If you want to debate tax policy, you need to know the lingo. Do you know what a marginal tax rate is? Are you sure?
It isn’t surprising that many Americans are confused by exactly which sources of income are subject to taxes, and how much. The tax code is full of provisions that exempt certain income, offset your tax bill and apply different rates to different types of income.
So don’t be embarrassed if “stepped-up basis” is new to you. This field guide will help demystify a few of the most essential tax concepts.
Marginal tax rates
The federal income tax for individuals is progressive; in general, the greater your income, the higher the tax rate. But those higher rates are often misunderstood to apply to the entire income.
Tax credits vs. deductions
What is the difference between a tax credit and a deduction? Basically, they work at opposite ends of the equation.
In addition to income tax, workers pay taxes earmarked for funding Medicare and Social Security. Along with other social insurance taxes, like unemployment, these are commonly referred to as payroll taxes.
Taxes on investments
The government treats money earned from investments differently than wages. Goods that appreciate in value, like stocks or houses, are considered capital assets. Typically, long-term investments held for more than a year are taxed at a lower rate than income such as wages, and short-term gains are taxed equivalently.
Some tax-overhaul plans have proposed eliminating something called “stepped-up basis” on inherited property.
—Additional design and illustration by Jess Kuronen.
SHARE YOUR THOUGHTS
What other tax-related terms or concepts do you find difficult to understand? Join the conversation below.
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8