Say what? How to make sense of tax jargonWatching political speeches, debates and Sunday morning talk shows can be like trying to watch a foreign film without subtitles. What are they really saying?
Watching political speeches, debates and Sunday morning talk shows can be like trying to watch a foreign film without subtitles. What are they really saying? What is a tax loophole? What do they really mean by corporate tax reform? Unless you’ve got a degree in finance – and sometimes even if you do – the words and phrases used by politicians can be downright confounding.
There are so many different terms to know about taxes, finance and accounting that if you don’t work with them every day, it’s easy to get lost in a fog of words, according to the Minnesota Society of Certified Public Accountants (MNCPA). And when you hear these terms being tossed around in candidates’ speeches as part of their economic plans, wouldn’t it be nice to know what they mean? Here’s a primer of a few tax and financial phrases you might hear during the 2012 campaign season.
Tax code. This system of laws, known as the Internal Revenue Code, describes how the federal government will tax individuals and businesses. The U.S. has one of the most complex tax codes in the world.
Tax loophole. A loophole is any technicality that allows a person or business to avoid the scope of a law or restriction without directly violating the law. In reference to taxes, loopholes usually refer to ways individuals and companies remove income or assets from taxable situations into ones with lower taxes or none at all. Using a loophole isn't breaking the law, but going around it in a way that was not intended by the regulators or legislators that put the law or restriction into place.
Corporate tax reform. At 35 percent, the U.S. has one of the highest corporate tax rates in the world. Some U.S. companies pay close to the 35 percent top corporate tax rate while other companies pay a much lower rate as a result of tax breaks that let them lower their "effective" tax rates. The corporate tax structure is a hot button that may be discussed during the presidential campaign, but will not likely see any changes until after the election.
Repatriation tax holiday. Some American companies keep large sums of cash in other countries because they do not want to pay the current 35 percent corporate tax in the U.S. So instead of these companies investing the money within the U.S. or paying it out in dividends to shareholders, the cash either sits idle or gets used to build facilities and expand outside the U.S. Legislators have floated the idea of a temporary "tax holiday" to allow companies to repatriate all that money at a significantly lower tax rate and get it back in the U.S.
Tax incentives. A tax incentive is an aspect of the tax code designed to encourage a certain type of behavior. Tax incentives can apply to individuals or corporations. Incentives for individuals are the types of things you write off on your federal taxes to the IRS like a mortgage interest deduction or an individual retirement account. Corporate tax incentives more typically span federal, state and local governments and are included in the tax code, but there may be specific incentives designed for individual companies. For example, a company may receive a sales tax exemption or a property tax abatement from a city for building and operating in a certain location.
Broaden the tax base. A broader base means that lower tax rates can raise an equal level of revenues or that the same rates can raise more revenue. By taxing a broader group, the tax applies to more income. This is a concept that arose last fall as presidential candidates began discussing ways to raise revenue.
Tax extenders. These are tax breaks that are not part of the permanent tax code and are designed to be temporary, but are extended by Congress each year anyway. These provisions, which apply to both individuals and businesses, include popular measures such as the research and development credit for businesses and the optional deduction for state and local sales taxes for individual ls.
Learning the lingo
Tax and financial terms can be vague and confusing. But understanding the jargon will help you interpret the information you’re hearing from lawmakers. As a result, you’ll learn how your personal financial situation is impacted by the bigger picture.