Glossary
Assets - tangible (physical) and intangible property owned by an individual or business. Personal assets include bank accounts, a main home, additional properties, cars, computers, tools, clothing, stocks and bonds, interest on a pension plan, and the cash value of life insurance policies. Business assets include bank accounts, buildings, inventory, and machinery.
Cancelled debt - any debt that is forgiven or discharged. An example is credit card debt in which some or all of the debt is forgiven. The amount that is forgiven is considered income by the IRS and the agency that forgives the debt will send you a 1099C which needs to be reported on your taxes for the year the 1099C was received. For example, if you owed a credit card $5,000 and reached an agreement that you pay $3,500 and the credit card forgives $1,500, then the credit card company will send you a 1099C for $1,500. The $1,500 needs to be reported on your taxes. Note that this was income that was not taxed and will likely change your projected result for your taxes. Be careful before you cancel debt. The exception would be if you can prove that you were insolvent,(your debts are more than your assets). See publication 4681 for more information.
Capital gains tax - the tax you pay on the profit (gain) from the sale of an investment (stocks or bonds) or property (such as a rental property or a business). In other words you sold something for more than what you purchased it for (which is the item's basis). See FAQ to read about the current capital tax rate.
Child tax credit - a credit given on federal taxes to help offset the cost of raising children.Starting in 2018 the credit increased from $1,000 per child to $2,000. Taxpayers qualify for this credit if all of the following applies:
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the child is younger than 17 at the end of the tax year
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the taxpayer claims the child s a dependent
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the child lives with the taxpayer for at least 6 months
Although the credit is refundable, the refundable portion is $1,400. The taxpayer claiming the dependent must make at least $2,500 and the credit starts to phase out at $200,000, or $400,000 if filing married filing jointly.
Credit - an tax incentive that can reduce the amount of tax liability (the amount of money you owe). Examples are the Savers Credit, the Child and Dependent Care Credit, and the American Opportunity Tax Credit.
Deduction -a reduction of income commonly due to an expense. Some examples:
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student loan interest
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educators expenses
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health insurance for self-employed individuals
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As part of the itemized deduction:
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medical deduction-most dental, mental, and medical expenses that exceed 7.5% of your adjusted gross income
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real estate taxes-the property taxes paid on your place of residence(s).
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home mortgage interest-interest on your home. As of 2018 tax year the interest incurred on a home equity must be to improve your home to be considered a deduction.
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Depreciation - a decrease in the value of a fixed asset over the course of time due to wear and tear. For example, if a business purchases a piece of machinery with a cost of $10,000 and is depreciated over five years, the business can expense the machinery for $2,000 each year (if they use the straight line method). If you are unsure about how long and what method to use, please consult an accountant or read Publication 946 about depreciation.
Earned income - income that is received as an employee or income received through a small business or farm. Taxable earned income includes, wages and salaries, union strike benefits, long-term disabilities benefits, net earnings from a small business, farm, or as a statutory employee. Earned income is not retirement income, social security , unemployment benefits, alimony or child support.
Earned Income Credit or EIC - a refundable tax credit for low- to moderate-income working taxpayers. It is available for taxpayers with and without children and the amount is based on earned income and number of children. Here is a great video that explains it. It is based on a sliding scale and here is the EIC chart for 2018. When the 2019 chart is available, I will include it on my website.
Employer Identification Number (EIN) - also known as federal tax identification number. It is the nine-digit number that you get for your business especially if you are going to have employees. If it is for a sole proprietorship (DBA), then the number is attached to your social security number. If you open or change to another business, the EIN remains the same. If the business is a corporation, it is attached to the name of the corporation. If you close the business and open another, you will get a new EIN. You obtain your EIN from the IRS here.
Fixed asset - a property that a business will own for over a year. Examples would be vehicles, buildings, furniture, and equipment. Assets contribute to the overall worth of the business.
Liabilities - a company's legal financial debts or obligations. Short term liabilities are for those that are due within a year. Long term liabilities are those that exceed a year.
Refund - difference between what you owed and what you paid in either through your paycheck withholding, your estimated tax payments, or refundable credits.
Refundable credit - a credit that can reduce your tax liability below zero. This means that if your credits completely negate your tax, you can still take a credit which will increase your refund. Examples are the American Opportunity Credit for families sending a dependent to college (or a person that is not a dependent) or the Earned Income Credit.
Revenue - This is the money that is generated from normal business operations also known as the gross income. It is also known as sales on an income statement. This income is reportable whether received by cash, check, credit card, or third party platform such as Venmo or CashApp. It is also important to note that all income needs to be recorded and reported on applicable taxes whether it is income reported on a 1099 form or not.
Self-employment tax - a tax of 15.3% that is imposed on the net profit of a business. This tax is your contribution towards social security and medicare. Employees pay 7.65 through their paychecks and their employer matches it. If you are self-employed, or a statutory employee, you pay both the employer's and employee's portion since the sole proprietor and business are one.
Shared Economy - also known as gig economy. It's system that is based on people sharing possessions and services, either for free or for payment. This includes services such as Uber, Lyft, Airbnb, and grocery delivery. This income, even if it's paid to you in cash, needs to be reported on your personal taxes on a schedule C along with any expenses incurred in relation to the income. The profit of this activity is subject to self employment taxes. It is recommended to pay estimated quarterly taxes if you have a profit in a shared economy activity. More information regarding the shared economy can be found here.
Sole proprietor - also known as a DBA, Doing Business As. It is an entity type of business that is owned and run by one person and which the is no separation between the individual and the business legally and tax-wise. If the net income is over $400, a sole proprietor must pay self employment tax.
Standard deduction - an amount of money that you can subtract from your adjusted gross income to compute your tax liability. The amount for 2022 for single filers and married filing separately is 12,950, married filing jointly is 25,900 and head of household is 19,400.
Reminder for NYS residents, even if you take the standard deduction on your federal taxes, you may be able to itemize on your NYS taxes starting with the 2018 tax year. The standard deduction for a single person who is a dependent is 3,100, single or married filing separately is 8,000, and married filing joint is 16,050.
Withholding - the amount taken out of your paycheck for federal and state taxes. Please consult your accountant or your employer's human resources department if you need assistance filling out the forms that determine how much is withheld. The forms can be found on the forms page.