5 Tax Terms You Must Know

In the realm of taxes, understanding crucial terms is vital. This guide presents 5 essential tax terms you must know in decoding deductions, credits, and more. This knowledge empowers informed financial choices for a smoother tax journey. Let’s explore these key tax terms.


Above-the-Line Deductions

An above-the-line deduction represents an eligible sum that you can apply to your tax return to lower the total amount of tax you are required to pay. These deductions are available regardless of whether you decide to detail your deductions or not.

Instances of above-the-line deductions encompass costs like those incurred by educators, deductions for student loan interest, contributions made to a health savings account, and payments made for educational tuition and fees.

To claim above-the-line deductions, you need to fill out Schedule 1 and affix it to your federal income tax filing.


Below-the-Line Deductions

Below-the-Line deductions are eligible sums that lower your total taxes. Itemized deductions and the standard deduction are the two main categories of below-the-line deductions. However, the standard deduction is not frequently referred to as a below-the-line deduction. The deduction that reduces your tax obligation the greatest is yours to select.


Capital Gains

A capital gain takes place when you sell a capital asset, like property, shares, or bonds, at a price higher than what you initially paid. The tax you owe varies based on the duration you possessed the asset.


Capital Losses

A capital loss is incurred when you sell a capital asset, such as real estate, stocks, or bonds, for less than what you initially paid for. This loss can be used to offset capital gains, potentially reducing your overall taxable income. If your capital losses exceed your capital gains, you may also be able to deduct the excess loss from your regular income, up to certain limits, which can help reduce your tax liability.


Child and Dependent Care Credit

The child and dependent care credit is a tax benefit accessible to families who cover the expenses of caring for a family member while engaged in employment or job-seeking activities.

An eligible individual could be:

  • Your dependent child aged below 13
  • Your spouse or dependent who cannot independently provide self-care and resides with you for over half of the year

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