Taxation Glossary

Below you’ll find definitions on all things taxation related. And there are a lot of them! To help you find what you need, use the following alphabet to jump to the correct section.

Notice that some are red? That’s a good thing; it means there are no terms in that section that you need to know.

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

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401K— A retirement savings plan sponsored by an employer. Employees invest part of their paycheck to a savings account. The funds added to the account are tax deferred until they are pulled out at the time of retirement. See also Roth 401K.

1040 Form — The U.S. Individual Tax Income Form. Used to report a person’s total income.

1099 Form — A tax form used to list and determine any other types income outside of ones covered in a W-2. This can include: money from real estate transactions, Social Security benefits and a cancellation of debt.

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A


Additional Child Tax Credit — A refundable credit added onto the standard Child Credit — not a credit for having additional children. While the Child credit can only be used up to the point where your tax burden is reduced to zero, this additional credit will result in getting a refund issued from the IRS.

Adjusted Basis — The starting point in figuring out if selling a property or other asset is a gain or a loss. Usually, the basis is what was paid for the property; adjustments reflect appreciation or depreciation relative to the original purchase value. The basis changes over time, depending on rarity, how well it was taken cared of, how long it was owned, and any improvements made.

Adjusted Gross Income (AGI) — Your income from all taxable sources, including any types of changes to tax circumstances. AGI is important to determine whether one qualifies for any deductions or tax benefits, as well as one’s Tax Bracket.

Adoption Credit — Applies part of the money spent in adopting a child against your tax burden; Non-Refundable. Eligibility for this credit includes adopting a child younger than 18 or who is physically/mentally unable to care for him or herself. If adopting a special needs child, additional credit might be available.

Alimony — Legally required payments to an ex-spouse (depending on the terms of separation or divorce) that might qualify as a deduction to taxable income, depending whether a person itemizes or not.

Alternative Minimum Tax (AMT) — A specialized kind of tax designed to target the wealthy who utilize multiple tax breaks, deductions, exemptions, and other legal methods to avoid paying taxes.

Amended Return — By filling out form 1040X, one can correct an error on a tax return filed within the last three years. Doing an amended return might lead to paying additional taxes or receiving a refund.

Audit — A review of your tax return conducted by the IRS, during which they require you provide proof that all information and deductions are correct.

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B


Bargain Sale to Charity — Selling something for less than it is worth to a charity; in essence, donating by taking a loss. This can lead to a tax deduction or might be considered an extra taxable income, depending on the circumstances and how much the sale was worth.

Basis — The starting point in determining if, when selling something, it is a gain or loss; price before appreciation or depreciation.

Benefits (also called Fringe benefits or Perks) — A form of compensation other than money provided by an employer, many of which are tax exempt. This includes health insurance, stock options, employee discounts, and using a company owned vehicle.

Blind — If somebody is considered legally blind, they might qualify for a larger tax deduction.

Burden of Proof — It falls to the taxpayer to ensure that their tax return is accurate, rather than the IRS having to verify that the return is inaccurate.

Business Use of Automobile — The costs of driving your own car for business reasons can be deducted from your taxes as a business or employee expense, usually calculated by mileage. This can include some of the costs for gas and any parking or toll expenses.

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C


Cancelled Debt — When a debt is forgiven or rescinded, the unpaid balance is counted as taxable income.

Capital Gain — The profit from selling assets like stocks or real estate for more than they were purchased for, as well as interest earnings and dividend payments received. Capital gains qualify as a taxable income, but are normally taxed at a different rate than regular wages or salary.

Capital Loss — A financial loss from selling an asset like stocks or real estate for less than they were purchased for. Capital loss can be deducted from other forms of taxable income to offset the amount owed in taxes.

Casualty Loss — Damages, usually to property, that happen due to an unexpected or disastrous event.

Charitable Contribution — A gift to a qualified charity that can result in a tax deduction. Some sort of proof, such as a banknote or receipt, is required regardless of the size of donation. For donations larger that $250, a receipt or acknowledgment is required to be reported by the charity.

Charitable Carryovers — Only 50 percent of a person’s adjusted gross income can be deducted in charitable contributions. If a contribution does exceed that 50 percent margin, the amount remaining can be put towards future tax years, up to 5 years in the future.

Child Credit — A Non-refundable $1,000 tax credit for each child under age 17 that is claimed as a dependent. (Also see Additional Child Credit)

Child Care Credit — A Non-refundable tax credit designed to help cover part of the costs of caring for a child under the age of 13.

Child Support — Payment made to an ex-spouse for the purpose of help supporting a child. These payments do not qualify for any type of deductions, and the income is not counted as taxable income by those receiving it.

Credit — A set dollar amount that can apply and lower how much a person has to pay in taxes. While a deduction can lower a person’s taxable income and change what tax bracket they are in, a credit simply lowers how much has to be paid and can even result in a refund.

College Expense Deductions — Those that qualify can deduct up to $4,000 off their taxable income for paying for a higher education. Higher tax brackets might not qualify for this tax deduction.

Combat Pay — An income received by active members of the U.S. military while deployed. This income source is tax-free.

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D


Deductions — A monetary amount that one is allowed to subtract from their total taxable income to determine how much a person should owe, and how much of a refund they may qualify for. (Also see Credits)

Dependent — A child or disabled person who cannot financially care for themselves. A person may claim a dependent on their taxes to lower their total taxable income.

Dependent Care Credit — A tax credit designed to help cover the cost of caring for a dependent, whether they be a child or a disabled person. (See Child Care Credit)

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E


Earned Income — A monetary payment received in exchange for service, such as a salary, tips and commissions. This is different from unearned income.

Earned Income Credit — If adjusted gross income is below a specific amount, a person might qualify for this credit that could get rid of their tax income amount and even result in a refund.

Education Interest — Interest on college loans can be deducted as an adjustment to a person’s income.

Educator Expenses — Teachers in grades Kindergarten to 12th grade can write off any classroom expenses that come from their own pocket (unreimbursed) on their taxes.

Elderly Credit — A Non-refundable income credit for people 65 years or older that have a lower income.

Electronic Filing — The ability to send your tax return directly to the IRS by power of the internet. The quickest way to file.

Energy Credit — A Non-refundable tax credit designed to help taxpayers afford alternative and renewable energy equipment.

Enrolled Agent — A tax professional who has passed an IRS test and can represent clients during an audit or appeal.

Estate Tax — A type of tax that is put towards the total value of everything a deceased person owned before the inheritance is passed on to their heirs.

Estimated Tax — A method for paying taxes that requires regular payments to be made throughout the year, based on the expected tax liability. This is typically used by the self-employed or gain income from other sources like by people paying rent or interest off of savings accounts.

Exemptions — Similar to a Deduction; lowers the taxable income for payers based on a variety of factors including dependents, home ownership, non-profit status, and other criteria defined by state and local tax authorities.

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F


FICA — The Federal Insurance Contribution Act tax pays for Medicare and Social Security; the costs are usually split between employers and employees.

Filing — The act of submitting your tax return to the IRS.

Filing Status — How somebody plans on filing taxes and who is included in the tax return. The different statuses are: single, married filing jointly, married filing separately, head of household, and qualified widow or widower.

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G


Gift Tax — A person is capable of giving away up to $14,000 without triggering this tax. The tax is in place so that people are unable to avoid paying estate taxes. If the tax is triggered, the gifter has to pay it, not the recipient.

Gross Income — All income from taxable sources before utilizing any deductions or subtractions.

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H


Head of Household — A filing status for unmarried people looking for a lower tax rate. This person has to pay for a majority of their dependents’ living arrangements.

Homebuyer Credit — A tax credit available to people who have closed on a home purchase. The amount available in the credit depends on when the home was purchased and what tax bracket the person belongs in.

Home Office Expenses — If a person uses their home for business on a regular basis, they can deduct certain costs associated with this type of use (and the associated depreciation) from their tax return.

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I


Income Tax — A tax that is directed and paid from the wages or money that a person receives in a year.

Indexing — Automatic changes to the tax brackets to prevent inflation from interfering with certain tax benefits.

Individual Retirement Account (IRA) — An account designed to encourage saving money for retirement. All taxes on a traditional IRA are suspended until the time of retirement when the funds are withdrawn, including appreciation; taxes on a Roth IRA are paid upfront, exemption appreciation of the fund from taxation at a later date.

Internal Revenue Service (IRS) — The federal agency of the United States government responsible for enforcing tax laws and collecting taxes.

Itemizing — The process of claiming qualified deductions on your tax return. This is done in place of a standard deduction.

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J


Job Hunting Costs — The costs of looking for a new job are deductible. This can include mailing resumes, putting out ads, employment agency and recruiter fees, and any travel charges that take a job seeker away from home overnight.

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L


Listed Property — A list the IRS keeps of things a person claims as a deduction or expense for business reasons, but the IRS might have reason to believe that item is used for personal reasons as well. This can include items claimed as business expenses such as: smartphones, laptops, photography equipment, boats and airplanes.

Long Term Care Insurance Premiums — If somebody has to pay premiums for care of a person for an extended period of time, it can qualify as a medical deduction.

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M


Marital Deduction — The ability to transfer property, assets, or funds between partners in a marriage without incurring any taxes.

Medicare Tax — A tax every working citizen is required to pay, alongside the Social Security tax; this is separate from income taxes, and generally not eligible for the same refunds or credits.

Mortgage Interest Deduction — Allows homeowners to deduct the amount of interest they paid in a year on their home from their taxable income.

Moving Expenses — Certain costs of moving for a new job are deductible if the job is 50 miles farther from the home than the previous job.

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N


Non-Refundable Tax Credit — A tax credit that cannot lower the total amount of tax owed to below zero. In a sense, this style of tax credit cannot result in a person getting a refund for it.

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O


Out-of-Pocket Charitable Contributions — Costs that come from your funds while doing work for a charity. These costs can be deducted as a charitable contribution.

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P


Passive-Loss — The process of losing money in an investment that a person doesn’t actively participate in. These kind of losses can be used to offset other capital gains.

Personal Interest — Interest on loans like credit cards, small loans, and car loans. Unlike mortgage or student loan interest, personal interest cannot be deducted.

Prizes and Awards — When winning a cash or prize with significant value, it can be taxed. This can include the lottery, large cash prizes at events, or being the winner on a gameshow. (Also see Benefits)

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R


Real Estate Taxes — More commonly called Property Taxes. Owed on ownership of a home, building, or land. Some of these taxes are deductible from your yearly income taxes.

Recapture — When a person sells an asset that they used as a deductible on their taxes, they have to pay a tax on the profit they made off the sale.

Refund — When a person paid more in taxes over the course of the year than what they owed, they get the money back from the government.

Refundable Tax Credit — A type of tax credit that can be used to lower how much taxes a person must pay below zero. This means the government must pay the amount below zero back to the person in a refund.

Return — Filing a statement of a person’s income, expenses, assets, deductions, and other information needed when processing taxes.

Rollover — The movement of funds from one retirement account to another without having to pay taxes.

Roth 401K — A style of 401K that has contributors pay taxes at the time it is earned. That way when it is pulled from the account at the time of retirement, taxes aren’t owed.

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S


Sales Tax — If itemized, state and local sales tax can be deducted from federal taxable income.

Self-Employed Health Insurance Premiums — If you are self-employed and pay for your own health insurance, the premium costs can be deducted.

Standard Deduction — A common deduction used as an alternative to itemization that can lower the total taxable income of a person.

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T


Taxable Income — This term can be confusing and mean different things to different parties, especially state and local tax authorities. In a general sense, taxable income is any source of funds that can be taxed. In the eyes of the IRS, taxable income is a person’s income after subtracting all adjustments and deductions.

Tax Bracket — A set of income classifications into which people fit based on their gross incomes. Each tax bracket has its own set tax rate. In a progressive system, higher incomes are taxed at a higher rate; incomes below a certain level may have no income tax burden.

Tax-Free Income — Sources of funds that aren’t taxed by the government, even without the application of deductions. This can include but is not limited to: child support, combat pay, auto rebates and funds withdrawn from a Roth IRA.

Taxpayer Advocate — An official who works with the IRS to help taxpayers resolve any tax related issues they have.

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U


Unearned Income — A monetary source that is not accumulated through personal efforts or services. This includes capital gains, and other investment income.

Underpayment Penalty — A fee that occurs if income taxes aren’t paid throughout the year alongside the due date of April 15th. Typically, an employer will handle paying these taxes, but a self-employed person needs to pay their estimated tax throughout the year.

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W


W-2 — A tax form an employer must send to the IRS and the employees reporting how much they earned during the year.
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