Essential Tax Terms

Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific sector, and the accounting business is no exception.

To help you understand the terms, acronyms, and phrases regularly used when filing taxes, Cooley & Martin has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your accounting needs effectively.

Credit: This can reduce the amount of tax owed or increase your refund.

Deduction: This allows you to lower your income before you calculate your tax liability.

Qualified Dividends: Often meet the criteria to be taxed at the capital gains tax rate.

Social Security benefits: Taxable at 85% if combined income on married filing jointly returns exceeds $32,000.

Long-Term Capital Gain: Typically, assets held for investment are capital assets. Capital Assets held for more than one year are considered long-term and treated to more favorable tax rates.

Interest: Interest income can be taxable to both Federal and State. For example, interest from treasury bonds is subject to federal tax but exempt from all state and local taxes.

Medical Expenses: IRC section 213 provides the rules for determining when an expenditure is a medical expense. Prescription drugs and insulin are examples of deductible medical expenses.

Prizes and awards: They are taxable except in three situations. The exclusions are tax-exempt scholarships and tuition reduction, meritorious achievement, and specific employee achievement awards.

Employer fringe benefits: Certain benefits can be excluded from tax, such as health plans, dependent care assistance, and educational assistance.

Charitable donations: Deductions are permitted for contributions to churches or specific nonprofit organizations, typically designated 501c(3). These donations can be cash, investments, other items, or even miles driven.

Personal Exemptions: To be considered a dependent for tax purposes, an individual must be regarded as either a Qualifying Child or a Qualifying Relative. The dependent cannot file as Married filing jointly.

Hobby Losses: If an activity is not engaged in “for profit,” deductions are allowed only to the extent of the income from that activity.

Business use of home: IRC section 280A(c) allows deductions concerning the following: -Certain Home offices -Storage of inventory - Rental Property - Day care services.

Damages: Certain payments that compensate for damage to a person are non-taxable. It’s limited to payments for physical injury or sickness.

Qualified Business Income (QBI): Certain businesses qualify for a deduction. Up to 20% of net income gets subtracted before arriving at taxable income.

Get in touch with us today!

We hope these terms made you feel more confident about working with a tax accountant. At Cooley & Martin, we strive to partner with our clients and take the time to understand their needs so that we can offer tailored solutions.

Our services include taxpayer defense and representation, tax compliance, and accounting services. We also offer clients Small business capital funding assistance and Professional Notary Services.

We serve clients across Charlottesville, Lynchburg, Tuckahoe, Harrisonburg, Staunton, Waynesboro, Fredericksburg, Laurel, Glen Allen, Madison Heights, Culpeper, VA, and the surrounding areas.

To learn more about the other services we have to offer, please click here. If you have any questions about taxes, please get in touch with us by calling (434) 975-2663 or emailing info@gjccpa.com.