Introduction

Taxation is a complicated subject, but you can use this beginner’s guide to tax terminology to understand the basics.

Taxation

Taxation is the process of collecting taxes. Taxes are collected by governments, who use them to pay for public services and programs that they provide their citizens. There are several different types of taxation, including income tax, sales tax, and property tax. The way that these taxes work varies from country to country, but generally speaking, they are collected based on your ability to pay (income) or what you buy/own (property).

Taxation has many purposes, including raising money for government services; redistributing wealth from rich to poor; encouraging people not only to save but also invest their savings so that new businesses can grow quickly enough so as not just employ more workers but also become self-sufficient so there aren’t any more unemployed people needing help from social security schemes such as unemployment benefits or welfare payments.

Taxable income

Taxable income is your gross income minus any deductions. It’s the amount of money you must pay taxes on.

Income taxes are a percentage of your taxable income. For example, earning $50,000 per year and paying 15% in taxes will owe the government $7,500 (15% of $50,000).

Standard deduction

The standard deduction is a set amount from your income to calculate your tax liability. The amount varies depending on your filing status and whether or not you are eligible to claim any other deductions. For example, if you are married filing jointly, and both spouses work full time, then the standard deduction will be higher than if only one spouse works full time while the other stays home with their children.

The standard deduction varies by filing status:

• Single – $12,000 (2019)
• Married Filing Jointly – $24,000 (2019)

Self-employment tax

Self-employment tax, also known as SECA, is a Social Security and Medicare tax paid by the self-employed. This tax is calculated on your net earnings from self-employment income.

For example, if you’re a sole proprietor and earn $100 in net profits from your business, you need to pay 7.65% of that amount ($7.65) as SECA taxes every quarter–this includes both the employer and employee portion of FICA taxes (12.4%).

If you’re a sole proprietor, you pay the self-employment tax on your net earnings from self-employment. For example, if you earn $100 in net profits from your business, you need to pay 7.65% of that amount ($7.65) as SECA taxes every quarter–this includes both the employer and employee portion of FICA taxes (12.4%).

Tax brackets

Tax brackets are the ranges of income that are taxed at different rates. The U.S. has seven different tax brackets, but only four apply to most taxpayers: 10%, 15%, 25% and 28%. These brackets apply to earners who make over $9,525; $38,700; $82,500; and $157,500 (for single filers).

The amount of money you pay in taxes depends on how much you earn each year and what bracket your income falls into–the higher your income falls within these ranges (and thus closer to the top), the more taxes you’ll pay on that portion of your earnings. For example: If someone earns $100k per year from their job (which puts them squarely in the 25% bracket), they’ll pay 25% on every dollar they earn until they reach their next threshold ($82k). Any amount above this limit will be taxed at 28%.

Refundable credits and payments

Refundable credits are a dollar-for-dollar reduction in your tax bill. Claiming a refundable credit reduces your tax bill to zero, and any remaining balance may be claimed as cash back. For example, if you had an income tax liability of $1,000 and qualified for an American Opportunity Education Credit worth $1,500 (the maximum amount), then this would mean that $500 of what was owed would be eliminated by claiming the AOC on Form 8863.

Refundable credits are not taxable because they do not reduce the amount of taxes owed but rather eliminate them; however, there is one exception: The Additional Child Tax Credit is not considered refundable even though it does reduce federal income tax liability–it also results in receiving an IRS Form 1040-C (which represents payment) instead of Form 1040EZ or 1040A (which represent refunds). You must file separate returns for each spouse if both spouses want their AOTCs; otherwise, only one spouse’s credit will be applied against their total federal income tax liability!

Exemptions and deductions

Exemptions and deductions are tax breaks that you can use to reduce your taxable income. But what’s the difference between an exemption and a deduction?

Exemptions are amounts you can deduct from your gross income when calculating income tax. You get one exemption for yourself, another for each of your dependents (like children or elderly parents), and possibly more if you’re blind or have certain medical conditions. For example, You earn $50,000 per year in wages at work; this figure is called your “gross” income because it includes all sources of earnings, including bonuses and any investment gains/losses made during the year. After considering any exemptions and deductions allowed by law (which we’ll discuss later), this leaves us with our “net” taxable income – how much we owe Uncle Sam come April 15th!

Credits and deductions

Credits and deductions are reductions in your tax liability. Credits are non-refundable, while deductions are refundable.

Here are some examples:

• The Earned Income Tax Credit (EITC) is a credit that can be worth as much as $6,431 for low-income workers with children. You must have earned income to claim it, but there’s no minimum amount required to qualify for this credit–you can get up to $500 if you don’t owe any taxes! If you do owe taxes, the EITC will reduce the tax due on your return by up to 40%. To claim this credit on Form 1040EZ or 1040A, just fill out lines 57a through 61a on page 2 of Form 1040EZ or lines 38a through 41a on page 1 of Form 1040A; if claiming more than one person who qualifies for EITC (e.g., two adults filing jointly), include all their names under Your name at the top right corner of page 2 or 3 so that IRS knows whom they should send refunds if any exist at all because some people might even owe money back once everything gets calculated correctly which means there could still be penalties involved depending on how many months late Filing was done too!

It pays to know your taxes!

Taxes are important. Taxes pay for roads, schools, and hospitals. They help people who can’t work because they’re old or sick or have children at home to look after. Taxes also help ensure we have enough food on our tables and medicines in our pharmacies.

Tax plays an important role in everyone’s life–whether you realize it or not! Taxes affect every aspect of society: from the way we live our lives (think about how much easier it would be without traffic jams) through to what kind of health care system we have access to, from whether there will be enough teachers available next year through to how fast your internet speed is going to get upgraded…

Taxes are complicated but don’t need to be! Once you understand what goes into calculating them and why different types exist, everything becomes clearer – no more guessing games where numbers seem arbitrary!

Conclusion

Taxation can be a complicated topic, but knowing the basics is important. If you have any questions about tax terminology or how it applies to your situation, please contact us today.