Tax Glossary

A list of common tax terms and phrases compiled in plain-English to further our reader's understanding of these terms.

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A  |  B  |  C  |  D  |  E  |  F  |  G  |  H  |  I  |  J  |  K  |  L  |  M  |  N  |  O  |  P  |  Q  |  R  |  S  |  T  |  U  |  V  |  W  |  X  |  Y  |  Z

 

 

A

Abatement - The reduction or elimination of all or a portion of one's tax liability. 

Ability to Pay - A concept of tax fairness that states that people with different amounts of wealth or different levels of income should pay tax at different rates than those individuals with lower incomes.

Above-the-Line Deduction - A type of deduction that may be claimed regardless of whether a taxpayer takes the standard deduction or choose to itemize deductions. These deductions are also called adjustments to income because they determine your Adjusted Gross Income.

Abusive Tax Scheme - An illegal series of tax transactions designed to evade paying taxes or hide income from the IRS.

Adjusted Gross Income (AGI) - An individual's gross or total income, minus any adjustments (also known as Above-the-Line Deductions).

Allowances - An amount claimed on an employee's tax withholding form (Form W-4) that tells the employer how much money to withhold from the employee's wages each pay period. The more allowances claimed, the less taxes withheld from the employee's paycheck.

Alternative Minimum Tax (AMT) - A special tax designed to keep wealthy individuals from taking advantage of loop holes or special tax breaks that would otherwise allow them to pay little or no federal income tax.

Amended Return - A corrected tax return (Form 1040X) filed to revise a previous year's tax return, usually due to a mistake.

Amount Due - The total amount of one's tax liability. Said differently, a person's total tax bill.

Annuity - A fixed sum of money paid to someone each year (or monthly), typically for the rest of their life. For example, pension plans provide an annuity payment to plan participants. 

Assessment - The official recording of a tax liability or debt on a taxpayer's account. If a taxpayer reports owing taxes on his or her federal income tax return, the assessment occurs at the time the taxpayer files the return with the IRS.

Audit - A review or examination of your tax return by the IRS. Although many audits are completely random, some returns may be deliberately chosen for audit due to a number of red flags.

Automated Substitute for Return Program - Under this program, the IRS uses information returns filed by third-parties (such as Forms W-2 and 1099) to prepare a tax return on behalf of someone who failed to file a return (i.e., a non-filer). The return prepared by the IRS is known as a "substitute-for-return," which the IRS uses to make tax, interest, and penalty assessment against the non-filer. 

Automated Underreporter Program - Under this program, the IRS uses information returns filed by third parties (such as Forms W-2 and 1099) to identify unreported income on returns filed by taxpayers.

 

 

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Basis - The value of a piece of property at the time a person first acquires it.

Blind - An individual is considered blind for tax purposes if they cannot see better than 20/200 with their best eye using contacts or glasses, or if they have a field of vision that is 20 degrees or less.​

Bonus - A type of compensation received by an employee that serves as a supplement or addition to the employee's usual compensation. Bonuses are taxable.

Business - A continuous and regular activity that has income or profit as its primary purpose.

 

 

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Capital Gain - The profit received from the sale of investment assets (e.g., stocks, real estate, etc.). There are two types of capital gains: short-term and long-term.

  • Short-term capital gains are the profit received from the sale of investment assets held for one year or less.

  • Long-term capital gains are profits received from the sale of investment assets held for more than a year.

Casualty Loss - A type of deduction taken for damage done to property as a result of a natural disaster or other qualifying event.​

Child Tax Credit - A type of tax credit that taxpayers may claim for each qualifying child listed as a dependent on their tax return. For 2020, taxpayers could claim a child tax credit of $2,000 per qualifying child, and up to $1,400 of the credit was refundable.

Civil Penalty - A type of penalty that may imposed on someone for failing to comply with federal tax laws. Civil penalties are generally assessed, collected, and paid in the same manner as income taxes.

Civil Penalty Abatement - The reduction or elimination of all or a portion of one's civil penalty liabilities. The IRS may approve a civil penalty abatement for: (a) IRS error; (b) reasonable cause; (c) administrative and collection costs not warranting collection of penalty; (d) discharge of penalty in bankruptcy; or (e) the IRS’s acceptance of partial payment of assessed penalty.

Collection Due Process (CDP) Hearing - A proceeding initiated by a taxpayer involving a hearing with an independent CDP officer in response to a notice of Federal tax lien or notice of intent to levy. The CDP hearing provides the taxpayer an opportunity to work with an independent hearing officer to resolve the collection of the taxpayer’s liability.

Combat Pay - Income earned by members of the U.S. Armed Forces while serving in a federally declared combat zone. This type of pay is generally not subject to federal income tax.

Commission - Compensation received by an employee for services performed. Commissions are paid based on either a percentage of sales made or a fixed amount per sale.

Community Property - A law in certain states which stipulates that any income earned or property acquired by married couples are owned equally by both spouses.

Constructive Receipt - A legal concept that income is taxed at the point in time which it is earned or made available to a recipient without restriction, regardless of whether the recipient actually cashes the check or withdraws the funds from their account. Likewise, if an individual authorizes someone to act as their agent and receive income on their behalf, then the individual is considered to have received the income at the point in time the agent receives it.

Credit - A dollar-for-dollar reduction in taxes owed.

Criminal Investigation Program - A program that serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law.

 

 

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Deduction - A reduction in an individual's taxable income that is usually connected with certain expenses paid or incurred.

Deficiency - The amount of additional tax the IRS determines an individual owes following an audit or examination of the individual's tax return(s).​

Defined Contribution Retirement Plan - A type of retirement plan that provides an individual account for each participant, and bases benefits solely on amounts contributed to the participant’s account and any earnings on these contributions. Types of defined contribution plans include profit sharing, stock bonus, money purchases, target benefit, leveraged employee stock ownership plan, and non-leveraged employee stock ownership plan.​

Dependent - A qualifying child or qualifying relative, other than the taxpayer or spouse, who entitles the taxpayer to claim certain tax credits (e.g., the Child Tax Credit and the Credit for Other Dependents).

Depreciation - The gradual decrease in value of certain business property for which businesses may write-off as an expense and claim a deduction. The depreciation deduction allows businesses to recover the cost of business or investment property over a certain number of years. Depreciation starts when the property is first used in the business or first used to produce income. Depreciation ends when you either: (a) take the property out of service; (b) deduct all your depreciable cost or basis; or (c) no longer use the property in your business or to produce income.

Direct Tax - A type of tax that is levied on the income or profits of the person who pays it, rather than on goods or services. Income tax is an example of a direct tax.

Disaster Loss - A tax deduction that may be claimed by those who suffered the loss or damage of property as a result of a federally declared disaster.

Dividend - A type of distribution provided to the holders of a stock that may be in the form of cash, property, services, stock rights, or additional stock.

 

 

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Earned Income - The money (or other form of compensation) an individual receives for working, regardless of whether the individual is self-employed or an employee.

Earned Income Tax Credit (EITC) - A refundable tax credit for working taxpayers with low-to-moderate income. The amount of the EITC for which taxpayers may qualify for increases relative to their income, filing status, and the number of claimed dependents.

Electronic Return Originator (ERO) - The authorized IRS e-file representative that originates the electronic submission of an income tax return to the IRS. EROs may originate the electronic submission of income tax returns they either prepared or collected from taxpayers. Some EROs charge a fee for submitting returns electronically.

Employee - A person who works for an employer. Individuals who receive a Form W-2 are considered employees. An individuals may also be considered an employee if their employer can control when, where, and how the employee performs their work.

Employer Identification Number (EIN) - A unique set of numbers assigned to employers. Each employer can be identified by its unique EIN.

Employment Tax - A tax paid by employers that consists of amounts withheld from employee wages (also known as payroll taxes) and the employer's required contribution. Employment taxes must be reported to the IRS quarterly, and must be deposited with an appropriate federal depository on either a monthly or semi-weekly basis.

Enrolled Agent - A person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards.

Estate Tax - A tax on the right to transfer property upon the death of the owner. For 2020, an estate tax only applied if the total value of the deceased owner's property equaled $11,580,000 or more.

Estimated Tax Payment - A payment made quarterly to the IRS and applied towards an individual's annual tax bill. Taxpayers are generally required to make estimated tax payments to the IRS if: (1) they expect to owe more than $1,000 in taxes for the year; and (2) taxes are not being automatically withheld from their wages by their employer.

Examination - A review of an organization's or an individual's accounts and financial information to ensure information on tax return is being reported correctly to the IRS. An examination is also known as an audit.

Excise Tax - A tax imposed on the sale of specific goods or services, or on certain uses. Federal excise tax is usually imposed on the sale of specific items like fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, tobacco and other goods and services.

Extension - The process by which you may extend the time you have to file your taxes by an additional three months. An extension is obtained by filing a Form 4868. Note, however, this only extends the deadline you have to file a tax return, not the deadline to pay any taxes owed.

 

 

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Failure-to-File Penalty - A penalty assessed against a taxpayer for failing to file his or her federal income tax return with the IRS on or before April 15th (or October 15th if granted an extension). The penalty amount is 5% of the total tax liability reported on the return plus an additional 5% for each month the failure to file continues, up to a total penalty amount of 25% of the tax liability. 

Failure-to-Pay Penalty - A penalty assessed against a taxpayer for failing to pay the amount owed on a tax return on or before April 15th. The penalty amount is 0.5% of the tax liability shown on the return plus an additional 0.5% for each month the failure to pay continues, up to a total penalty amount of 25% of the tax liability.

Fair Market Value - The price that a piece of property sells for on the open market, under current economic conditions.

FICA Taxes - Established by the Federal Insurance Contributions Act (FICA), these taxes are composed of social security taxes and Medicare taxes. Both employees and employers are responsible for paying FICA taxes.

Filing Status - A category used to determine a taxpayer's filing requirements, standard deduction, eligibility for certain credits, and correct tax liability. Each taxpayer must select one of the following filing statuses on their tax return: (a) Single; (b) Head of Household; (c) Married Filing Jointly; (d) Married Filing Separately; or (e) Qualifying Widow(er).

Flat Tax - A type of tax that is applied equally to all taxpayers, regardless of income level. State sales tax is an examples of a flat tax.

Flexible Spending Account (FSA) - A special employer-sponsored account which is generally used for qualifying medical expenses. The FSA is funded by pre-tax contributions automatically withheld from an individual's paycheck, which are sometimes matched by an employer.

Foreclosure - The legal process by which a lender or creditor takes possession of a home generally because the homeowner defaulted on a loan/mortgage.

Free File - A public-private partnership between the IRS and many tax preparation and filing software industry leaders who provide their brand-name products for free to eligible taxpayers.

Fringe Benefit - A type of compensation (or benefit) provided to an individual by his or her employer that supplements the individual's regular pay. The value of a fringe benefit is generally taxable.

FUTA Tax - Established by the Federal Unemployment Tax Act (FUTA), this tax funds unemployment benefits for workers who have lost their jobs. Employers are solely responsible for paying FUTA tax; employees do not pay FUTA tax. Most employers also pay a state unemployment tax. 

 

 

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Gasoline Excise Tax - A type of excise tax paid by consumers when they purchase gasoline. The tax covers the manufacture, sale, and use of gasoline.

Gift Tax - A special tax paid by the giver (donor) of a gift that is worth more than a certain amount (e.g., $15,000 in 2020). A gift is considered to be any transfer of property, including cash, event tickets, and real estate, made to an individual, directly or indirectly, where full consideration is not received in return for the gift. Under special arrangements, the recipient (donee) may agree to pay the gift tax instead. Some transfers of money are exempted from the gift tax, such as a gift to a spouse or a gift used to pay medical or educational expenses.

Gross Income - All income received in the form of money, goods, property, and services that is not exempt from tax.

 

 

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Head of Household - A type of filing status that may be claimed if certain conditions are satisfied. Filing as Head of Household allows the taxpayer to receive a higher standard deduction amount than if he or she filed as Single or Married Filing Separately.

Hobby - An activity engaged in where profit or financial gain is not the primary purpose. Taxpayers cannot claim a deduction for losses incurred from hobby activities, but they can deduct hobby expenses up to the amount of hobby income earned. 

Home Mortgage Interest Deduction - A deduction that may be claimed for mortgage interest paid on a loan/mortgage secured by the taxpayer's main home or second home.

Home Office - An area of an individual's home used primarily or exclusively for business purposes, for which the individual may be entitled to claim certain deductions on his or her tax return.

Household Employee - Housekeepers, maids, babysitters, gardeners, and others who work in or around a taxpayer's private residence as an employee. A person is considered a household employee if the taxpayer can control not only the work the person does but also how the person performs the work.

 

 

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Income Tax - A type of tax paid by individuals and businesses based on income earned and unearned.

Independent Contractor - A self-employed individual who performs services for others in exchange for money or other compensation. The recipient of the services do not control the means or methods the independent contractor uses to accomplish the work, but the recipient does control the results of the work (i.e., whether the work is satisfactory).

Indirect Tax - A type of tax that is not paid directly but rather shifted to others (e.g., through a cost increase), such as business property tax and sales tax. 

Individual Retirement Account (IRA) - Also known as a traditional IRA, this is a special account designed to encourage saving money for retirement. Contributions made to a traditional IRA may be fully or partially deductible (depending on an individual's filing status and income), and amounts in an IRA are generally not subject to tax until they are withdrawn from the account. If an account holder withdraws funds from the IRA before reaching a certain age (59 1/2 in 2020), then the withdrawal is usually subject to a 10% early withdrawal penalty.

Individual Taxpayer Identification Number (ITIN) - A number issued by the IRS to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, a social security number.

Inflation - The simultaneous increase of consumer prices and decrease in the value of money and credit.

Information Return - A type of return required to be filed with the IRS by any person engaged in a trade or business who makes reportable transactions during the calendar year, including a corporation, partnership, individual, estate, and trust. Persons required to file information returns to the IRS must also furnish statements to the other party to the transaction, such as the recipients of income. Form 1099-Misc (Miscellaneous Income) and Form W-2 (Wage and Tax Statement) are examples of information returns.

Innocent Spouse Relief - A request made with the IRS that may relieve the petitioner of responsibility for paying tax, interest, and penalties if the petitioner's spouse (or former spouse) improperly reported items or omitted items on their jointly-filed tax return. 

Interest Income - The income a person gains from keeping funds in certain bank accounts or from lending money to someone else. Interest income is considered unearned income for tax purposes.

Internal Revenue Service - The Internal Revenue Service (IRS) is the federal agency responsible for collecting taxes and for enforcing the Internal Revenue Code. The IRS is a bureau of the Department of the Treasury.

Investment Income - The income a person gains from investments, including taxable and tax-exempt interest, dividends, capital gains, certain rent and royalty income, and passive activity income. 

Itemized Deduction - Certain deductions that lowers one's tax liability by reducing the amount of income subject to tax. Most taxpayers have a choice of either taking the standard deduction or itemizing deductions, and taxpayers should choose whichever option results in the lowest tax liability.

 

 

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Levy - The legal seizure of property by the IRS to satisfy a tax debt. The IRS can levy a taxpayer's wages, bank accounts, vehicles, real property and other property.

Like-Kind Exchange - A an exchange of property that is of the same nature or character, even if they differ in grade or quality. 

Local Tax - A tax imposed by local officials, usually at the county, city, or municipality level. 

Luxury Tax - A tax paid on expensive goods and services considered by the government to be nonessential (e.g., luxury cars). Revenue from luxury taxes is redistributed through government programs that benefit all citizens.

 

 

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Marginal Tax Rate - The amount of additional tax paid for every additional dollar earned.

Married Filing Jointly - A type of filing status claimed by married individuals who wish to combine income and file a single tax return together.

Married Filing Separately - A type of  filing status claimed by married individuals who do not wish to file a joint return and agree to report their income separately. 

Medicare Tax - A tax used to fund Medicare---a government program that provides medical benefits to certain individuals when they reach age 65. For 2020, the Medicare tax rate is 2.9% (1.45% paid by the employee and 1.45% contributed by the employer).

Mortgage - A type of loan used to buy or refinance a home, which in turn is used as collateral to secure the loan. 

Mortgage Interest Credit - A tax credit available to taxpayers who received a mortgage credit certificate (MCC) from a state or local government for low-income housing and who paid certain mortgage interest.

 

 

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Nonrefundable credit - A type of tax credit that reduces one's tax liability dollar-for-dollar but will not lower the liability below zero so as to produce a refund. 

Nonresident - A person who does not live in a particular state but is still required to file an income tax return for that state because he or she did business in the state.

Nontaxable - Certain income that is not subject to federal income tax. 

 

 

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Offer-in-Compromise (OIC) - A proposal by a taxpayer to the Federal Government that would settle a tax liability for payment of less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement.

 

 

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Part-year Resident - A person who lived in a particular state for only part of the year but must file a state income tax return there.

Payroll Tax - A percentage of income withheld from an employee's wages and paid to the government to fund public programs (e.g., Social Security and Medicare).

Penalty - An additional charge (or assessment) added to one's tax bill usually as a result of late-filing a tax return or making a late tax payment. 

Pension - A type of retirement plan that pays an annuity.

Principal Residence - The place where an individual resides for the majority of the year.

Progressive Tax - A tax that increases as one's income increases. The federal personal income tax is an example of a progressive tax. 

Property Tax - A tax that generally applies to real property (e.g., a home) but may also apply to personal property such as boats, vehicles, etc.

 

 

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Qualifying Child - A child who may be claimed as a dependent on a tax return. A child must satisfy several conditions before being deemed a "qualified child" for dependent purposes.

 

Qualifying Relative - A person other than a child who may be claimed as a dependent on a tax return. The person must meet satisfy several conditions before being deemed a "qualified relative" for dependent purposes.

 

Qualifying Widow(er) - A filing status category that applies to surviving spouses with dependents. The status enables the taxpayer to retain the benefits connected with the Married Filing Jointly status.

 

 

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Recapture - The repayment of a tax credit if requirements were not met by the taxpayer at the time the credit was claimed.

 

Refund - An amount of money received from the U.S. Treasury because a taxpayer either overpaid their tax liability for the year or received refundable tax credits in excess of their tax liability.

 

Revenue - The income generated from normal business operations.

 

Roth IRA - A special type of individual retirement account (IRA) named after Senator William Roth of Delaware. Contributions to a Roth IRA are not tax deductible, but interest and qualified withdrawals (after reaching retirement age) are not subject to tax.

 

 

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Salary - The compensation received by an employee for services performed. A salary is a fixed sum paid for a specific period of time worked, such as weekly or monthly.

 

Sales Tax - A tax paid in connection with the sale of retail products, goods, and services. A state generally sets the sales tax percentage, but some states have no sales tax.

 

Scholarship - Money awarded to a recipient for educational purposes. Scholarship funds are generally nontaxable if used to pay for qualified expenses such as tuition, required fees, books, and supplies.

 

Self-employment Tax - A tax paid by self-employed individuals that supports social security and Medicare programs. For 2020, the self-employment tax rate is 15.3%, which consists a 12.4% tax for social security and 2.9% tax for Medicare.

Severance Pay - The money and/or benefits provided to an employee upon his or her termination or separation of employment. Severance is generally considered taxable income.

 

Short Sale - This occurs when a homeowner sells their property for less than the amount remaining on the note/mortgage. Short sale usually occur when homeowners experience significant financial hardships.

 

Single - A filing status category claimed by those who are unmarried, divorced, or legally separated and who do not qualify for Head of Household status.

Social Security Tax - A tax levied on both employers and employees to fund the Social Security program. It is collected in the form of a payroll tax or through self-employment taxes. For 2020, the social security tax rate is 12.4% (6.2% paid by employees and 6.2% contributed by employers).

 

Standard Deduction - A fixed dollar amount that that lowers one's tax liability by reducing the amount of income subject to tax. For example, the standard deduction in 2019 for a single taxpayer was $12,200 ($24,400 for married filers filing jointly).

Standard Mileage Rate - A specific rate set by the IRS that can be applied to each mile driven for business, charitable, or medical purposes and deducted from one's taxable income. For 2020, the standard mileage rate is 57.5 cents per mile.

 

 

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Tariff - A tax levied on certain goods imported from foreign countries.

 

Tax Avoidance - The legal use of tax planning strategies to reduce one's tax liability.

Tax Bracket - A range of incomes that is taxed at a specified tax rate. There are currently seven federal tax brackets (10%, 12%, 22%, 24%, 32%, 35% and 37%).

 

Tax Code - The official body of federal tax laws, including tax rules and regulations.

Tax Counseling for the Elderly (TCE) - A program that offers free tax assistance to certain taxpayers, particularly those who are 60 years of age and older. The program is operated by IRS-certified volunteers who specialize in questions about pensions and retirement-related issues unique to seniors. 

 

Tax Credit - A dollar-for-dollar reduction to one's tax liability.

Tax Exemption - A part of a person's income that is not subject to tax.

Tax Evasion - The illegal use of tax planning strategies to hide income and evade taxes.

 

Tax Liability - The total amount of taxes owed.

 

Tax Shelter - An activity designed primarily to either avoid or evade taxes.

Tax Year - An annual accounting period for keeping records and reporting income and expenses. Taxpayers may choose between a calendar tax year (the 12 consecutive month period beginning January 1st and ending December 31st) or a fiscal tax year (a 12 consecutive month period ending on the last day of any month except December).

 

Taxable Income - The total amount of income subject to tax after accounting for deductions.

Taxlete - A term we use to signify one's proficiency in self-preparing his or her personal income tax return.

Taxpayer Advocate Service - An independent unit within the Internal Revenue Service (IRS) whose mission is to help taxpayers resolve problems with the IRS and to recommend changes to prevent future problems.

Trust - A type of entity that manages a person's assets during their life or after their death. A trust is a separate entity from an individual and is managed by an appointed trustee or trustees.

 

 

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Unearned Income - Income that is not earned, meaning it is derived from another source, such as inheritance or passive investments that earn interest or provide dividends.

 

Use Tax - A special tax levied by a state on goods used in the state but purchased in another state.

 

 

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Voluntary Compliance - The concept that applies to the U.S. tax system that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly, and file a tax return on time.

 

 

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Wages - Compensation received by employees for services performed. Usually, wages are computed by multiplying an hourly pay rate by the number of hours worked.

 

Wealth Tax - Another name for the Alternative Minimum Tax. The concept that applies to the U.S. tax system that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly, and file a tax return on time.

Withholding - The money an employer withholds from its employees' wages that is then paid over to the government for application to the employees' annual tax liabilities.

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