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Glossary Of Tax Terms

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Ability to Pay: Refers to the principle of fairness, which states people of different income levels and amounts of assets, such as property, stocks or savings accounts, should pay different tax rates.

Adjusted Gross Income (AGI): Gross income which is reduced by certain things, such as a deductible IRA contribution or interest on a student loan. This includes interest, wages, dividends and capital gains. It is considered the first step to calculating a final federal income tax bill.

Amount Due: Money owed to the government when the total tax amount exceeds the total payments.

Appeal: To call for a change or review of an IRS decision.

Benefits Received: The concept of paying taxes according to the amount goods and services received from the government.

Citizen or Residency Test: Allows taxpayers to claim an exemption for U.S. citizens who lived in Canada or Mexico for part of the year.

Deductions: Expenses that the IRS allows you to subtract from your AGI that arrives at your taxable income. The tax bill in most cases is lower, the lower your income is.

Dependency Exemption: Taxpayers can claim a qualifying child or relative, other than the spouse, as a dependent. The exemption is the amount claimed that is not subject to taxation.

Exemptions: Amount taxpayers can claim for themselves, their spouses or eligible dependents, which is not subject to taxation.

Filing status: Decides the rate for taxation of income. The statuses are: married filing a joint return, married filing a separate return, head of household, qualifying widow/er with dependent child.

Form W-4: Form completed by employers so employees can choose the amount of tax to withhold.

Gross Income: All money, property and other assets received that must be reported on a tax return.

Itemized Deductions: Expenses that are able to be deducted from an AGI to help one reach a smaller income amount that you have to use to calculate your tax bill. They include mortgage interest, medical expenses, charitable contributions, casualty and theft losses, other taxes, and unreimbursed employee expenses.

Luxury Tax: Tax paid on goods considered non-essential by the government.
Medicare Tax: Provides medical benefits for certain individuals when they turn 65.

Progressive Tax: A higher percentage of income is taxed in high-income groups and a lower percentage in low-income groups.

Proportional Tax: The same percentage of income is taxed in all income groups.

Refund: Money received from the government when tax payments were greater than the total tax.

Social Security Tax: Provides benefits for retired workers, the disabled and their dependents.

Standard Deduction: The fixed dollar amount a taxpayer is able to subtract from their income, and is available to all filers and is determined by the specific taxpayers filing status. They change every year due to inflation adjustments.

Tax Credits: Like credits received from a store, after your tax bill is calculated you can use the credit to reduce the amount of the check that you owe. They are more valuable than the deductions due to the fact that they directly cut the amount of taxes owed instead of reducing the amount of taxed income.

Tax Cut: When the government reduces the amount of taxes it takes.

Tax Evasion: Failure to pay, or an underpayment of taxes.

Tax Exemption: The proportion of a person's income that is not subject to taxation.

Tax Liability: The total amount of tax which must be paid.

Voluntary Compliance: The expectation of citizens to report their income accurately, voluntarily, and on time.

Withholding: Money that is held from an employee's paycheck, which will be credited against the employee's tax liability when they file their returns.