happy to answer any questions you may have, whether it is to define a confusing tax term or explain the process of filing a tax return. My goal is to ensure that you feel informed and comfortable with your taxes. My personalized tax services make sure all of your needs are met through a streamlined approach to planning and filing taxes. I will partner with you to help you navigate the complexities of taxes. Contact me today to make taxes easy, I look forward to working with you!