Common Income Tax Questions & Definition Glossary:
Below are federal income tax definitions for some of the phrases and tax questions that you may encounter when filing your income taxes. Our goal is to help you find the answer you are looking for as quickly as possible, but should you need assistance with additional phrases that you are not familiar and cannot be found here, please do not hesitate to contact us.
ABLE stands for “Achieving a Better Life Experience.” It is a saving account that is tailored toward helping families who are facing the financial hardships of raising children with disabilities. The account allows families and those with disabilities to save for disability-related expenses in a way that has unique tax advantages.
Adjusted Gross Income
For an individual, Adjusted Gross Income is the total gross income for the year less allowances for personal exemptions and itemized deductions. This amount is the figure the IRS uses when determining the tax due by the individual. Included in this is all income you received (both wages and self-employment payments) as well as any goods, property or services received in lieu of payment.
This term refers to the tax credit given to individuals or couples that adopt a child within a tax year. The credit is meant to defer the costs associated with the adoption, including legal fees, home inspections, and even travel and incidentals. Taxpayers are allowed to combine the adoption credit with other child tax credits and deductions.
After-Tax Contributions are also called Voluntary Contributions. These are amounts deposited by a individual into an IRA or other retirement account after taxes have been paid on that amount. The reason these contributions are made is that, when the money is withdrawn at a later date, fewer taxes will be owed at that time.
Alternative Minimum Tax (AMT)
The AMT was created to prevent middle and upper-class citizens from overusing deductions and exemptions. A taxpayer must pay this if their calculated federal income tax falls below what the AMT amount is. For more on how the AMT may impact you, visit this page.
This includes everything that you own that has a monetary value (i.e. everything worth money). Tangible assets can be physically touched. Land, buildings, automobiles, jewelry, artwork and collectibles are tangible. Intangible assets have value but do not have solid form. Documentation is used to show that they exist. Ownership of stock or bonds are an example of this.
Each year, people and companies are responsible for filing their own income taxes. The federal government cannot realistically check everyone's taxes for accuracy, but they do check those tax returns that raise red flags in their system. An audit is when the Internal Revenue requests a person or company's tax information to make sure that they completed their taxes correctly.
If a taxpayer has fallen behind on paying his or her taxes, he or she may owe back taxes. These are taxes owed from previous tax years. Depending on the circumstances, fees and penalties might be owed on back taxes.
Backup withholding is a type of withholding that the IRS may require in certain specific situations. Some of these situations include incorrect reporting of the TIN or Social Security number to a bank or business for investments or accounts, and under reporting interest income, which may cause the IRS to request that the payer withhold interest.
This is a legal process which allows a person to get relief from debts that he or she can't afford to pay. Bankruptcy may help to cancel some of or all of an individuals obligations. It can also provide more time to repay certain creditors. Some debts, such as income tax and student loans, cannot be canceled through bankruptcy.
Bona Fide Residency
A bona fide residency is a permanent address that can be documented showing that a person lives somewhere. This is required for rights such as voting and when running for public office. It can sometimes impact taxes when an individual has multiple residences. When proof is required, typically it can be established with a driver’s license, tax return, or voter registration card.
The Buffett Rule, named after billionaire Warren Buffett, is a proposed law that imposes a 30% minimum tax rate on all individual taxpayers making over $1,000,000. Anyone below this income level would not be impacted. The goal of the tax is to ensure that the richest American taxpayers are not paying a lower tax rate than middle class Americans.
This is the period of time that is defined as one year by a typical calendar. It usually includes the period from January 1st to December 31st. It should be noted that a different period has to be specified in order for this term to refer to something else.
Capital Gains or Losses
Any increases or decreases in value of a capital asset (such as stocks, bonds or real estate) at the time which it is sold constitutes a capital gain or loss to be reported on the tax return.
Cash Liquidation Distribution
When a corporation is dissolving or going out of business, cash liquidation distribution occurs. By law, the company is required to pay cash to its shareholders in exchange for their stocks in the corporation. In addition, if the shareholder earns more than $600 for their part of the distribution, the shareholder will be sent a Form 1099-DIV documenting the proceeds.
This is destruction or loss of property caused by a sudden, unpredictable event such as a flood, fire, earthquake, or other causes. Gradual deterioration of property over a period of time that results in loss or damage is, however, not a casualty loss. When adequate coverage is not provided by insurance, casualty loss can be tax deductible, but you will need proof that the property was damaged during such events and you have been reimbursed for the loss.
This is any donation of cash, stock, services, or goods made to a registered non-profit organization. In the case of non-money donations, an estimate of the value must be given. This value is based on the current re-sale value of the goods donated. Services can only be counted under specific circumstances.
Child Tax Credit
This is a tax credit designed for low to middle income earners with children under the age of sixteen. A credit is applied for each child. A taxpayer can only qualify by meeting income requirements. The credit can be taken even if the tax bill of the taxpayer does not exceed the amount of the credit.
Consolidated Omnibus Budget Reconciliation Act (COBRA)
The COBRA program offers temporary medical insurance to Americans who lose their coverage due to events such as job loss. For example, when someone receives health insurance from an employer and employment is terminated, they can qualify for COBRA coverage after becoming unemployed. The same goes for the children and other family members who have lost coverage as a result of this termination. This program allows people to remain insured while they look for replacement medical insurance and employment.
This is a type of tax that has been proposed by various groups as a replacement for our current income tax system. The tax would be very similar to the sales tax that many people already pay to their counties, cities, and states. It is designed to make everyone pay taxes, reduce filing expenses, and encourage savings.
Combat Zone Exemption
If an active duty military member is assigned to an identified "combat zone" and earns pay during this assignment, it is nontaxable and reported in a special section of their W-2 (Box 12 (code Q)). These zones are regularly updated and can include temporary assignments, staging assignments associated within the combat zone, and those receiving temporary hostile pay while in such zones. This pay can be accounted for when determining qualifications for certain tax credits, so while tax-free it can impact the filer in other ways. Furthermore, if the filer was in an active combat zone within the last 180 days, they will receive an automatic two-month extension for their end of year filing.
Cost basis is the total outlay incurred in acquiring and preparing an asset for use in a business. The starting point for depreciation is cost basis reduced by any salvage value. Ongoing basis is reduced as periodic depreciation deductions are taken against business income. Adjusted cost basis is considered in the event of asset disposition to determine gain or loss.
Coverdell Education Savings Account
Coverdell is a trust for beneficiaries under the age of 18 that can be used to pay for their education from grade school to college. Contributions can be made at any USA bank and funds can be withdrawn for education expenses tax free. A single beneficiary is allowed multiple accounts, but the total contributions cannot exceed $2000 per year.
The death tax is a popular term for what is more properly called the estate tax. The estate tax is the amount of tax paid when a person dies and leaves money to heirs. The first five million dollars of an estate is exempt from taxation. The maximum rate of taxation on estates over this amount is 40 percent.
Deferred income is income not reported as taxable in the initial year of receipt. Tax code provisions allow filers to reduce taxable earned income by contributing to qualified retirement accounts. Tax on the contributed amount is deferred to a later year in which withdrawal is made from the retirement account. The withdrawal becomes taxable income in the later year.
Dependent Care Credit
This is a tax credit made available to people who are paying for the care of a legal dependent. It is typically used to compensate working parents for day care expenses. Under certain circumstances, however, it can also compensate people who are paying for help to take care of an elderly relative.
Dependent Care Flexible Spending Account (FSA)
A tool which allows account holders to set aside pretax funds to pay for expenses such as daycare for eligible dependent minors or adults. Contributions to these are pre-tax meaning funds are taken out of the account holder's paycheck before taxes are withheld.
Depreciation is a deduction taken in order to recover the acquisition costs of equipment and buildings used in a business. It is based on the useful life of an asset and is taken over a period of years. Depreciation effectively offsets income for tax purposes. The ongoing cost basis of each affected asset is also reduced accordingly.
Assets rarely retain their value. They wear down, become depleted, or obsolete. When a taxpayer sells or disposes of property in which depreciation deductions were claimed, some or all of the gain must be recognized as ordinary income, not as capital gains. This is referred to as depreciation recapture. Unless an exception applies, depreciation recapture applies as ordinary taxable income. Read on for a more detailed explanation.
Individuals who are eligible for a refund of their federal income tax have the option of having their IRS refund deposited directly into their checking account or savings account in lieu of receiving a paper check. Taxpayers who opt for direct deposit receive their refund more quickly than if they opt for a mailed paper check.
Disability Tax Credit
Someone with a prolonged and serious physical or mental impairment may be eligible for this tax credit. It provides relief from certain expenses facing disabled people. Disabilities must last for at least 12 months and be certified by a qualified practitioner to qualify.
Disqualifying income is income that is not qualified for claiming the earned income tax credit. If this income exceeds a certain amount, the taxpayer cannot claim this credit. Examples of disqualified income includes interest money, royalties, dividends, net income from rent, capital gains and passive income that is not from self-employment.
A payment collected from a corporation for investing in their company (investing in the form of a share purchase). Dividends represent a percentage of the company's total distribution dividend by the number of shares outstanding.
Double taxation occurs when the same income is taxed twice. It usually refers to dividends paid out by corporations. Corporate earnings are first taxed on the company income tax return. Any earnings paid out as dividends are then taxable to the recipient on that person’s individual income tax return. The amount is subjected to income taxation two times.
The Earned Income Tax Credit, or EITC, is a deduction designed to benefit low- to moderate-income workers by reducing the taxable income they are assessed based on income, marital status and the number of dependent children in the household. The EITC is a refundable credit based on the amount of earned income. Unlike most credits that must offset taxes due, the earned income credit can be received even if the taxpayer paid little or no actual income tax. Single taxpayers can qualify for lesser amounts, but most filers have one or more qualifying children. more on the EITC
The exact type of education credits can vary, but this term refers to the set of credits made available to taxpayers who paid higher education costs. Depending on the type of credit it is possible for students and their parents to qualify.
Effective Tax Rate
The aggregate rate in which a filer actually pays. read more on tax rates
Certain expenses that are associated with the cost of having a job can be deducted on a tax return. Typically this includes the cost of office supplies, tools, and in certain cases uniforms. The cost of driving to and from work is not deductible.
If you entertain clients for your business and spend your own money to do so, a portion of your expenses can be deducted from your taxes. In most cases, 50% of qualifying costs can be deducted for items like food, beverages and other entertainment related items; a receipt can be used as documentation for your tax records.
This is a tax paid by large estates prior to their being disbursed. Exemptions to the estate tax vary by year, but historically estates with a total worth of $2 million or less are exempt. All aspects of the estate are included in this calculation, including real estate, equipment, jewelry, vehicles, and other items.
Estimated Tax Payment
The calculation and payment of income tax in preliminary stages prior to the filing of a return, where the tax is paid in quarterly portions. Once the remunerator submits this, the paid sum is applied to owed taxes for the pursuing return. Any overpayment will be refunded once the return filing takes place.
Aside from income taxes, state, federal, and local governments may also collect excise taxes. This is a tax levied on the purchase or consumption of certain items. For example, the price of gasoline includes several excise taxes that may be collected to fund such things as road maintenance, investment in renewable energy sources and more. Taxpayers may sometimes be eligible for a refund of some excise taxes such as what they have paid on long-distance telephone service.
A failure to file (FTF) means that the taxpayer hasn't sent a required tax return to the IRS. This can result in civil or criminal penalties. The consequences partially depend on an individual's apparent intent. For example, the government penalizes FTF offenders more harshly when they also try to conceal earnings. Some people with low incomes don't need to file returns; the rules vary depending on a person's age, marital status and occupation.
Failure to Pay
A failure to pay (FTP) occurs when a person doesn't send a tax payment on or before the due date. This may result in a monthly fine equal to 0.5 percent of the money owed. However, taxpayers can avoid such penalties by proving that they have legitimate reasons for paying late. The IRS typically charges smaller fines when someone makes an effort to file a tax return and send a portion of the amount due.
This type of legal arrangement is designed to protect and maintain assets. Personal assets are transferred to the trust. Legally, the family no longer owns the assets. Instead, the trust has ownership of them. Most people shift their resources into a family trust to keep them safe and to decrease their tax bracket.
Federal Poverty Level
Every year, the federal government of the United States decides an income level below which individuals are determined to be living in poverty and are eligible for various tax credits and subsidies. Credits and subsidies may be available to those who earn anywhere from under the Federal Poverty Level to 4X it.
FICA - Federal Insurance Contributions Act Tax
This funds Social Security and the Medicare system in the United States. The tax per employee for Social Security is 12.4%, half of which is paid by the employee and half of which is paid by the employer. Similarly, the total tax per employee for Medicare is 2.9 percent, which is shared equally between the employee and employer. The Social Security portion of FICA has a wage base limit which changes periodically. There is no such limit for the Medicare portion.
A fiduciary refers to the person who is officially appointed to oversee assets that are held in trust for another. The fiduciary is responsible for managing the assets in a way that benefits the person who initiated the trust or specified beneficiary.
There are five separate filing status choices: single; married filing a joint return with your spouse; married but each filing a separate return; head of household; or qualifying widow or widower. Whichever the filing status, it based upon the status as of Dec. 31 of the filing tax year. more
A financial hardship may be a job loss, or other income losses that may impact the ability of taxpayers to pay their federal income tax. The IRS sometimes provides options for those who are unable to pay their federal income tax because they have suffered a financial hardship.
Flexible Spending Account
A flexible spending account (FSA) is an account set up by an employer that allows employees to set aside some of their income tax-free for certain expenses. The most common FSA types are the medical FSA and the dependent care FSA. The medical FSA is set up to cover approved medical costs such as doctor visits, prescription medications and surgeries. A dependent care FSA enables account holders to use monies to pay for dependent care expenses such as daycare. The IRS sets an annual limit on how much employees can contribute to each type of FSA.
Foreign Corrupt Practices Act
Employees of international organizations, such as the United Nations or the World Trade Organization, are considered foreign officials under the the Foreign Corrupt Practices Act (FCPA). In general, an illegal bribe or kickback to an official or an employee of a government is not tax deductible. The FCPA generally makes it illegal for Americans or their agents to make or offer, directly or indirectly, payments to influence official action to obtain business.
Foreign Tax Credit
Many investors pay taxes on stocks held in other nations. Others pay on their business income in foreign countries. The IRS allows those who pay taxes on earnings and investments in other countries to receive credit on their U.S tax returns for taxes already paid to another country. This is designed to avoid taxing Americans twice on the same income.
A dependent child who is detached from their custodial support, which could be a guardian or parent, and lives in a licensed foster home that is qualified by state regulations. The foster home comprises of foster parents.
Filing status available to certain "single" taxpayers who qualify. more
Health Savings Account
A Health Savings Account (HSA) is a savings option that allows individuals to set aside income for medical expenses. Individuals do not pay federal taxes on this sum. An HSA is associated with a high-deductible insurance plan, and the account holder governs how the money is spent and saved. Each year, the IRS limits how much can be contributed to one’s HSA. Any money set aside that is not used in a year remains in the account until it is spent, which means that the account balance of an HSA can grow over time. For more visit this page.
Hobby Loss Deduction
A hobby loss deduction can be taken as an itemized deduction, but its extent is limited compared to deductions for profitable endeavors, which are generally not limited. The slippery slope of this rule is when a business continues to incur losses year after year and the IRS might begin to question its legitimacy as a business.
Home Office Expense
This is a deduction that can be taken by people who own a business, work from home and/or are self-employed. The deduction can only be for an area of the home that is used solely for the purposes of a business or job. Costs associated with the space, such as utilities, can also be deducted.
This is loss of money or property caused by theft—including identity theft and tax-related identity theft. The loss and expenses can be tax deductible, but you will need proof of the theft or that your identity has been compromised.
Independent contractors provide goods and services on a periodic basis, and are responsible for the costs associated with their service including the full FICA withholding. Since business are not responsible for paying FICA or other benefits to independent contractors, these service providers are sometimes preferred versus adding permanent employees.
Individual Taxpayer Identification Numbers (ITIN)
The Internal Revenue Service issues Individual Taxpayer Identification Numbers (ITIN) to individuals without Social Security Numbers so that they may pay their tax bill. This is a nine-digit number that appears on the card like this xxx-xx-xxxx. In order to file your taxes, you must have your valid SSN or ITIN.
A method wherever a remunerator is involuntarily forced to eliminate property that has been purloined, condemned, destroyed or repossessed, and another piece of property or money is received in role of the property. Involuntary conversion may end up an attainable gain or loss to the remunerator, as long as the property wasn't the taxpayer's main home.
When filing taxes, people may receive deductions, or money off their taxes, for certain expenses such as charitable donations or medical expenses. People can add up, or itemize, all their deductions and see how much money they are entitled to take off of their taxes. People can choose to take whichever is greater: the standard deduction or an itemized deduction.
This refers to a situation in which two persons or parties share the ownership of a piece of property. Under joint tenancy, both persons have full right to the property, and the possession of it transfers entirely to the other person or party upon the death of one of the joint tenants. A house held in common by a married couple is among the most common examples of joint tenancy.
Both students and those who pay for student expenses are eligible to receive this credit. This credit does not require students to be enrolled in a traditional four-year degree program. It is offered for up to $2000 per tax year and can be given to students who are taking individual classes and/or who are pursuing alternative academic routes. For more information on this credit click here.
When a taxpayer sells property they typically pay tax on the gain at the time of sale. However, if a taxpayer exchanges a business or investment property solely for another piece of business or investment property, this is called a “like-kind” exchange wherein section 1031 of the Internal Revenue Code allows a tax deferral. Like-kind exchanges are sometimes referred to as "tax-free exchanges." This is a misnomer, however, as the reality is that recognition of the gain is deferred until the property acquired is disposed of in a subsequent taxable transaction. Thus, the gain is merely deferred, not tax-free.
Limited Liability Corporation (LLC)In the United States, filing as a limited liability corporation (LLC) allows a business and its owners to receive the protections that corporations enjoy while paying business taxes as a part of personal income. The owners or members of an LLC are subject to self-employment tax, and their personal assets are kept separate from business assets in the event that the LLC is sued and must pay damages of some kind.
A luxury tax is a tax leveled on items that are not essential or deemed necessary by the average person. Luxury taxes are often known as "sin taxes" or excise taxes. These taxes can be found most often on alcohol, tobacco products and vehicles that exceed a certain price. These taxes tend to vary on a state by state basis.
When filing taxes, people can choose from a few different tax statuses: head of household, married filing jointly, married filing separately, or single. Each status has a unique tax rate, with married filing jointly having the more favorable rate for tax payers. Couples who are legally married and submit their taxes together on one tax return qualify for this status.
Married Filing Separately
The filing status of married filing separately is available to married persons who choose not to use the married filing jointly status. For personal or financial reasons, legally married tax filers may wish to avoid the married filing jointly obligations. Couples going through divorce often choose the status during the breakup in order to minimize any further complications.
The federal government developed this program to provide medical services for Americans who have reached 65 years of age. It is funded through FICA of which employers and employees pay an equal portion. Self-employed taxpayers also fund Medicare through Self-Employment Tax (SET).
The mileage allowance is a tax deduction for wear and tear and gas used in a vehicle when that vehicle is used for business, medical, or charitable purposes. The IRS sets a standard rate for each type of mileage allowance. The current allowance is 56.5 cents per mile for business, 24 cents for medical and 14 cents for charitable use.
Modified Adjusted Gross Income (MAGI)
MAGI is the total taxpayer’s adjusted gross income plus any tax-exempt income such as foreign earned income, tax-exempt interest, and social security benefits not included in income. The individual’s MAGI determines things such as his or her eligibility for a Roth IRA, allowable deductions for traditional IRA contributions and whether the individual is due tax credits for health insurance.
For tax purposes, a mortgage is considered more than a mere lending agreement. It is defined as any contract guaranteed by land and everything attached to it. There are no requirements that stipulate the loan must be obtained from a bank or mortgage lender.
The deduction for mortgage interest is one of the most common deductions among those who itemize. The deduction is only for the interest paid during the tax year, and does not include any closing costs, fees, points, taxes, property insurance or private mortgage insurance. Mortgage interest will be referenced on the form 1098.
This refers to any income that is exempt from taxation. While there is very little income that qualifies, examples include some types of government assistance payments and small amount of income from a hobby or side business. Insurance and annuity payouts also can qualify as nontaxable income.
If a taxpayer is unable to pay the full amount of federal income tax that is owed to the U. S. government, they may qualify for an offer in compromise. In this case, the IRS agrees to consider the tax debt settled for less than what the taxpayer actually owes. Taxpayers qualify for an offer in compromise based on their income, assets and other factors. The IRS only accepts offers in compromise on a case-by-case basis, and may counteroffer when one is provided.
Open Enrollment (Health Insurance Marketplace)
This is a time period where you can enroll in a health insurance plan without a qualifying event. The period begins on November 1, of each year and ends on January 31,of the following year.
Typically this term refers to income that comes from a job (that is, any income for which the taxpayer holds a W-2). It includes all wages, salary, and bonuses. It does not include profits from a business, interest, or stock, which is calculated separately on the tax form.
Monetary support that is received when someone is unable to work due to a medical condition that impacts him/her or a family member. For example, FPL is commonly received during and immediately after childbirth. This source of income is taxable and may be paid out from an insurance company or government agency. It may also be referred to as "paid parental leave."
A partnership is a business entity that includes two or more people or other entities. Partnerships typically have joint power in the business relationship. When it comes to taxes, they are typically assessed at the entity level but pass-through to the partners.
Passive Income or Loss
A type of income or losses that that is received/incurred as the result of the taxpayer’s involvement with an S Corporation or partnership in which he or she does not materially participate. Portfolio income, including interest, dividends, royalties, annuities and gains on stocks and bonds and lottery winnings, while they may SEEM passive are actually not considered passive. The tax treatment of passive income and loss is different than the tax treatment of active income or an active loss.
Exemptions reduce the amount of taxes owed by a taxpayer. The Personal Exemption is an amount set forth by the IRS that someone can deduct against their income to reduce their income taxes. This is a preset amount that typically increases each year. However, a person can't use this tax exemption if someone else claims him or her as a dependent.
Permanent disability is a term used in tax code, insurance and law. Permanent disability is applicable when a person has a disabling condition that will continue indefinitely, i.e. that they will not recover from. The disability must be something that significantly impacts the ability to work. Loss of sight or both limbs are common examples of permanent disability.
Criminals often use an impersonation technique known as phishing to gain an individual’s personal information. In this case, contact is often made attempting to gain access to private financial details, such as bank account numbers, credit card numbers, passwords, social security numbers and other personal data. Phishing messages can arrive via email, phone, fax, SMS and sometimes even postal mail.
An electronic filing PIN is used to sign e-filed forms and documents. more
The government maintains income guidelines that make it simple to determine if a person or family lives in poverty. Poverty-linked benefits range from heating fuel subsidies to free school lunches. The income level, which determines poverty, is frequently revised as living expenses rise.
A proprietorship is a type of business formation owned by a single individual. Unlike a partnership or corporation, a proprietorship requires no organizational document or official registration to establish its legal existence. Records of income and expenses are maintained for the business activity, and net earnings are included on the personal income tax return of the owner.
Qualified deductions are certain miscellaneous deductions that are allowed for qualifying items. In other words, it applies to items that can only be used as deductions under certain circumstances. For example, purchases of certain items using electricity can qualify for a credit if they meet specific criteria for being energy efficient.
Qualified Tuition Program (also known as 529 Savings Accounts)
A savings plan that is often offered by a particular state or educational institution. It allows students and their guardians or loved ones to start saving for college in a way that features specific tax advantages.
Qualifying Widow and Widower
Qualifying widow or widower is a filing status available to a surviving spouse for two years after the death of a marriage partner. The surviving spouse continues to receive preferential rates and deductions equivalent to the married filing jointly status. There must be a qualifying child residing in the same household for the entire duration of the tax year affected.
The U.S. government rewards taxpayers who choose to produce electricity in sustainable ways. This credit is applicable to homeowner’s who install solar water heaters, heat pumps that use geothermal energy, wind turbines, fuel cells, solar panels and other sustainable energy products.
When itemizing deductions, a person may deduct state and local taxes or sales tax paid in a given year. A sales tax deduction is claimed on Schedule A. However, it only applies to the years 2005 through 2014. Unless Congress extends this tax break, it is not valid for 2015 and beyond.
Receiving monetary benefits from a second party for services or products you have provided to them without being their employee is your self-employment income. As an independent contractor or business owner, you are responsible for paying your own taxes, withholdings and insurance fees that are incurred from your contracts and business dealings.
Split Tax Refund
It is possible to split your refund into two or more accounts which may help taxpayers to manage money more efficiently. An IRS Form 8888, Allocation of Refund is necessary to file a Split Refund if you file a paper return. However if you ask the IRS to do a direct deposit (refund) through electronic filing, into one account, you can use the direct deposit line on Forms 1040, 1040A or 1040EZ.
The standard deduction is a dollar amount, allocated by the IRS, that reduces the amount of income that will be taxed. It is used by people who do not itemize and includes the basic standard amount along with any additional amounts for age or blindness. It is adjusted for inflation every year and varies according to the filing status.
A pension, insurance policy or annuity may pay a survivor benefit when its owner passes away. So does the Social Security Administration. Occasionally this is referred to as a "death benefit." Bereaved children and spouses usually receive the money.
Take-home pay is the amount of money you have earned after taxes and other payroll deductions have been subtracted from your gross earnings. Examples of payroll deductions include insurance premiums, 401k contributions and flexible spending account contributions.
Tax Code (US)
The tax code is the set of statutory and regulatory rules the IRS uses when determining an individual's tax liability. These rules are strict guidelines that must be used by both individuals and businesses when determining the amount of tax due.
A tax exemption is when a person or an organization is excused from paying all or some taxes that are normally taxable. For example, veterans and clergymen are eligible for exemptions that reduce their tax liability. Similarly, many charitable and religious organizations are exempt from paying income tax.
If a taxpayer fails to pay their taxes, the IRS can file a tax lien. This will force the taxpayer to pay the tax bill (plus applicable fees and penalties) when he or she sells a tangible item (typically real estate or other large asset). The lien allows the IRS to have the first right to funds from the sale.
A tax schedule is a form the IRS requires when the taxpayer is claiming itemized deductions on the tax return instead of filing the standard tax form. It lists certain types of income or deductions, the amounts of which are transferred to the standard form with the Tax Schedule being included in the overall return.
Tax Season (US)
This is an informal term used by tax professionals to describe the period between the end of the tax year and the date on which taxes are due. Historically, most tax professionals find their workloads greatly increased during this period. Tax season is typically January 1st to April 15th.
A tax shelter is a method of reducing the tax owed by an individual or an organization. The most common example is an Individual Retirement Account (IRA) or a 401k account. Amounts contributed to these accounts by an individual are not taxed at the time of deposit, thereby reducing an individual's income subject to tax.
Tax Tables / Brackets
A table representing the different U.S. income tax rates by filer type. more on tax tables & brackets
Taxable income is the amount of income an individual or a corporation has received over the course of the year that is subject to tax. Simply speaking, the IRS starts with the gross amount made over the year, then applies deductions and allowances to reduce the amount for which the individual or corporation must pay tax.
Thrift Savings Plan (TSP)
For employees of the U.S. federal government and members of the uniformed services, the Thrift Savings Plan is a defined contribution plan that allows federal employees to contribute pre-tax dollars to an investment account for retirement. Employees receive a match from the federal government depending on how much they contribute, and a minimum period of employment is required before employees can keep this match.
Tip income (Gratuities)Funds received directly from a customer in a service setting are called “tips” or gratuities. Any service provider who receives tip income greater than $20 a month is responsible for paying taxes on the tips they receive. Records of such should be maintained in order to file accordingly.
Unearned income is income that is not derived from working at a job or operating a private business. Some examples of unearned income include alimony payments, gambling winnings and proceeds from insurance policies. Investment income is also considered to be a type of unearned income. Unearned income is usually taxed at a different rate than earned income.
If a taxpayer received unemployment compensation or insurance payments during the tax year, he or she must pay tax on this income. In some states, this tax is withheld from the check, while in other states, taxpayers have the choice to save for this tax on their own. Unemployment compensation is considered to be ordinary income.
Stands for Uniform Capitalization and refers to accounting rules which state that businesses, depending on the circumstances, may either expense or capitalize costs. To expense costs means that the business deducts production and other related costs from their bottom line, thus lowering tax liability. Capitalizing costs means that the business deducts the same costs over the life of the item. For example, a factory purchases a machine for $100,000 that is expected to last for a period of ten years. The factory wants to determine how it will account for that purchase. The factory may expense the item, which would be $100,000, by deducting it immediately from its balance sheet. The factory may also capitalize the machine by determining its expected “life” of ten years and dividing that by the purchase price. For the next ten years, the factory will deduct $10,000 annually per the capitalization. more on UNICAP & Depreciation