Most of the taxpayers don’t know about various tax terms when they are going to pay their income tax return for the very first time. Sometimes due to the lack of tax knowledge, they take the wrong decision. Finance and tax is a wide concept and for a layman, it’s very complicated to understand. As Albert Einstein says himself “The hardest thing to understand in the world is the income tax”. A great scientist of the century with an IQ of 160 can say this about tax. You can imagine how difficult it would be for a taxpayer to understand tax.
To those who unfamiliar with accounting practices, some of the tax-related terminologies are indistinguishable. To all who are going to pay their tax in this April, we are going to clear some of the confusion today by looking at 6 confused tax terms. Knowing the difference will not help you when you file, but it will also make you smart and intellectual at the parties.
Tax return vs. Tax refund
It may sound similar and both mean kind of the same thing (giving or paying something back), but when it comes to tax they are completely different terms.
A tax return is a form on which a taxpayer makes an annual statement of income and personal circumstances, used by the tax authorities (IRS) to assess liability for tax. Your taxes are filed when your return is completed and sent to the IRS.
Tax refund, on the other hand, is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount paid. The IRS sends you money if you pay more in taxes during the year than you actually owed.
Simple: your return is basically your financial report that goes to the IRS. Your refund is the money you get back for paying too much in taxes. You file income tax return; hopefully, you receive income tax refund.
Credit vs. deduction
These two above terms is basically good news for your tax. While both credit and deduction save you money on taxes, but they do it in different ways.
A tax credit is an amount of money a taxpayer is able to subtract from taxes owed to the government. For example, you owe $2000 in taxes for the year, if you have $500 credit, then the amount $500 will subtract from the amount you owed and you will have to pay only $1500. Even better is a refundable credit, such as child tax credit or the earned income tax credit. Even if you owe nothing in taxes, you can claim a refundable credit, which means a bigger refund.
On the other hand, the tax deduction is a reduction of income that is able to be taxed. A deduction goes straight what you earned, not what you owe. Let’s make it easy, if you earned $10,000 over the year, $100 deduction means you’ll only be taxed on $9900 of the money you made. Deductions for mortgage interest, charitable giving, state tax, IRA contributions and medical expenses are some of the ways you can reduce taxable income.
Federal return vs. state return
A federal return provides information so that the taxation authority can check on the taxpayer’s calculation, whereas state return is filed as per income tax laws of the state where you lived during the tax year. If your native and workplace are different, you’ll file a return for each state.
The same goes for living different states during the year: you must file a return for each state. Because every state has different laws governing the collection of income tax, so you have to pay according to the rule of each state. But there are seven states where you don’t have to pay income tax return at all:
- South Dakota
So these are some commonly confused tax terms, now you know six tax terms that are easy to confuse and what they actually mean. When you file with www.taxcare.net we guide you each and every aspect of tax. We’ll check all the laws in place for filling in your state so you don’t have to insert the same information two or more times. Whether you are looking for tax preparation, payroll or small business bookkeeping service California, choose Taxcare and get timely and accurate advice that keeps you pace with every-shifting tax requirements.