Glossary Of Tax Terms

Glossary Of Tax Terms Related Information:

Doing your taxes can be quite a stressful job and can result in a hectic time for you. To top it all, if you are not familiar with many of the terms used with taxation, then your job can become even more complex. Here’s a glossary of some common (and uncommon) taxation terms, which will give you a better understanding of taxes.

Ability to pay: People having differing amounts of wealth or earning different sums of income should pay tax as per their ‘ability to pay’ at different rates. It is a concept devised to be fair to everybody. All assets such as cars, stocks, homes, bonds, and savings accounts come under wealth, whereas salaries, wages, rent, interest, and dividends account for income.

Adjusted gross income: Gross income after availing any applicable deduction, such as student loan interest etc.

Amount due: Sum that has to be paid if a taxpayer’s tax payments are less than their total tax payable.

Appeal: Asking for an IRS decision or adjustment to be reviewed.

Adjustment to income: Expenses that can be reduced from income even if deductions are not listed.

Audit: The procedure of examining and verification of income tax returns and other transactions, by the IRS, usually resulting in tax consequences.

Benefits received: A model devised for tax fairness which conditions that people should pay taxes according to the amounts of benefits they get from any government goods and services.

Business: Any ongoing and regularized activity with income or profit as the end goal.

Casualty loss: A loss, which is the result of partially or completely destroyed property; the destruction of which was caused due to unavoidable and unexpected occurrences such as fires, floods, storms, hurricanes etc.

Charitable contribution: Any contribution, money, assets or property donated to a charity, which qualifies as one.

Child and dependent care credit: A credit on tax liability, which is an amount based on a percentage of any sum spent on the care of a child or any other dependent by an employed person.

Child tax credit: This is a credit on tax available to any person who has children who are under the age of seventeen.

Citizen or Resident Test: This test enables taxpayers to claim a dependency exemption for people who are citizens of the US for some part of the year or who reside in the United States, Canada, or Mexico for some part of the year, with the assumption that all other dependency tests are abided by.

Commission: Money received by employees as compensation for services performed. Commissions can either be based on a percentage of total sales made or can be a fixed amount per sale.

Compensation: Any salaries, wages, tips, commissions, fees, or self-employment income for services performed.

Compulsory payroll tax: A routine and compulsory tax garnered from employers and employees in order to finance particular plans.

Credits: Various reductions allowable by Congress in total tax liability.

Deduction: An amount that can be subtracted from taxable income.

Deficit: Making less money than your expenditure results in a deficit.

Dependency exemption: An exemption, which reduces the taxable income, which is available to taxpayers for any eligible dependents. The amount of exemption is preset but varies from year to year.

Dependent: Any person who meets preset five tests of dependency and can therefore qualify to be claimed as a dependent for taxation.

Direct Deposit: A quick, easy, and safe way to receive a tax refund. A direct deposit enables tax refunds to be deposited directly into the taxpayer's bank account, which is either a savings or checking account that qualifies for Direct Deposit. The taxpayer is given the required details and routing number that enables direct deposit into their accounts.

Direct tax: A tax that is imposed directly on you and cannot be passed on to others, for instance, the federal income tax.

Earned income: Income resulting from personal services and includes all kinds of wages, tips, salaries, bonuses, commission etc.

Earned income credit: A tax benefit that is allowed to employed people whose earned income and adjusted gross income is lower than a prefixed amount.

Employment expenses: Any routine and regular expenses that are unavoidable and necessary to carry out the work for which an employee is hired.

Entertainment expenses: Expenses, which are in the nature of entertainment, but are directly related to work and necessary for business purposes.

Estimated tax: A tax amount, estimated by a taxpayer, which he expects to pay in total taxes for a financial year. Estimated tax amounts are usually paid every quarter through vouchers.

Exemption: An amount from total income that a taxpayer can claim for himself or any eligible dependants. Exemptions reduce a person’s taxable income. Exemptions can be personal or dependency exemptions and the amount is fixed each year.

Excise tax: A kind of tax levied on the sale or use of particular goods or transactions.

Federal income tax: The tax levied by the federal government on peoples’ personal income, which is then used by the federal government in their national programs for defense, law enforcement, foreign dealings, interest on the national debt etc.

Filing status: An individual’s filing status ascertains the rate of income tax applicable to that person. Single, married filing a joint return, married filing a separate return, head of household, and qualifying widow or widower with dependent child, are the five different types of filing status.

Foster child: Any child who is not a natural or adopted child, but resided with the taxpayer for a full year and who was treated by the taxpayer as their natural born child.

Home office expense: Business expenses incurred by those who run a qualified business from their houses.

Income taxes: Taxes levied on the earned (salaries, bonuses, wages, tips, commissions) and unearned (interest, rent, dividends) income of people. Income taxes are of two types - personal income taxes, which are levied on individuals and corporate income taxes, which are levied on businesses.

Indirect tax: A tax for which you are not directly responsible and can be passed on to others. Example, business property taxes.

Internal Revenue Service: The federal agency or the Treasury Department division, which is responsible for collecting income taxes in the United States.

Itemized deductions: Reductions that are listed as appropriate, in the tax code, for reducing modified gross income.

Luxury tax: A kind of tax paid on luxurious and pricey products and services, which are not deemed by the government to be essentials.

Mass tax: A wide-ranging tax that has an effect on most of the taxpayers.

Married Filing Joint filing status: Your filing status that says that you are married and both you and your spouse want to file a combined return. Joint returns demand that you report your joint income and deduct your joint expenses as allowed.

Married Filing Separate filing status: Filing status of a person who is married but wishes to file separately from their spouses. This manner of filing is beneficial to those who only want to handle their own taxes, or who would end up paying lesser taxes than in a joint return.

Nontaxable income: Income that is not subject to tax.

Personal Identification Number: A personal identification number is given to taxpayers who wish to file their tax returns electronically, and acts as an electronic signature. The PIN has to be a five-digit number, which is selected by the taxpayers themselves and authenticates the validity of their electronically submitted tax returns.

Property taxes: Taxes levied on property, which essentially refers to real estate, but can also be levied on boats, vehicles, recreational automobiles, and business stocks.

Sales tax: A tax levied on the sale of retail products, which is a fixed percentage of the total retail cost.

Standard deduction: A prefixed sum of income, which cannot be taxed, and is available to those who do not itemize deductions.

Taxable income: The amount of income that is subject to tax. This amount is reached at after availing all allowable deductions and exemptions.

Tax avoidance: Any deed undertaken to reduce the amount of tax liability and increase the income after taxes.

Tax code: The authorized body of tax laws, rules and regulations.

Tax credit: A dollar-for-dollar amount that can be reduced from taxes. Credits are subtracted directly from the amount of owed taxes.

Tax cut: A reduced amount of taxes accepted by the government.

Tax deduction: A personal expense, business expense, or any amount that reduces the taxable income.

Taxes: Mandatory payments of money to the government, which is then used by the government to make available public goods and services, which benefit the entire community.

Tax evasion: Non-payment of taxes or an intentional underpayment of taxes.

Unearned income: Income which has not been earned as a result of services given, but has been received by way of interest, dividends, rent, and royalties.

Worksheet: A form that is given to taxpayers, by the IRS, to gather information, but which does not need to be filed with the tax return.