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5 terms to know about taxes

Earned Income Tax Credit:  The IRS defines the credit as “a refundable federal income tax credit for low to moderate income working individuals and families.” In other words,  when the calculated credit is more than the dollar amount of taxes owed, the payer qualifies for the credit. The EITC is particularly helpful to families bringing in a low level of income. According to the Tax Policy Center, families “with three or more children may receive a credit of up to $5,891 in 2012.

Capital Gains Tax: A tax on any profits made through the transfer or sale of assets. The level of taxation depends on the length of the gains (short-term versus long-term). Short-term gains are defined as assets held less than a year and are taxed at a higher rate than long-term investments. The level of taxation on profit gains versus the tax rate on earned income, since 1950, have generally been taxed at a lower rate than income, to spur investment.

The 1%: This past presidential election discussed the top 1% of income earners in the U.S. but many wonder just what income bracket that percent is. According to the Washington Post, as of 2010, the top 1% “had a minimum income of $516,633.” With the economy slowing over the last five years, the income threshold for the 1% has decreased more than $100,000 dollars since 2007.

Payroll Tax Holiday: In 2011 and again in 2012, President Obama and Congress lowered the rate at which individuals pay into Social Security, from 6.2% of income to 4.2%.  As part of the “Fiscal Cliff” avoidance deal Congress passed on December 31st, 2012, the Holiday has come to an end. As has been widely reported, Social Security is in dire financial straights, and the extra revenue is meant to help alleviate some of the concerns about the fund. Rep. Kevin Brady of Texas was quoted saying, “I think there’s a growing consensus that Congress and the president can’t continue to divert such a critical revenue stream from Social Security.”

Charitable Deduction: Individuals and couples are offered line-item deductions on donations to charity and not-for-profit organizations. The standard rule of thumb on the amount one can deduct from their taxes is up to 50% of income for cash donations.  With the passage of the “Fiscal Cliff deal,” which raised tax rates for those making more than $400,000, some voiced concern that the rate increase would mean less deduction incentives for charity. Some camps believe this deal should not affect charitable deductions, others are worried.


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