From Tithes to 1099s: Tax Terms to Know

Taxes are as old as (and older than) the Bible. Jesus even addresses them in His teachings. To the taxpayers, He instructs them to “render to Caesar the things that are Caesar’s, and to God the things that are God’s.” (Matthew 22:21). And to tax collectors, He says, “Collect no more than you are authorized to do.” (Luke 3:13)

Two thousand years later, most of us still grumble when we talk about taxes. But scripture suggests we should see taxes in a different light. Taxes are the law of the land, and God calls us to perform in accordance with those laws. However, we are also called to be faithful stewards of our money – and that includes not overpaying taxes.

Fortunately, it is possible to minimize our taxes through proactive, ongoing financial planning. Unlike tax preparation, tax planning is a year-round process and should be an important part of your financial plan. Understanding how our tax system works is an important step – which isn’t easy given the complicated and continuously changing tax codes.

Tax language isn’t much easier. However, knowing some of the most frequently used terms can be helpful. Below, we explain a few key tax terms you should know as you tackle your tax planning.

What Tax Terms Should You Know?

1099 Form

A 1099 form shows non-employment income you received throughout the year. Independent contractors may receive 1099-NEC forms from their clients. Other types of 1099 forms include 1099-DIV (for dividends and distributions), 1099-INT (for interest income), and 1099-R (for distributions from pensions, annuities, IRAs, and other retirement plans).

Adjusted Gross Income (AGI)

Your AGI is your total gross income from all the money you’ve brought in minus certain adjustments (such as educator expenses, retirement contributions, student loan interest, etc.).

Basis

Basis is the amount of investment in a property and is used to determine how much of a gain or loss you have on the sale or exchange of a property. While it’s typically the asset’s cost, it can be adjusted for things like depreciation or improvements.

Capital Gains

Profits from the sale of an asset are also called capital gains. These gains are considered either short-term (when you own the asset for less than one year) or long-term (when you own the asset for one year or more).

Short-term gains are taxed at your ordinary income rates, which currently range from 10% to 37%. Long-term gains are taxed at 0%, 15%, or 20%, depending on your total taxable income.

Charitable Donations

Gifts made to 501(c)(3) charities are tax-deductible. This includes tithes to churches, which are automatically recognized as charitable organizations by the IRS. The organization will send written confirmation of your donations either at the time they are made or at the end of the year.

Credits

Tax credits are subtracted from your tax bill. Popular tax credits include the child credit, adoption credit, and credits for making certain energy-related improvements to your home. Some credits are refundable, meaning you can get a refund even if you don’t owe taxes. Non-refundable tax credits can reduce your tax bill to $0 but cannot be given as a refund.

Deductions

Tax deductions are expenses that are subtracted from your gross income (e.g., mortgage interest, charitable contributions, retirement account contributions), lowering your taxable income. If you have deductions exceeding the annual standard deduction amount, you may itemize deductions on your tax return.

Dependent

Any person who relies on you for significant financial support can be classified as a dependent. This may include minor children, special needs adult children, or elderly relatives.

Effective Tax Rate

The effective tax rate is calculated by taking your total tax amount and dividing it by your total taxable income. For example, if you pay $20,000 in taxes and your total taxable income for the year is $100,000, your effective tax rate is 20%.

Estate

Your estate includes all the assets you own, including real estate, investments, retirement accounts, checking and savings accounts, personal property, etc. Estates valued over a certain amount may be subject to additional taxes after the owner’s death.

Filing Status

Tax brackets, rates, and standard deductions are determined by your filing status. All taxpayers fall into one of five statuses: single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse.

Gross Income

The IRS looks at all the income you receive to calculate your gross income. Sources may include Social Security benefits, wages from employment, interest, investment dividends, gambling winnings, business sales, etc.

Levies

A levy is a legal seizure of your property by the IRS to satisfy a tax debt.

Liens

The IRS can put a lien against your property if you owe taxes. They will take the amount of the lien from the proceeds once you sell the property.

Marginal Tax Rate

The U.S. has a graduated tax system that takes various levels of income at different rates. As your income reaches a higher level, the tax rate increases. The levels are adjusted each year for inflation and are based on your filing status.

Tax Cuts & Jobs Act

Congress passed new tax legislation in 2017 that made sweeping changes to federal tax laws, including reduced tax rates and higher standard deductions. The Act is scheduled to expire at the end of 2025 unless Congress decides to extend it.

Underpayment Penalty

Taxpayers are required to pay taxes throughout the year, either by withholding money from a paycheck or by making quarterly estimated payments. The IRS may impose a penalty if you don’t pay or substantially underpay throughout the year.

Wash Sale

Investors who sell a security at a loss cannot buy the same (or substantially identical) security within 30 days before or after the sale. If you do, you cannot claim the loss from the sale as a deduction on your tax return.

W2 Form

The W2 form shows how much income an employee has earned throughout the year, as well as how much money has been deferred to retirement accounts and deducted for other relevant expenses. Employers are required to send the W2 to employees by January 31 each year.

W4 Form

Employees submit a completed W4 form to their employers, which includes their name, address, and Social Security number. The W4 form also includes information about how much tax the employer should withhold from the employee’s paycheck each time they are paid.

W9 Form

Independent contractors submit a completed W9 form to their clients, which includes their name, business name, address, and Social Security number or Employer Identification Number (EIN).

At Blue Trust, we understand the value of making tax reduction efforts in light of your overall goals. If you would like to speak to a financial advisor about how best to take advantage of the ever-changing tax system to improve your financial stewardship and accomplish your goals, please reach out to blog@bluetrust.com or call 800.841.0362.