Glossary of frequently used tax terms from eSmart Tax

Tax Jargon Defined.

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  1. 401(k) plan. An employee retirement plan, in which employees contribute funds each pay period. Employees can opt to contribute before or after payroll deductions in some cases. The accounts earn funds through investment plans chosen by the employee.
  2. Adjusted gross income (AGI). This equals the total income received from all sources after deducting certain expenses like student loan interest, alimony and moving expenses.
  3. Alimony. Alimony equals the total amount of money paid to a former spouse as ordered by the court in a divorce.
  4. Alternate minimum tax. Individuals, businesses, and corporations that earn over a threshold amount set by the federal government must pay a minimum tax amount regardless of the number of exemptions and deductions they can claim.
  5. Amended return. If you make or have made a mistake on a tax return in the past three years, you must fill out a form 1040X to amend the tax return the mistake was made on.
  6. Business expenses. The amount of money spent to keep a business operational. Necessary expenses include office supplies , equipment and certain computer software.
  7. Capital Gains. The profit made when an investment sells for more than the original purchase price.
  8. Charitable contribution. A charitable contribution equals the dollar amount given to a qualified non – profit or not – for profit organization.
  9. Child tax credit. The additional tax credit for qualifying children. Taxpayers take this credit in addition to the credit for child and dependent care expenses and the earned income credit. A qualifying child lived with the taxpayer for six months , is your son, daughter, stepchild, foster child or adopted child.
  10. Cost basis. The original and other associated prices paid for an asset like mutual funds, stocks, property, equipment or bonds.
  11. Credit. An amount deducted from your taxable income to reduce the overall tax amount. Common tax credits include savings contributions, dependent children and the first time home buyer credit.
  12. Deduction. Allowable deductions lower the amount of your total taxable income. Taxpayers may choose to take the standard deduction. Or, itemize deductions, which requires a list of qualified expenses.
  13. Defined benefit plan. A retirement plan in which the accrued benefit is determined by a formula instead of maintaining individual account balances.
  14. Defined contribution plan. A retirement plan in which each member holds a personal account and their benefits depend on the contributions they make to their account. Profit sharing, for example, and stock holdings are types of defined contribution plans.
  15. Dependent. A dependent relies on the support of the taxpayer for six months or more during the tax year. For each qualifying dependent you claim, you can deduct an amount from your taxable income.
  16. Depreciation. An allowable deduction for the decreasing value of certain equipment and property. Various types of property have an assigned tax life. As the life of that property lessens, the taxable value reduces.
  17. Dividend. The money paid by employers to employees, or shareholders out of profits earned by the business.
  18. Earned Income. The income earned through wages, commissions and tips. Unearned income sources include; dividends, interest and capital gains.
  19. Estate taxes. This is a tax on the right to transfer your property after your death. The total value of your assets and other holdings subtract qualifying deductions equals the total “Taxable Estate”.
  20. Estimated tax. An estimate of the taxes due on future earnings that are paid quarterly by self-employed and contracted businesses.
  21. Exemption. The amount taxpayers can claim for themselves or eligible dependents to lower their taxable income. Personal or dependency exemptions equal the same amount but follow different rules.
  22. FICA (Federal Insurance Compensation Act). The contributions each employee must pay into Social Security retirement supplement system and the Medicare hospital insurance program. Employees and employers must pay a percentage into each program each pay period.
  23. Filing status. Filing status determines the amount of income tax withheld from employee salaries. The five statuses to choose from are; single, married, filing a joint return, married, filing separately; head of household or widow with dependent child.
  24. Foreign tax credit. This tax credit protects people from double taxation on income earned from a foreign country. This non-refundable credit is given to those who earn an income in a foreign country and would be taxed by both countries.
  25. Form W-2. Employers issue each employee a form W-2 by January 31 every year. The amount withheld for Social Security, Medicare, unemployment insurance, federal and state tax also appear on this form.
  26. Form W-4. This form tells employers the amount to withhold from employee salaries. It shows the number of personal or dependent exemptions taken.
  27. Gross income. The total number of goods, properties and earnings accrued during the tax year before deductions, exemptions and adjustments.
  28. Head of household. This filing status applies to unmarried taxpayers who pay for more than half of a residence’s upkeep for at least 6-months out of the year. You can take a higher standard deduction and receive other tax breaks by filing as head of household instead of single.
  29. Innocent spouse. This rule protects divorced people from penalties or prosecution if a return filed jointly with a former spouse contains fraudulent or erroneous information. The innocent spouse has the right to claim they were unaware of the fraud and received no benefit from any funds collected.
  30. Losses from Capital Gains. The amount of money lost from selling an investment. If an investment sells for less money than the original purchase price the difference equals the loss.
  31. Lump sum distribution. When a retirement benefit plan pays with one large payment during the year, this is a lump sum distribution. The amount can often go directly into a new retirement account.
  32. Married, filing separately. You can file a separate tax return from your spouse. Some states consider a married couple’s income 50/50 regardless of filing separate and some tax breaks do not apply under this filing status.
  33. Net Income. The amount of money left after deducting FICA, unemployment and retirement from the gross income.
  34. Penalty. IRS penalties on taxpayers who file a late return. The penalty is a fine plus the interest on the balance of the fine, which increases until paid in full.
  35. Resident alien. A person who permanently lives in the United States without legal citizenship.
  36. Refund. The amount of taxes a person overpaid during the year that the IRS will give back after processing a tax return.
  37. Rental income. The amount of money collected during the year from rental properties.
  38. Self-employed person. A person who earns money running a business or trade instead of working for an employer who pays taxable wages. A self-employed person must pay Social Security, Medicare and payroll taxes throughout the year.
  39. Standard deduction. The standard deduction allows tax payers the choice of deducting an amount based on their filing status or itemizing deductions on their tax forms.
  40. Taxable income. The total income, or gross income, before taking out deductions and exemptions.