Whether you’re a business owner or an individual filing your own taxes, tax season is a stressful time of year for many people. But, it can also be an opportunity to gain knowledge and take control of your financial situation. Being aware of key tax terms can not only help make the process of filing taxes easier and more efficient, but it can be the beginning steps to learning the tax system and how to use it to your advantage. Here’s a list of some important tax terms to be familiar with this tax season:
Adjusted Gross Income (AGI): This is the total amount of income you earned minus any deductions or adjustments, such as student loan interests or alimony payments. AGI is used to determine what your taxable income is. Adjusted gross income is important because it has a direct effect on how much you owe in taxes and what credits you can be eligible for.
Tax Deduction: This is the amount of money that can be subtracted from your total taxable income before your taxes are calculated. The benefit of these deductions is that it reduces the total amount of your income that is subject to federal taxation, resulting in a lower tax bill. Deductions are available on business expenses, mortgage interest, donations to charity, medical and dental expenses, education expenses, and more.
- Tax Credit: This is an amount of money that can be subtracted from the total amount of taxes that is owed. These are more valuable then a deduction because they reduce your overall taxes an individual or a family pays. These credits can be claimed for many different reasons, some of these reasons include, having children, attending post secondary school, or making charitable donations. A full list of available credits can be found on the Canada Revenue website.
Tax Exemption: An exemption is a term used to describe specific types of income, investments, and transactions that are exempt from taxation in Canada. This covers income from investments such as capital gains, dividends, and interest, or transactions and services, such as gifts or inheritances. Tax exemptions reduce the amount of taxes individuals or organizations must pay, meaning significant savings that can help make an organization more competitive, by reducing their operating costs.
Taxable Income: This is the amount of income that is subject to taxation after subtracting all deductions and exemptions from your adjusted gross income.
Tax Rate: This is the percentage of taxes that is owed on your taxable income. This tax rate is determined by your filing status and level of income.
Taxable Event: This is an event that triggers taxable change in a business or individuals financial situation. They usually involve the sale of property, the receipt of income, the payment of taxes, or the transfer of assets.
Tax Return: This word refers to the form you submit to the CRA to report your annual income and claim any deductions or credits.
Tax Refund: This is the money that is returned to you by the government after you file your tax return. If the amount of money you owe is less than the amount of taxes you have already paid, you may receive a refund.
Tax Liability: This is the total amount of taxes owed, based on your taxable income. You are required to pay in order to comply with the law.
LedgersOnline can Help
The help of an experienced tax professional such as an accountant and bookkeeper can help you navigate through the tax season and make the most of your tax return. A bookkeeper will help you determine which deductions to take and which to avoid to ensure you are maximizing your return. They will also help you meet filing deadlines and provide guidance on how to get filing extensions if one is needed. Additionally, they will help guide you through the complex rules around filing taxes. The team at LedgersOnline is ready to help you make the most of your taxes. Contact us today and see how we can make tax season easier.