Common Tax Terms Explained
The U.S. Internal Revenue Service tax code is long. 73,608 pages long, to be precise. If you’re in the midst of completing your 2012 taxes, it might help to re-familiarize yourself with some common tax terms.
Our tax system breaks down into three main parts: Income, Deductions/Credits, and Taxes. A fourth category, Misc., covers general terms that don’t fall into the three main categories.
All the money you receive during the year from all sources is income.
Adjusted Gross Income (AGI)– This is gross income minus specific adjustments to income. Your AGI directly influences your eligiblility to claim many tax deductions and credits.
Taxable Income– AGI minus all allowable adjustments, mainly deductions and exemptions. You owe taxes on this amount.
Earned Income- Income made from participating actively in a trade or business, including wages, salary, tips, commissions, and bonuses.
Passive Income- Earnings derived from a rental property, limited partnership or other enterprise in which you are not actively involved.
Capital Gains- An increase in the value of your capital assets (investments or real estate) that gives it a higher worth than the price at which you bought it.
Deductions are expenses the Internal Revenue Service allows you to subtract from your AGI to arrive at your taxable income. You can directly subtract credits from the tax you owe.
Standard Deduction– A fixed dollar amount that you can subtract from your AGI to reduce the amount of taxes you owe.
Itemized Deductions– Expenses that fall under a long list of allowable IRS tax deductions. You cannot take itemized deductions if you claim the standard deduction.
Dependent- A child, spouse, parent, or certain other relative to whom you contribute all or a major portion of necessary financial support.
Exemption– Amount that you can claim for yourself and your dependents.
Tax Credits- After you calculate your tax bill, you can use the credit to reduce the amount of the check you must write to Uncle Sam.
Non-Refundable Tax Credit- A tax credit that cannot reduce the amount of tax you owe to less than zero.
Taxes refer to amounts you pay to the government. In this case, income tax is the amount you owe the government after all deductions, exemptions, and credits have been subtracted.
Alternative Minimum Tax (AMT)- A tax calculation that adds certain normally tax-deductible items back into your adjusted gross income.
Estate Tax- The amount of tax levied on a deceased individual’s taxable estate.
Self-Employment Tax- A tax imposed on you if you are self-employed. You must pay this tax in order to receive Social Security benefits upon retirement.
1040– The official income tax return form printed and distributed by the IRS. There are three versions: 1040, 1040EZ, and 1040A.
Filing Status– Your status has an impact on deductions. Statuses are single, married filing jointly, married filing separately, head of household, or widow or widower.
Progressive Taxation- Higher tax rates apply as income levels increase in this system. The progressive tax system in the U.S. is the subject of strong debate.
Withholding- Taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck.
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