When it comes to tax season, sifting through all the confusing terms, acronyms and beguiling phrases can throw even the most experienced tax filers off guard. U.S. News asked financial professionals to explain the jargon they find most misleading or just plain annoying. Read on for their 10 most-hated terms.
Acronyms. The tax world is chock-full of acronyms – AGI, MAGI, FSA, HSA, HDHP, DCFSA and on and on. "People toss them around, often not even understanding what they are. That creates confusion," says Eva Rosenberg, a Los Angeles-based enrolled agent, known as the TaxMama. "When your tax pro throws an acronym at you, don't just nod and pretend to understand. Ask them to clarify and define the term. That way, you'll have a better understanding about the advice you're getting."
"Above the line." "What person besides a tax pro has any idea what 'the line' is?" asks Kathryn Hauer, author of"Financial Advice for Blue Collar America." The phrase refers to credits or deductions that you don't have to itemize, she says. Conversely, "below the line means" you do have to itemize to earn the credits or deductions. "'The line' is where you put your [adjusted gross income] amount at the bottom (line 37 this year) but it can be confusing," Hauer says.
"Alternative minimum tax." This tax, commonly abbreviated AMT, has its own set of rates. Certain taxpayers must pay whichever is larger between the "regular tax" or "alternative minimum tax." But two of the three words in this tax phrase are misleading. "It is not alternative, nor is it minimum," says Leon LaBrecque, CEO of LJPR Financial Advisors in Troy, Michigan. Instead, a more descriptive term would be the "mandatory maximum tax," LaBrecque says.
"Cost basis." Simply put, this term refers to the original value of an asset, which is used to determine gains or losses when you sell an investment. "'Cost basis' is jargon that needs to go in the dumpster," says Phillip E. Cook, certified financial planner and president of Mogul Wealth Management Inc in Manhattan Beach, California. "Why don't they call it 'purchase price'? Everyone understands that," Cook adds.
"Death tax." Politicians have batted around this phrase in an effort to spread fear among voters, says James W. Bryan, a certified financial planner and principal of wealth management at Cahill Financial Advisors in Edina, Minnesota. Politicians are typically talking about federal and state estate taxes on the handing down of a person's property. But that term is misleading. "A great majority of estates are not taxed, and politicians have dripped the idea into many heads that everyone who inherits money is taxed on it," Bryan says. Some states do have "inheritance taxes" that more closely resemble a "death tax," he adds. But they're in the minority.
RELATED: Take a look at commonly overlooked tax breaks:
"Itemized deductions." These are expenses that tax filers can claim on their tax forms to reduce their tax bill. "In the tax world you either receive a standard deduction that is set by the [Internal Revenue Service] or you received itemized deductions, whichever is higher," says Breanna Reish, a certified financial planner professional in Riverside, California. "Itemized deductions are made up of the things that everyone keeps receipts for," she says. Those items might include donations, property taxes, unreimbursed employee expenses and medical costs.
"Modified adjusted gross income." This income calculation, commonly shortened to MAGI, is used to determine whether you qualify for certain tax deductions. It takes your adjusted gross income and adds back a few items, including student loan interest, certain tuition expenses and other deductions. "It's confusing because sometimes AGI matters and other times it's MAGI," says Marguerita M. Cheng, certified financial planner and co-founder of Blue Ocean Global Wealth in Gaithersburg, Maryland.
"Tax diversification." This strategy refers to using retirement and other accounts with a healthy mix of tax treatments. "It's jargon because it conflates tax planning with an investment concept," says Warren F. McIntyre, certified financial planner at VisionQuest Financial Planning in Troy, Michigan. While there isn't a better term to use, he says, a more descriptive phrase might be "don't put all of your investments in one tax basket."
"Tax return." This one seems simple, but people tend to confuse it with "tax refund." "A tax return is what you file," says Brian Pon, a certified financial planner and financial advisor at Financial Connections Group in the San Francisco area. "A tax refund is money you might receive after you file a tax return."
"Unearned income." This refers to income stemming from investments, inheritance and other sources beyond wages or salary. But calling it "unearned" is misleading. "If it isn't earned, did it drop into your checking account from the sky?" says Glenn J. Downing, certified financial planner at CameronDowning in Miami. "Did you steal it? Awful term. All legal income is earned. The IRS should simply call it what it is – investment income."