The U.S. tax code didn’t get to be 74,000 pages long without getting a little confusing. But don’t throw up your hands just yet; there are plenty of books, software programs, and professionals to help you sort out and file your tax return.
But even if you don’t do your taxes yourself, there are some things everyone needs to be familiar with. To get started — or refresh your memory — here’s a primer of 11 key tax terms you should know.
Adjusted gross income: Your total income minus any allowable deductions. This number is essential for calculating your tax liability. It determines your tax bracket, as well as how much you can contribute to tax-deferred retirement accounts.
Basis: The basis of an asset is its value, used for computing gain or loss when the asset is sold. For instance, if you bought stock in a company five years ago and sold it this year, you’ll need to know the basis, or the amount you paid for it to begin with, to determine your gain or loss on the sale for tax purposes.
Capital gains: The profit that results from disposing of a capital asset, such as stock, bond, or real estate. If you sold an asset resulting in profit, you’ll have to pay capital gains tax, which is 15 percent for most taxpayers and 20 percent for those in the top bracket.
Defined benefit plan: Also known as a traditional pension plan, this type of retirement plan promises a participant a specified monthly benefit at retirement. That benefit is usually based on factors such as the participant’s salary, age, and the number of years he or she worked for the sponsoring company.
Defined contribution plan: More common today than the defined benefit plan, this type of retirement plan includes contributions from the employee and/or the employer. The value of the account will change based on contributions and the value and performance of investments in the plan. Common types of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.
Dependent: A dependent is a person other than yourself or your spouse for whom you can claim a tax exemption. To count someone as a dependent, he or she must be your qualifying child or qualifying relative.
Exempt from withholding: This phrase means you are free from the withholding of federal income tax from your paycheck. You must meet certain income, tax liability, and dependency criteria to be exempt from withholding. This does not make you exempt from other kinds of tax withholding, such as Social Security tax.
Exemption: This is the amount that a taxpayer can claim for himself or herself, spouse, and eligible dependents. The total of your exemption is subtracted from your adjusted gross income before tax is figured on your remaining taxable income.
Itemized deduction: This is a deduction that is allowed on Schedule A (Form 1040) for medical and dental expenses, taxes, home mortgage interest and investment interest, charitable contributions, casualty and theft losses, and miscellaneous deductions. They are subtracted from adjusted gross income in figuring taxable income. You can’t claim itemized deductions cannot be claimed if you choose the standard deduction.
Standard deduction: Taxpayers who choose not to itemize deductions on their tax return can take a standard deduction. For tax year 2015, the standard deduction is $6,300 for single taxpayers and married taxpayers filing separately. The standard deduction is $12,600 for married couples filing jointly and $9,250 for heads of household.
Tax credit: A tax credit directly reduces your tax liability. Credits are allowed for such purposes as child-care expenses, higher education costs, qualifying children, and earned income of low-income taxpayers.
[Editor's note: This was originally published February 2, 2015.]