TAX TERMINOLOGIES 101
The mere mention of tax rattles everyone, even if we contend with filing income tax returns annually. While the entire concept is complicated in nature, every taxpayer should have a fundamental knowledge of the tax code.
Below are the terms that can help you understand taxation better.
Bracket – The rate at which an individual is tax, which is set based on income levels. In a progressive tax structure, the more a person earns, the higher the percentage is levied by the government. For instance, if Cherry is single and has a taxable income of $9,225, she pays 10% of it in taxes.
Capital Gains – Profit realized throughout the year on investments. Capital gains are only levied when an asset is realized and at a lower rate. These are categorized as short-term or long-term within a year. An investor can posses shares which appreciate annually, but he does not accrue a capital gains tax until these are sold.
Credit – Amount of money a taxpayer can deduct from his tax obligation. As per IRS, it is as if you never received the amount. The value of tax credit is based on what it is being provided for. For example, if Dan belongs to the 28% bracket, a $100 deduction saves him $28, while a $100 credit saves him $100.
Deduction – Reduction from gross income which surfaces due to several types of expenses incurred by a taxpayer. Such deductions are removed from the adjusted gross income, lowering the overall tax-expense liability. Say Valerie made $50,000 in 2014 and has a $1,000 deduction. This would cut her taxable income to $49,000.
Income – Money earned by an individual or entity in return for rendering a good or service, or through investing capital. The IRS has two classifications of income: earned and unearned. Earned income includes wages, salaries, tips, other taxable employee pay, union strike benefits, long-term disability benefits received before retirement, and net earnings from self-employment. Unearned income entails interest and dividends, social security, alimony, retirement income, child support, and pay received for work while in a penal institution.
Marginal – Percentage of tax paid by individuals based on their next taxable income above the preset threshold. This taxation method seeks to tax individuals according to their earnings. In essence, it includes federal, state, and local income taxes, and also federal payroll and self-employment taxes. Those who earn the least amount of money are taxed at a lower rate.
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