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Glossary of Common Tax Terms

Below is an A-to-Z list of definitions for a number of common terms and phrases related to income tax.

Adjusted gross income. Often referred to as AGI, this is a taxpayer's income minus allowable reductions

Adjustment to income. A deducible expenditure, even if the taxpayer does not itemize deductions

Adoption credit. An income tax credit for qualified adoption expenses that cannot exceed the amount of tax paid

Advance earned income credit. Employers make advanced payments of the earned income credit to employees through their paychecks

Alternative minimum tax. To prevent high-income individuals from claiming too many tax benefits, the IRS requires some taxpayers to calculate and pay a minimum tax, no matter how many deductions and credits they could otherwise claim

Audit. When the IRS examines and verifies your tax return or any other transaction with tax consequences to ensure you have paid the correct amount of tax

Capital gain. The profit earned from the sale of real estate, assets, securities, or investments

Casualty loss. A loss caused by the partial or complete destruction of property resulting from an unexpected event, e.g., storms, fires, floods, etc.

Charitable contribution. Property or money donated to a qualified charity or nonprofit for which you can claim a tax deduction

Child and dependent care credit. A tax credit in the amount of a percentage of the amount expended on dependent or child care by an employed individual

Child tax credit. A tax credit available to people with children under the age of 17

Compensation. Any payment received for services you have provided, including wages, salaries, commissions, stock options, and fringe benefits

Credits. Reduces the amount of tax you owe or increases your refund by one dollar for each dollar of credit you receive

Deduction. Reduces the amount of your income that is subject to tax, thereby reducing your tax bill

Deductible medical expenses. The IRS allows you to claim a deduction for certain medical expenses that exceed 7.5% of your adjusted gross income

Dependent. A child under the age of 19 (24 for a full-time student) or family member may be claimed as a dependent on your tax return if you contribute to their support

Depreciation. A reduction in the value of a business asset due to wear and tear or obsolescence that may be claimed as a deduction

Earned income. The taxable income you receive from working for someone else or from your own business

Earned income tax credit. A federal tax credit for low- to middle-income workers that can be refunded to taxpayers when the credit amount exceeds the amount of tax owed

Employment expenses. Ordinary expenses necessary to perform the duties for which an employee was hired

Entertainment expenses. Spending for entertainment directly related to the conduct of business, but which is not deductible

Estate tax. A tax paid by the estate of a deceased person before their money and property are passed on to their heirs

Estimated tax. When a taxpayer is not having taxes withheld from their income, they must make regular payments — usually every quarter — based on an estimate of what their tax bill will be for the year

Excise tax. A tax imposed on specified goods, services, and activities

Exemption. An amount that can be subtracted from your income, thereby reducing the amount of income that can be taxed

Fair market value. The price at which property would be sold on the open market by an informed seller to an informed buyer

Federal Income Tax. Tax imposed by the federal government on the income of U.S. citizens, businesses, and other legal entities

Form 1040. The tax form used by most individuals to calculate their tax due and report their tax payments

Head of household. An unmarried taxpayer with dependents who pays more than half of the household's costs, usually a single parent or a divorced parent with custody of their children

Hobby loss. A loss from an activity pursued for pleasure that cannot be deducted

Home office expense. Costs associated with running a business or working as an employee from a residence that can be claimed as a deduction by homeowners and renters

Independent contractor. A person or entity who has been hired to perform work for a business, but is not treated as an employee for tax purposes

Individual Retirement Account. Often referred to as an IRA, an account that allows a taxpayer to save for retirement by putting some of their income into an account where it will not be taxed until it is withdrawn after retirement, when it is usually taxed at a lower rate

Internal Revenue Service. The federal agency responsible for collecting taxes, administering tax laws, and enforcing the tax code

Itemized deductions. Expenses that can be deducted by taxpayers who choose to itemize their deductions, usually because it leads to greater tax savings than claiming the standard deduction

Married filing jointly. The tax status of a married couple that agrees to file a single joint return reporting both of their incomes and the taxes they owe

Married filing separately. The tax status of a married couple that chooses to file separate tax returns reporting each spouse's income and tax liability

Modified adjusted gross income. Usually the adjusted gross income with various items added back in, depending on why it is calculated

Nontaxable income. Income that is not taxed

Payroll taxes. These are taxes usually deducted from the paycheck of an employee and include Social Security taxes and Medicare taxes

Permanent and total disability. A disability expected to last at least a year and keeps an individual from being employed

Personal exemption. An amount the IRS allows you and your dependents to automatically deduct on your tax return if you choose not to itemize your deductions

Property taxes. State or local taxes that are paid on property owned by a taxpayer, most often real estate

Sole Proprietorship. A business owned and controlled by one person who pays the taxes on its income

Qualifying widow(er). The filing status used by the spouse of a deceased individual with whom they were filing jointly for the two years after their spouse's death

Real property. A parcel of land and everything that is permanently attached to it

Sales tax. A state or local tax equal to a percentage of the sales price of an item paid by the buyer or seller

Schedules. IRS forms used to report various kinds of tax information on income, deductions, and credits

Self-employed. A person who earns their income by working for themselves and not someone else, who must pay self-employment taxes

Standard deduction. A predetermined amount of income not subject to tax and claimed when an individual does not itemize deductions

State taxes. A variety of taxes imposed by states, including taxes on income, sales, property, and inheritances

Student loan interest. The interest you pay to your student loan lender each year that can be claimed as a deduction of up to $2,500 on your federal tax return

Tax benefit. A tax law that helps you reduce the amount of tax you owe, including tax deductions and credits

Tax bracket. The range of incomes subject to tax at specified rates that is adjusted for inflation for each tax year

Tax burden. A ratio of the tax paid by an individual as a proportion of their total income during a specified time period

Tax identification number. A number that is given to a taxpayer by either the Social Security Administration or the IRS to help with the processing of tax returns

Tax levy. The seizure of property by a federal, state, or local tax authority to pay tax that is owed

Tax preparer. A person who prepares and files income tax returns on behalf of individuals and businesses

Tax refund. The money returned to you by the federal, state, or local government for tax overpayments

Taxable income. Adjusted gross income minus deduction and exemption amounts

Unearned income. Income not derived from services performed, such as interest, dividends, and royalties

Worksheet. An IRS document provided to the taxpayer to perform necessary calculations and determine their tax rate that is not usually filed with the return

Get Legal Help Understanding Common Tax Terms

Learning the vocabulary of tax claims is just one small part of the enormous system of tax laws that can come into play when you have a tax issue. Professional assistance is often necessary since, even within the legal community, tax issues are acknowledged as particularly complicated. Contact a qualified tax attorney to better understand common tax terms and get help resolving your tax issues.

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