Understanding Your Tax Return: An Illustrated Guide to Common Terms on Tax Day
If you want to understand your tax return, or debate tax policy, you need to know the lingo. Do you know what a marginal tax rate is? Are you sure?
On this federal-tax filing due date, it isn’t surprising that many Americans are confused by their tax return. It is hard to know exactly which sources of income are subject to taxes, and how much. The tax code is full of provisions that exempt certain income, alter your refund and apply different rates to different types of income.
So don’t be embarrassed if “stepped-up basis” is new to you. This field guide will help demystify a few of the most essential tax concepts.
Marginal tax rates
The federal income tax for individuals is progressive; in general, the greater your income, the higher the tax rate. But those higher rates are often misunderstood to apply to the entire income.
Tax credits vs. deductions
What is the difference between a tax credit and a deduction? Basically, they work at opposite ends of the equation.
Payroll taxes
In addition to income tax, workers pay taxes earmarked for funding Medicare and Social Security. Along with other social insurance taxes, like unemployment, these are commonly referred to as payroll taxes.
Taxes on investments
The government treats money earned from investments differently than wages. Goods that appreciate in value, like stocks or houses, are considered capital assets. Typically, long-term investments held for more than a year are taxed at a lower rate than income such as wages, and short-term gains are taxed equivalently.
Stepped-up basis
Some tax-overhaul plans have proposed eliminating something called “stepped-up basis” on inherited property.
—Additional design and illustration by Jess Kuronen.
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