What Is FICA Tax? 10 Tax Terms You Should Know in 2021
When it comes to taxes, all kinds of tax-related lingo applies — often in the form of acronyms, like FICA — which can be confusing. Read over these 10 tax terms to find out what’s what in the world of taxes. You might even discover some helpful tax benefits.
1. What Is Alternative Minimum Tax?
The AMT was instituted by Congress to make sure wealthy taxpayers don’t escape being taxed via the regular income tax system. Taxpayers in higher tax brackets must calculate their tax liability under both regular and AMT rules and pay the higher amount, which can result in hundreds or thousands of additional dollars in taxes.
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2. What Is Capital Gains Tax?
According to the IRS, anything that qualifies as a capital asset — something you sold for more than what you paid for it — is subject to a capital gains tax, such as investments or personal property. Anytime you make income from the sale of something, you’re required to report it on your federal income tax return.
To determine your net capital gain, you’ll need to know if your gains are short-term or long-term. If you’ve had the asset for a year or less before you sell it, it’s a short-term gain. If you’ve had it for more than a year, it’s a long-term gain.
The capital gains tax rate you’re liable for will vary depending on whether your asset is considered a short-term or long-term gain. The short-term capital gains tax is taxed at the same rate as your ordinary income — from 10% to 37% for 2020. People subject to a long-term capital gains tax can qualify for a reduced tax rate — generally 0%, 15% or 20%.
3. What Is Child Tax Credit?
The child tax credit, or CTC, applies to individuals who can claim a child as a dependent, as long as the child meets additional conditions, including having a Social Security number before the due date of the tax return. The current child tax credit is $2,000 per qualifying child.
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4. What Is Earned Income Tax Credit?
The earned income tax credit — aka EITC — benefits working people with low to moderate income by reducing the amount of tax they owe and possibly resulting in a refund. You must meet all of the IRS’ qualifying rules to receive the credit.
5. What Is Excise Tax?
Excise taxes are taxes levied by federal and state governments that are often included in the price of specific goods or activities. Two categories of excise taxes exist: specific and ad valorem. Specific excise taxes are set fees added to products, such as gasoline, alcohol and cigarettes. Specific excise taxes might also apply to certain activities, such as highway usage by trucks. Ad valorem excise taxes, which are less common, are taxes added based on the value of a product.
6. What Is FICA Tax?
FICA — aka Federal Insurance Contributions Act — tax is a U.S. federal payroll tax that is deducted from each paycheck. Overall, the FICA tax rate is 7.65%: 6.2% goes toward Social Security tax and 1.45% goes toward Medicare tax, which helps fund benefits for children, retirees and the disabled.
7. What Is Income Tax?
Income taxes, which are based on how much money you earn in a year, are the U.S. government’s largest source of revenue. Income not only includes your pay but also things like dividends, royalties, lottery winnings, interest, rents and self-employment earnings. The amount of income tax you owe depends on the IRS tax bracket your earnings fall within. Additionally, all but seven U.S. states implement a state income tax.
8. What Is OASDI Tax?
The OASDI — aka Old-Age, Survivors and Disability Insurance program — is also known as Social Security. Therefore, the OASDI tax is the portion of the FICA tax — 6.2% — that goes toward Social Security. The current maximum level of earnings subject to the OASDI tax is $137,700 for 2020, and will increase to $142,800 for the 2021 tax year.
9. What Is Tax Liability?
Tax liability is the total amount of federal income tax on your income — which can include self-employment, household employment and tax penalties — minus any nonrefundable credits due, such as the child tax credit or dependent care credit. When tax withholdings and payments do not cover your tax liability for the year, the unpaid difference becomes taxes due or taxes you owe to the federal government.
10. What Is VAT?
The value-added tax is a consumption tax used in every economically advanced nation except for the U.S. It is assessed on the value added to goods and services — the price difference between the sales and purchase of goods and services by one business to another business — and is paid only on the value added at each stage of production and distribution so double taxation is avoided.
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