Translating Tax Jargon Ahead of Tax Day: An Illustrated Guide to Common Terms
14 May 2021 - 9:29PM
Dow Jones News
By Randy Yeip, James Benedict and Andrew Levinson
If you want to debate tax policy, you need to know the lingo. Do
you know what a marginal tax rate is? Are you sure?
It isn't surprising that many Americans are confused by exactly
which sources of income are subject to taxes, and how much. The tax
code is full of provisions that exempt certain income, offset your
tax bill 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.
(END) Dow Jones Newswires
May 14, 2021 07:14 ET (11:14 GMT)
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