Decoding Tax Jargon: Making Sense of Confusing Terms

Paying taxes and a government imposed due date can feel overwhelming enough. Add complex terms and jargon, and it's no surprise tax season has a bad rap. But fear not! Our goal is to make tax season easier, less intimidating, and ultimately empowering for everyone. In this post, we've put together an introductory glossary of common terms used in individual income tax preparation. Consider this your first go-to guide for navigating the world of taxes with confidence and clarity.

Glossary - Income Types

Contracting / Gig Work

Contracting income refers to the money earned by self-employed individuals who work as independent contractors or freelancers. Independent contractors offer their services to clients or businesses on a contract basis, rather than being on employee payroll. They may receive forms 1099-NEC or 1099-MISC from their clients that summarize the amount of money paid to them during the year.

(See also: Schedule C Income)

Cryptocurrency Trades

Cryptocurrency trades refers to transactions or income earned through activities related to digital currencies, such as Bitcoin, Ethereum, or one of the many others.

Selling digital assets, mining or staking cryptocurrency, trading one digital asset for another, using or receiving cryptocurrency as a payment, or receiving interest from your cryptocurrency creates a taxable cryptocurrency event.

Buying digital assets with cash, or transferring digital assets between wallets or accounts you control are not income transactions (similar to how purchasing a company's stock is not an income-generating transaction).

Foreign Income

Not all income from abroad is treated the same.

If your investment account at a U.S. brokerage (like Charles Schwab or Fidelity) shows small amounts of foreign dividends or taxes paid, you're in the clear — we handle that. But if you worked abroad, earned income from a non-U.S. company, or hold accounts or assets in another country (like a Canadian bank account), that’s different. Those situations often require special filings we don’t prepare, like the FBAR or Form 8938.

If you're unsure, let us know — we’ll help you sort it out.

Investment Income (1099s)

Investment income is expansive. It refers to the earnings generated from various types of investments, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and interest-bearing accounts. In general, "investment income" also includes income from business or rental property investments. At Vivify, we serve clients whose only investment income is reported on a type of Form 1099.

There are many types of 1099s and investment income, but the some of the most common include:

1. 1099-INT: Reports interest earned from savings accounts, certificates of deposit (CDs), and bonds.

2. 1099-DIV: Reports dividends and distributions received by shareholders of corporate stock or mutual funds.

3. 1099-B: Reports income from the sale of securities.

4. 1099-S: Reports real estate transactions. This may be from a personal residence sale, or real estate sale held for investment.

5. 1099-R: Reports withdrawals from retirement accounts, such as Traditional IRAs, Roth IRAs, pensions, annuities, and 401(k) plans.

K-1 Income

Schedule K-1 reports amounts that are passed on to taxpayers by their ownership in a partnership, an S corporation, or to beneficiaries of an estate or trust. Schedule K-1 is a tax form that is issued by these entities each year to report the taxpayer's share of the income, deductions, credits, and other tax items. The entities file one copy with the IRS and provide another copy to the taxpayer.

Schedule C Income

Schedule C Income refers to income or loss generated a business you operated or a profession you practiced as a sole proprietor. Instead of a separate taxable entity, this income activity can be added to a personal tax return via Schedule C.

To qualify as a business activity, two key factors must be met:

1. Your primary intention for engaging in the activity should be to earn income or make a profit (not a hobby).

2. You should be actively involved in the activity on a regular and consistent basis.

(See also: Contracting Income)

Restricted Stock Units (RSUs)

These are shares of company stock you’re granted as part of your compensation — but they don’t fully belong to you until they “vest.” Once they vest, the value of the shares is treated like income, and you’ll see that reported on your W-2. Even though no cash hits your bank account, you still owe tax on the value of the shares at vesting. If you later sell the stock, you might owe more tax depending on how much it’s gained or lost since then.

Retirement Income (1099-R)

This form reports money taken out of retirement accounts like IRAs, 401(k)s, or pensions. It’s not just for retirees - you might receive a 1099-R if you moved money between retirement accounts, converted a traditional IRA to a Roth (hello, backdoor Roth!), or took a distribution for any reason. Some or all of the amount may be taxable, depending on the type of account and the nature of the transaction.

Social Security Income (SSA-1099)

Social Security is a federal government program designed to provide financial support to retired, disabled, or eligible surviving individuals. It is funded through payroll taxes paid by employers and employees during their working years. Social Security income may be subject to federal income tax depending on the recipient's total income for the given year. States have different rules on taxation of social security income.

The official program is known as the Old-Age, Survivors, and Disability Insurance (OASDI) program. It's administered by the Social Security Administration (SSA). Each year, the SSA provides the summary of a person's annual benefits received on Form SSA-1099 to the individual and the IRS.

Stock Options

Stock options are a type of compensation received by an individual from their employer.

Stock options grant the holder (the employee) the right to purchase company stock at a predetermined price within a specific timeframe. Ideally, the company stock has increased in value during the specified period and the holder is now able to purchase the stock at the lower, predetermined price.

Stock option plans can vary, as do the tax implications. Be sure to save the plan information provided by your employer to share with our tax pros!

W-2 Employment Income

Income from Employment, also known as W2 income, refers to the earnings individuals receive as compensation for their work as payroll employees. It includes wages, salaries, and tips. This type of income is typically subject to federal and state income taxes, as well as Social Security and Medicare taxes.

Each year, employers provide summaries of an employee's income for that year on Form W2 to each employee and the IRS.

Glossary - General Tax Jargon

Adjusted Gross Income (AGI)

Total gross income after adjustments. These adjustments, such as contributions to retirement accounts or student loan interest, are referred to as above-the-line deductions because they are not limited to taxpayers who use itemized deductions. AGI serves as the starting point for calculating taxable income and is used as the base for many tax law limitations.

Deductions

Expenses that can be subtracted from your income, reducing the amount of income subject to taxation. Above-the-line deductions are taken into account for adjusted gross income (AGI). From AGI, taxpayers may choose the standard or itemized deduction.

Standard Deduction: A fixed deduction amount to reduce taxable income. Adjusted for inflation each year and is based on the taxpayer's filing status, age, and whether they are blind.

Itemized Deductions: Specific expenses listed by the taxpayer to reduce taxable income, such as state and local taxes paid, certain medical expenses, mortgage interest, and charitable contributions. Itemizing deductions may be more beneficial if they exceed the standard deduction.

Filing Status

Your filing status determines how you file your tax return and affects the calculation of your tax liability. The five current statuses include Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child.

Multi-State Income

Multi-State Income refers to income earned by an individual in more than one state during a specific tax year. This might occur because an individual moves during the year, works in multiple states, owns rental properties or other investments in different states, or conducts business activities across state lines.

While all income is subject to federal income tax regardless of the state, each state has different rules about the income it taxes and it is not always a happy or easy matchup between states... meaning the taxpayer wants to be sure they are looking at each state individually and collectively.

Tax Bracket

Tax brackets are the ranges of income subject to different tax rates. As your income increases, you move into higher tax brackets. Each tax bracket has a corresponding tax rate applied to the income within that range.

Tax Credits

Reduce the amount of tax liability dollar for dollar. They can be either refundable or non-refundable. Common tax credits include the Child Tax Credit, Earned Income Tax Credit, and Education Credits.

Withholding

Withholding refers to employment taxes an employer is required to deduct from employee paychecks and pay to the IRS. It is based on the information you provide on Form W-4 and helps ensure you pay your taxes throughout the year. Employment taxes include income tax, Social Security and Medicare taxes.

Familiarity with some of the common jargon is the first step to confidently maneuvering the tax world. And remember, if you ever need personalized guidance or have any questions, our team of trusted tax professionals is just a call away. Embrace tax season with confidence and enjoy the journey!