Tax Glossary
A
Adjusted Gross Income (AGI): The total income an individual earns, including wages, dividends, and other sources, minus specific deductions such as business expenses and student loan interest.
Allowable Deductions: Expenses that can be subtracted from your income, reducing the amount subject to taxation.
Amortization: The gradual reduction of an intangible asset’s value over time, often used for expenses like startup costs.
B
Back Taxes: Unpaid taxes from previous years, which may accrue penalties and interest.
Bracket Creep: When inflation pushes an individual into a higher tax bracket, resulting in increased tax liability.
Business Expenses: Costs incurred in the course of running a business that may be tax-deductible.
C
Capital Gains: Profits from the sale of assets like stocks or real estate, subject to specific tax rates.
Child Tax Credit: A credit provided to taxpayers for each qualifying dependent child, reducing the overall tax liability.
C Corporation: A business entity taxed separately from its owners, commonly used for larger businesses.
D
Dependent: An individual, such as a child or relative, who relies on another person for financial support. Claiming dependents can lead to tax credits.
Direct Tax: A tax paid directly by an individual or entity to the government.
Deduction: An expense that can be subtracted from an individual’s or business’s income, reducing the taxable amount.
E
Earned Income Tax Credit (EITC): A refundable tax credit for low to moderate-income individuals and families.
Estate Tax: A tax levied on the transfer of an individual’s property after death.
Exemption: An amount of money taxpayers can subtract from their adjusted gross income for each eligible dependent.
F
Filing Status: The classification that defines the taxpayer’s family situation and determines tax rates.
Flat Tax: A tax system where a uniform percentage of income is taxed, regardless of the taxpayer’s income level.
Form 1040: The standard individual income tax return form used in the United States.
G
Gift Tax: A tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.
Gross Income: The total income earned by an individual or business before deductions.
H
Home Office Deduction: A deduction for business use of a portion of an individual’s home.
Hybrid Tax: A tax system that combines elements of both progressive and regressive taxation.
Health Savings Account (HSA): A tax-advantaged savings account for individuals with high-deductible health plans.
Head of Household: A filing status for unmarried individuals who financially support and maintain a household for a qualifying dependent.
I
Income Tax: A tax on an individual’s or entity’s income, typically calculated as a percentage of income.
Individual Retirement Account (IRA): A tax-advantaged account for individuals to save for retirement.
Inheritance Tax: A tax imposed on the value of an estate before it is distributed to heirs.
J
Joint Return: A tax return filed by a married couple, combining their incomes and deductions.
Joint and Several Liability: Both spouses on a joint tax return are individually and jointly responsible for any tax, interest, or penalties owed.
Job-Related Expenses: Deductible expenses incurred in the course of employment.
K
Kiddie Tax: Taxation of a child’s unearned income at the parents’ tax rate.
Keogh Plan: A tax-deferred retirement plan for self-employed individuals.
Know Your Customer (KYC): Verification procedures used by financial institutions to confirm the identity of their clients.
L
Liability: The amount of money a taxpayer owes to the government.
Long-Term Capital Gain: Profits from the sale of assets held for more than one year, subject to preferential tax rates.
Lump-Sum Distribution: A one-time payment of an entire pension or retirement account balance.
M
Married Filing Jointly: A filing status for married couples who choose to file a joint tax return.
Medicare Tax: A tax on earned income to fund the Medicare program.
Mortgage Interest Deduction: A deduction for interest paid on a mortgage used to acquire, build, or improve a primary or secondary residence.
N
Net Investment Income Tax (NIIT): A tax on certain investment income for higher-income individuals.
Nonrefundable Tax Credit: A tax credit that can reduce the amount of tax owed to zero but does not result in a refund.
Notice of Deficiency: A formal communication from the IRS informing a taxpayer of a proposed change to their tax return.
O
Offer in Compromise: An agreement between a taxpayer and the IRS to settle a tax debt for less than the full amount owed.
Operating Loss: When business expenses exceed income, resulting in a loss for tax purposes.
Overpayment: A payment made to the IRS in excess of the amount owed.
P
Pass-Through Entity: A business structure that does not pay income taxes itself but passes income and deductions through to the owners.
Payroll Tax: Taxes withheld from an employee’s paycheck to fund Social Security, Medicare, and other programs.
Penalty: A financial consequence imposed by the IRS for failure to comply with tax laws.
Q
Qualified Dividends: Dividends that meet specific criteria for lower tax rates.
Qualified Widow(er) with Dependent Child: A filing status for widows or widowers with a dependent child who can use the married filing jointly tax rates for two additional years.
Qualified Business Income Deduction (QBI): A deduction for certain pass-through businesses, reducing taxable income.
R
Real Property: Land and anything permanently attached to it, such as buildings.
Refundable Tax Credit: A tax credit that can reduce the amount of tax owed below zero, resulting in a refund.
Required Minimum Distribution (RMD): The minimum amount an individual must withdraw from certain retirement accounts after reaching a certain age.
S
Self-Employment Tax: A tax on net earnings from self-employment to fund Social Security and Medicare.
Standard Deduction: A fixed dollar amount that reduces the taxpayer’s adjusted gross income.
State Tax: Taxes imposed by individual states on income and other sources.
T
Taxable Income: The portion of income subject to taxation after deductions.
Tax Evasion: The illegal act of not paying taxes owed to the government.
Tax Fraud: The intentional act of providing false information on a tax return to avoid paying taxes owed.
U
Underpayment Penalty: A penalty imposed by the IRS for not paying enough taxes throughout the year.
Unearned Income: Income not derived from employment, such as dividends or interest.
Unified Credit: A tax credit that can be applied against both gift and estate taxes.
V
Value Added Tax (VAT): A consumption tax levied at each stage of the production and distribution chain.
Victim of Identity Theft: A person whose personal information has been stolen and used to commit fraud, often resulting in tax-related issues.
Virtual Currency: Digital or virtual currency used as a medium of exchange, such as Bitcoin.
W
Withholding Tax: Taxes withheld from a taxpayer’s income by an employer or payer, typically to cover income tax liability.
W-2 Form: A form provided by employers to employees, reporting income earned and taxes withheld during the tax year.
W-4 Form: A form completed by employees to determine the amount of federal income tax to be withheld from their paychecks.
Y
Year-End Bonus: Additional compensation provided by employers to employees at the end of the calendar or fiscal year.
Yearly Limit: The maximum allowable contribution to certain tax-advantaged accounts within a calendar year.
Yield: The income generated by an investment, typically expressed as a percentage of its market value.
Z
Zero-Rated: Goods or services that are taxable at a 0% rate, meaning no tax is charged but input tax can be claimed.
Zoning Tax: A tax imposed by local governments on property owners based on the designated use of the property.