We present a glossary of tax terms that may help you, with an odd example based on a diet, just to make it more fun.
- Exclusion: Let’s pretend that you have a wedding coming up and you absolutely have to fit into your bridesmaid dress and so you put yourself on a super strict diet of 1200 calories for a month. An exclusion to the diet are those homemade raspberry macaroons that someone left out in the break room. Similarly, exclusions are items that you don’t even report as taxable income when you’re figuring your taxes. They’re often gifts or inheritances. Or raspberry macaroons.
- Deduction: If you go over your daily allotted diet of calories, you might go to the gym for extra time to make up for it . . . that’s sort of like a deduction. They come in four sorts:
- Above the line deductions: Such as alimony, can be claimed whether or not you are itemizing (see below). This is like showing up to the gym and doing an extra work out on top of your normal schedule, even if you haven’t been snacking.
- Itemized deductions: These are a group of specific deductions that include mortgage interest, medical expenses, charitable donations and others. Not everyone itemizes and, if you don’t, you want to do the standard deduction. In our analogy, this is when you keep a little book of calculations to determine exactly how many calories you’re burning and how many extra you can eat.
- Standard deduction: This is a simplified way that replaces itemized deductions. Look, you’re going to the gym, right, and working out, yeah? Well then you’re losing weight, and you don’t need the little notebook and every little calculation! Don’t be so fussy, right?
- Business deductions are for your business activities. They’re business cards, office expenses, and sometimes travel. You know, like when you’re taking the stairs to your seventh floor office at least two times a day, or offering to help carrying those boxes from the mailroom.
- Credits: Tax credits are taken off of your taxes near the end, so that each dollar in credit means a dollar you don’t have to pay. Hey, you stayed under your calorie count today! Good for you! Tax credits can be non-refundable, meaning they can only reduce your taxes to zero or refundable, meaning that you get money back if the credit exceeds the amount of taxes that you owe. Er, let’s not explain how this fits into our diet analogy, shall we?
Tax terminology can be confusing, even when your accountants aren’t using weird extended metaphors about dieting. If you’re one of our clients, or if you want to be, give us a call and question us about these tax-savers. We’ll be as clear as possible in person, we promise.
Tags: weirdly funny