Glossary of Basic Tax Terms

  • 1040 Form - The standard IRS form used by individuals to file their income tax return. This form has several variations including, most notably, the 1040A and 1040EZ.
  • Adjusted Gross Income (AGI) - The amount of income which is taxable, consisting of gross income from all taxable sources minus all allowable adjustments.
  • Alternative Minimum Tax (AMT) - A tax calculation that adds certain normally tax-deductible items back into the adjusted gross income. If the AMT is higher than the regular tax liability for the year, the regular tax and the amount by which the AMT exceeds the regular tax are due and payable. Although much maligned, the Alternative Minimum Tax was initially designed to prevent taxpayers from avoiding their fair share of tax liability.
  • Capital Gain - An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the price at which it was purchased. A capital gain may be classified as short-term (one year or less) or long-term (more than one year) and must be claimed on an income tax return.
  • Child Tax Credit - A credit which can be claimed by primary taxpayers for each dependent child who is under the age of 17 at the end of the tax year.
  • Deduction - Any allowable item or expenditure that can be subtracted from gross income in order to reduce the amount of income which is subject to taxation.
  • Dependent - A child, spouse, parent, or certain other relative to whom the primary taxpayer contributes all or a major portion of necessary financial support.
  • Earned Income - Income derived from active participation in a trade or business, including wages, salary, tips, commissions and bonuses. (See also Passive Income.)
  • Earned Income Credit - A refundable tax credit that reduces or eliminates the taxes that low-income wage-earners pay. It can also frequently operate as a wage subsidy by lowering the amount of tax owed to less than zero. (See also Non-Refundable Tax Credit.)
  • Estate Tax - The amount of tax levied on a deceased individual’s taxable estate (which consists of the value above a set exemption amount of the gross estate minus any allowable deductions). The estate tax does not apply to the transfer of assets to a surviving spouse, which is known as the “marital deduction”.
  • Exemption - A deduction, based on a status or circumstance, allowed by law to reduce the total amount of taxable income.
  • Filing Status - The category which defines the type of tax-return form that an individual will use; it is closely tied to marital status. There are five filing statuses: single, married filing jointly or surviving spouse, married filing separately, head of household, and qualifying widow(er) with dependent child.
  • Itemized Deduction - A deduction from an individual’s taxable adjusted gross income that consists of money spent on certain goods and services throughout the year. The specific deductions that are allowed are outlined by the IRS and include such expenses as mortgage interest, state and local taxes, gifts, and medical expenses; they are documented on IRS Form 1040 Schedule A.
  • Non-Refundable Tax Credit - A tax credit that cannot reduce the amount of tax owed to less than zero. If the credit were able to reduce the amount of tax owed to less than zero the taxpayer would be entitled to receive a payment from the IRS.
  • Passive Income - Earnings derived from a rental property, limited partnership or other enterprise in which an individual is not actively involved. (See also Earned Income.)
  • Property Tax - A tax assessed on real estate by local governments, usually based on the assessed value of the property along with its land.
  • Self-Employment Tax - A tax imposed on self-employed people, who must pay this tax in order to receive Social Security benefits upon retirement. The amount of this tax may be reduced if the individual also pays Social Security and Medicare taxes through another employer.
  • Standard Deduction - A base amount of income which is not subject to tax. This base amount is used to reduce a taxpayer's adjusted gross income if he or she does not choose the itemized deduction method of calculating taxable income. The amount of the standard deduction is based on the taxpayer's filing status, age and whether or not he or she is blind or can be claimed as a dependent on someone else's tax return.
  • Tax Credit - A dollar-for-dollar reduction which lowers the actual amount of tax owed.
  • Taxable Income - The amount of net income (gross income minus all adjustments, deductions, and exemptions) that is used to calculate income tax owed.

blog comments powered by Disqus