Ability to pay is the basis for the progressive tax system, in which taxpayers with higher incomes are asked to pay more in taxes than those with lower incomes.
Above-the-line deductions are essentially tax breaks you can take to reduce your gross income without having to itemize your deductions.
Accelerated depreciation allows companies to take larger deductions and reduce their taxable income in the earlier years of an asset’s life in exchange for increased taxable income in future years.
The term accounts payable refers to money owed by a business to its vendors and/or creditors for services or goods provided on credit.
Accounts receivable refers to money owed to a company for goods or services provided on credit.
Ad valorem means “according to value” in Latin. Ad valorem taxes are charged based on the assessed value of a product or property. The most common ad valorem taxes are property and real estate taxes.
Adjusted basis is used to determine loss or gain on a property sale. The following formula is generally used: (original value of the property + value of improvements) – depreciation = adjusted basis.
Adjusted gross income is your gross income (wages, dividends, and other income) minus any adjustments to your income. Adjustments may include alimony payments, student loan interest, retirement account contributions, and others.
Adjustment to income is another name for above-the-line deduction.
Payments made to an ex-spouse (legal separated or divorced). For tax purposes, alimony is claimed as income for the payee, but it’s a tax deduction for the payer.
Allowances reduce the amount of income tax an employer withholds from an employee’s paycheck. Allowances are claimed on a Form W-4.
The alternative minimum tax (AMT) ensures that taxpayers with higher incomes pay at least a minimum amount of tax by setting limits on the tax benefits they can take to reduce their tax liability.
Taxpayers who need to make corrections to a previously filed tax return may file an amended return.
The American Opportunity Tax Credit is a partially refundable tax credit available to taxpayers within the first four years of post-secondary education to offset the cost of qualified expenses. The maximum annual credit per student is $2,500. Either the student, or a taxpayer who claims the student as a dependent, may take the credit.
The amount of money a taxpayer must pay to the government when the total tax due is greater than total tax payments made.
An annuity is a fixed sum of money paid to someone annually, typically for the remainder of their life.
If a taxpayer disagrees with decision or proposed adjustment, they may request a review, which is also known as an appeal.
An audit is basically an examination/review of a tax return to verify the information provided is accurate. Audits may be triggered by errors, omissions, and other items out of the ordinary, as well as by random selection.
See “Tax Audit Representation.”
A business authorized by the IRS to participate in the IRS e-file program.
Tax avoidance is the legal method of minimizing the amount of income tax owed by a taxpayer by taking advantage of the many tax deductions and credits allowed under the tax laws.
Back taxes are unpaid taxes at the local, state, or federal level. Typically, the taxes are owed from previous tax years.
The amount a piece of property is worth when it is first acquired.
A bonus is additional compensation received outside of an employee’s regular salary. Since it is considered supplemental income, it is subject to federal withholding at a 22% flat rate.
Per the IRS, a business is a “continuous and regular activity that has income or profit as its primary purpose.”
A business structure that provides protection from personal liability and is taxed as a separate entity. C corporations file Form 1120, U.S. Corporation Income Tax Return.
Borrowed money that has been forgiven or discharged for less than a taxpayer owes. The amount that is not required to be paid back (canceled debt) is taxable.
Profit from the sale of an investment or real estate. Capital gains are claimed on a taxpayer’s income tax return.
A tax carryover (or carryforward) occurs when a taxpayer applies the unused portion of a tax deduction or tax credit to a future year’s tax return.
Damage, loss or destruction of property due to a sudden, unexpected, or unusual event (flood, hurricane, tornado, etc.). Generally, casualty losses may be deducted from a taxpayer’s income tax return if the loss is caused by a federally declared disaster.
Payments made to the custodial parent for care of a child. In general, child support payments are not taxable (payee) or deductible (payer).
The citizen or resident test allows taxpayers to claim a dependency exemption for persons who are U.S. citizens for a portion of the year, or who live in the United States, Canada, or Mexico for a portion of the year, if all other dependency tests are met.
Combat pay is income earned by U.S. service members who are stationed in a designated combat zone. Generally, combat pay is nontaxable.
A commission is money paid to an employee based on a percentage of sales made, or a fixed amount per sale. Commissions are considered supplemental income and are taxable.
Compulsory payroll tax is the tax collected from employers and employees to finance specific government programs, such as Medicare and Social Security.
A trust or custodial account set up for paying qualified education expenses for a designated beneficiary. An ESA may be used for qualified elementary, secondary and post-secondary expenses.
The IRS may deem a taxpayer “currently not collectible” if they have no assets or income available to pay their taxes, or if paying taxes would cause undue hardship. Collection actions against those considered currently not collectible are temporarily suspended.
Decedent refers to a person who is no longer living (deceased).
A deduction lowers a taxpayer’s tax liability by lowering their taxable income.
Delinquent taxes are a result of a failure to file taxes or a missed tax return payment.
Dependency exemption refers to the amount a taxpayer may claim for a qualifying child or relative. The exemption amount, which changes from year to year, reduces the income subject to tax.
A dependent is a qualifying child or relative, other than the taxpayer or the taxpayer’s spouse, for which the taxpayer may claim a dependency exemption.
A decrease in the value of an item over time.
Direct deposit is a method where a tax refund or payment is electronically deposited into a taxpayer’s bank account.
Direct Pay is the free, online payment portal offered by the IRS where individual taxpayers can pay their taxes directly from their savings or checking accounts.
Direct tax is a tax that is paid directly to the local, state, or federal government, such as federal income tax or property tax.
Disaster loss is another name for casualty loss.
Dividends are payments made to a company’s shareholders in the form of cash, additional shares of stock, or other property. All dividends are taxable.
Money or other compensation earned through a paycheck or self-employment, including wages, salaries, and tips.
The Earned Income Credit is a refundable tax credit for taxpayer’s who earn a low or moderate income, and meet certain criteria. Taxpayers that do not owe taxes may still receive a refund.
Employer Identification Number (EIN) is the nine-digit number assigned by the IRS to identify the tax accounts of employers.
E-file is the transmission of a tax return by telephone or computer by using either tax software or a tax professional.
Electronic preparation simply means that a tax return is completed by using tax software and a computer.
The authorized IRS e-file provider who originates the electronic submission of a taxpayer’s income tax return to the IRS. Most EROs charge a fee for submitting returns electronically, whether they prepared the return or not.
Various taxes paid by employers, including Social Security, Medicare, and FUTA.
Entity refers to the designated structure of a business, such as sole proprietorship or LLC. The business entity determines which income tax forms a business must use when filing taxes.
The estate tax is a tax on the right to transfer property (cash and securities, real estate, insurance, trusts, annuities, business interests and other assets) upon a taxpayer’s death. If the total value of the property exceeds a certain value ($11,580,000 in 2020), an estate tax return must be filed.
Another term used for an audit.
An excise tax is an indirect tax on specific goods or services, such as alcohol or gasoline, which provides revenue to the government.
Exempt is a term that means a taxpayer is free from withholding of federal income tax, if they meet certain income, tax liability, and dependency criteria. They are not, however, exempt from other kinds of tax withholding, such as the Social Security or Medicare taxes.
The amount taxpayers may claim for themselves, their spouses, and/or eligible dependents. Exemptions reduce a taxpayer’s income subject to tax.
Taxpayers may request a 6-month extension to file their tax returns by submitting Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. The extension moves the April 15 filing deadline to October 15.
Fair market value is the price an item may sell for on the open market between a willing buyer and seller. The unrelated parties must have reasonable knowledge of the relevant facts and should not be required to act.
The tax levied on personal income by the federal government.
A fellowship is money received in the form of a grant to help pay for educational or research pursuits. Generally, fellowship funds are nontaxable when used for qualified expenses.
Federal Insurance Contributions Act (FICA) Tax. Also known as Social Security tax. Provides benefits for retired or disabled workers, as well as their dependents.
The rate at which a taxpayer’s income is taxed is determined by their filing status. There are five filing statuses: single, married filing a joint return, married filing a separate return, head of household, and qualifying widow(er) with dependent child.
Financial records are any items related to income and expenses, including, but not limited to paystubs, bank and credit card statements, cancelled checks, receipts, invoices, tips, bonuses, and gifts.
Per the IRS, a fiscal year is “12 consecutive months ending on the last day of any month except December.” This is different from a calendar year, which runs January 1 to December 31. Many organizations start their fiscal year on October 1 and end it on September 30.
Fixed income is an investment that returns a payment to a taxpayer on a regular schedule. Examples of fixed income include certificates of deposit (CD), money market funds, and annuities.
Flat tax, also known as proportional tax, is a system where taxpayers are assessed the same tax rate, regardless of their income level.
Collection Information Statement for Wage Earners and Self-Employed Individuals. Form 433-A is required by the IRS in certain situations where an individual owes federal income tax and is unable to pay in full. Typically used when a taxpayer requests a payment plan or temporary delay of payment due to hardship.
Collection Information Statement for Wage Earners and Self-Employed Individuals. Form 433-A (OIC) is used by individual taxpayers requesting an Offer in Compromise.
Collection Information Statement for Businesses. Form 433-B is required by the IRS in situations where a business owes federal income taxes and cannot immediately pay them. Typically used when setting up an installment agreement.
Collection Information Statement for Businesses. Businesses use Form 433-B (OIC) when requesting an Offer in Compromise.
Installment Agreement. Taxpayers who are unable to pay their tax debt in full and seek to arrange a payment plan with the IRS may use Form 433-D.
Collection Information Statement. Form 433-F is used by the IRS to collect financial information from taxpayers with delinquent tax debt who are requesting an installment agreement, or a delay in collections (Currently Not Collectible).
Installment Agreement Request and Collection Information Statement. Taxpayers who owe more than $50,000 in IRS tax debt, or are unable to pay their balance within 72 months, may use Form 433-H.
Offer in Compromise. Form 656 is used by tax professionals when requesting to settle a client’s IRS tax debt for less than they owe.
Offer in Compromise. Individual taxpayers and businesses may use Form 656-B, if they wish to make an Offer in Compromise without the assistance of a tax professional.
Offer in Compromise – Periodic Payment Voucher. Form 656-PPV is for taxpayers who file an Offer in Compromise (OIC) that is expected to be paid within 6 to 24 months. Payments must be made during the IRS investigation until a decision is made to accept, reject, return, or withdraw the OIC request.
Quarterly Federal Excise Tax Return. Form 720 is used by businesses that deal in goods and services subject to excise tax.
Claim for Refund and Request for Abatement. Use Form 843 to request a refund or reduction of penalties, interest, and fees paid to the IRS.
Consent to Extend the Time to Assess Income Tax. Form 921 is used to request a filing extension when a taxpayer owns real estate that is under contract, but not yet sold.
Employer’s Annual Federal Unemployment (FUTA) Tax Return. Employers use Form 940 to report their annual Federal Unemployment Tax Act (FUTA) tax.
Employer’s Quarterly Federal Tax Return. Employers use Form 941 to report income taxes, Social Security tax, or Medicare tax withheld from their employees’ paychecks, as well as pay the employer’s portion of Social Security and Medicare tax.
Employer’s Annual Federal Tax Return. Form 944 is for small business owners whose annual liability for Social Security, Medicare, and withheld federal income taxes is $1,000 or less.
Annual Return of Withheld Federal Income Tax. Use Form 945 to report federal income tax withheld from nonpayroll payments, such as gambling winnings, military retirement, or pensions.
U.S. Individual Income Tax Return. Form 1040 is used by taxpayers to file their annual income tax return.
Mortgage Interest Statement. Taxpayers who pay $600 or more in interest and points on a mortgage (previous year) should receive Form 1098 from their lenders.
Contributions of Motor Vehicles, Boats, and Airplanes. If you donate a qualified vehicle (valued at $500 or more) to an organization, they are required to file Form 1098-C.
Student Loan Interest Statement. Taxpayers who pay more than $600 in student loan interest during the year should receive Form 1098-E from their lenders.
Tuition Statement. Taxpayers receive Form 1098-T from eligible educational organizations where they have enrolled and paid for classes/courses.
Cancellation of Debt. Taxpayers who have had their debt cancelled, forgiven, or discharged should receive Form 1099-C. You will owe tax on the amount not paid to the lender due to repossession, foreclosure, and other situations where the debt is forgiven.
Dividends and Distributions. Financial institutions use Form 1099-DIV to report dividends and other distributions to taxpayers and to the IRS.
Interest Income. Taxpayers who receive $10 or more in interest income from banks, or other financial institutions, should receive Form 1099-INT.
Miscellaneous Income. Taxpayers who receive $600 or more for rent, prizes, awards, or royalties over $10, should expect to receive Form 1099-MISC. Beginning in 2020, nonemployee compensation (previously Box 7) will no longer be reported on this form.
Nonemployee Compensation. Starting in 2020, nonemployee compensation of $600 or more must be reported using Form 1099-NEC instead of Box 7 on Form 1099-MISC.
Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Form 1099-R, or some variation, is sent to taxpayers if they received a distribution of $10 or more from their retirement plans.
U.S. Corporation Income Tax Return. Form 1120 is used by domestic corporations to report their income, gains, losses, deductions, and credits, as well as determine their income tax liability.
Statement of Person Claiming Refund Due a Deceased Taxpayer. Use Form 1310 to claim a refund on behalf of a deceased taxpayer. A personal representative, surviving spouse, or anyone who is in charge of the deceased taxpayer’s property may file the form.
Payroll Deduction Agreement. Taxpayers who enter into a payment plan with the IRS may elect to complete Form 2159 and have their employers deduct the payments directly from their paycheck.
Underpayment of Estimated Tax by Individuals, Estates and Trusts. Taxpayers should use Form 2210 to see if they owe a penalty for underpaying estimated taxes and, if they do, to figure the amount of the penalty.
Child and Dependent Care Expenses. Use Form 2441 to take the credit for child and dependent care expenses paid while working or looking for work.
Power of Attorney and Declaration of Representative. Form 2848 gives an eligible person authorization to represent a taxpayer before the IRS, as well as receive and inspect that taxpayer’s confidential tax information.
Moving Expenses. Taxpayers should use Form 3903 to figure any moving expense deduction for a move related to the start of work at a new workplace. If the new workplace is outside the United States, the taxpayer must be a U.S. citizen or resident alien to qualify for the deduction.
Taxpayer Statement Regarding Refund. Form 3911 is for married taxpayers who filed a joint return and lost their refund check. Submission of this form will initiate the replacement process.
Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits. Members of recognized religious groups may file Form 4029 to apply for exemption from social security and Medicare taxes.
Social Security and Medicare Tax on Unreported Tip Income. Use Form 4137 to determine the Social Security and Medicare tax owed on tips not reported to an employer.
Application for Exemption From Self-Employment Tax for Use By Ministers, Members of Religious Orders and Christian Science Practitioners. Form 4361 may be used by those applying for an exemption from self-employment tax due to ministerial earnings. Must be an ordained, commissioned, or licensed minister of a church, a Christian Science practitioner, or a member of a religious order (who has not taken a vow of poverty).
Request for Copy of Tax Return. Taxpayers may use Form 4506 to request a copy of their tax return, or to designate a third party to receive their return.
Depreciation and Amortization (Including Information on Listed Property). Use Form 4562 to claim depreciation and amortization, expense certain property, or to provide information on the business/investment use of automobiles and other listed property.
Substitute for Form W-2, Wage and Tax Statement, or Form 1099R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA’s Insurance Contracts, Etc. If a taxpayer does not receive a W-2 or a Form 1099-R from an employer, or the forms are incorrect, they may submit Form 4852 as a substitute form.
Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Taxpayers who need additional time completing and submitting their tax returns may request an automatic extension by using Form 4868.
Noncash Charitable Contributions. Use Form 8283 to report non-cash charitable contributions that total more than $500.
Injured Spouse Allocation. In cases where a refund is offset to pay past-due obligations of one spouse, and they have filed married jointly, the injured spouse may use Form 8379 to get back their portion of the refund taken.
Mortgage Interest Credit. Form 8396 may only be used by taxpayers who receive a mortgage credit certificate (MCC) from a state or local government agency. Taxpayers who qualify can claim the credit each year.
Tax for Certain Children Who Have Unearned Income. Form 8615 is typically used by children under the age of 18 who have unearned income of $2100 or greater. The form helps figure the amount of tax due.
Tax Information Authorization. Form 8821 gives authorization to any individual, corporation, firm, organization, or partnership designated to inspect and/or receive the taxpayer’s confidential information, either verbal or written, for the type of tax and timeframe listed on the form. It may also be used to revoke or delete prior authorizations.
Change of Address. Use Form 8822 to notify the IRS of any change in your home mailing address.
Expenses for Business Use of Your Home. Taxpayers who work from home may use Form 8829 to determine the allowable expenses for business use of their home on Schedule C (Form 1040), as well as any carryover to next year of amounts not deductible this year.
Qualified Adoption Expenses. Form 8839 is used to figure the amount of adoption credit and any employer-provided adoption benefits a taxpayer may exclude from their income. The exclusion and the credit for expenses of adopting an eligible child may both be claimed.
Education Credits (American Opportunity and Lifetime Learning Credits). Taxpayers who have paid qualified education expenses to an eligible postsecondary educational institution may be eligible for the American Opportunity Tax Credit (partially refundable) or the Lifetime Learning Credit (non-refundable). Use Form 8863 determine and claim the appropriate credit.
Allocation of Refund (Including Savings Bond Purchases). Taxpayers may use Form 8888 to allocate direct deposit of their refund into one or more bank accounts, as well as purchase up to $5,000 in paper series I savings bonds.
Health Savings Accounts (HSAs). Use Form 8889 to report health savings account (HSA) contributions, figure deductions, and report distributions.
Tuition and Fees Deduction. Taxpayers may use Form 8917 to determine their deduction for any tuition and fees paid to a qualified postsecondary institution.
Collection Appeal Request. Taxpayers who receive a notice of federal tax lien, levy, seizure, or termination of an installment agreement may request an appeal by completing Form 9423.
Installment Agreement Request. For taxpayers who are unable to pay their taxes in full, Form 9465 may be used to request a monthly installment agreement.
Wage and Tax Statement. A W-2 includes wages earned, as well as federal, state and other taxes withheld from a taxpayer’s paycheck. It is used when filing state and federal income tax returns.
Certain Gambling Winnings. Taxpayers may receive Form W-2G if they’ve won money while gambling. This includes horse racing ($600 or more, if win is 300 times the wager), slots and bingo ($1200 or more), leno ($1500 or more) and poker ($5,000 or more, minus the wager).
Employee’s Withholding Certificate. Taxpayers complete Form W-4 to let their employers know how much tax to withhold from their paychecks, which is determined by filing status, number of dependents, anticipated deductions, other income (not from jobs), and extra withholding.
Request for Taxpayer Identification Number and Certification. Form W-9 is typically used in business-contractor relationships where the business is required to file Form 1099-MISC. The form includes the taxpayer’s name, address, and the taxpayer’s identification number (social security number or employer identification number).
A foster child is a minor who is placed with a taxpayer by an authorized agency or by court order. Eligible foster children may be claimed as dependents by taxpayers.
A franchise tax is levied by some US states to certain businesses, such as corporations and partnerships, with a nexus in the state. Franchise taxes are not based on income. They are calculated based on the net worth of or capital held by the business.
The Fresh Start Initiative, also referred to as the Fresh Start Program, is an updated set of guidelines for pre-existing IRS programs that help more people qualify for tax debt relief.
A fringe benefit is compensation given by an employer to an employee that is in addition to their regular pay/salary. Examples of common fringe benefits include company cars, stock options, childcare, and employee discounts. In general, the value of the fringe benefit is taxable.
Flexible Spending Account. An FSA is a type of savings account that allows taxpayers to contribute a portion of their regular earnings to pay for qualified medical, vision, dental or childcare costs. The funds contributed are not subject to payroll taxes, thereby lowering a taxpayer’s taxable income and tax liability.
FUTA stands for Federal Unemployment Tax Act. Under this act, the government can tax businesses with employees to help raise revenue for state unemployment agencies and to pay eligible unemployment claims. Employers who pay wages of $1,500 or more must file Form 940 annually in conjunction with paying this tax.
When a taxpayer transfers property to another person and receives nothing in return (or less than full value), a gift tax may be imposed. The tax will apply regardless of whether the donor intended the property to be a gift or not. There are some exceptions, such as money used for medical or educational expenses.
Total Income reported on a tax return before adjustments, exemptions, credits, and deductions are applied.
Taxpayers who are single (unmarried) and have qualifying dependents may use head of household as their filing status, if they have paid more than half the cost of keeping up their home for the year.
A health savings account is a type of savings account that allows taxpayers to set aside funds (pre-tax) to pay for qualified medical expenses. Unlike FSAs, which are controlled by an employer, HSAs are controlled by the individual taxpayer.
A hobby is an activity that is done for sport or recreation, not to make a profit. Taxpayers may deduct hobby expenses that are equal to or less than any income derived from their hobby. Hobby losses, however, may not be deducted from other income.
A designated area or space within a taxpayer’s residence that is used primarily (or exclusively) for business purposes. Depending on the nature of the business, the taxpayer may be eligible for certain home office deductions or other business write-offs.
The home office deduction is available to taxpayers who use their home, regularly and exclusively, as their principal place of business. Taxpayers may use the simplified option or regular method to determine the amount of the deduction. Eligible deductions may include money spend to repair or maintain the office space, mortgage interest and property taxes, insurance, utilities, as well as other direct or indirect expenses.
Horizontal equity is a concept based on the principle that “equals should be taxed equally” – in other words, taxpayers within the same income group are taxed at the same rate.
Household employees may include housekeepers, maids, babysitters, and others employed by a taxpayer to do work at a private residence. Depending on the amount paid to the household employee, the taxpayer may be responsible for Social Security, Medicare, and federal unemployment taxes, as well as state taxes (if applicable). Beginning in 2020, new household employees must complete Form W-4 upon being hired. Taxes on household employees are often referred to as “nanny tax.”
Taxes on income, earned and unearned. Individual taxpayers and businesses are both subject to income taxes.
An independent contractor is an individual who is self-employed. They control the means and methods of how they accomplish their work.
An indirect tax is one that may be shifted to others, such as sales tax.
An IRA is a personal savings arrangement that allows a taxpayer to set aside money for retirement. There are certain benefits for making IRA contributions, such as tax deductions, tax-deferred growth on earnings, and nonrefundable tax credits, if eligible.
Inflation occurs when the price of consumer goods increases at the same time the value of money/credit decreases.
Injured Spouse Relief may be available to a taxpayer who has had all or part of their tax refund offset to satisfy their spouse’s legally enforceable past-due taxes (federal or state), child support payments, or other federal non-tax debt. By completing Form 8379, the injured spouse may be eligible to receive their portion of the tax refund back.
A taxpayer may be relieved of their joint tax liability by requesting Innocent Spouse Relief (Form 8857), if there was an understatement of tax and any of the following occurred: the taxpayer’s spouse omitted income or claimed false deductions/credits without the taxpayer’s knowledge; the taxpayer was divorced, separated or no longer living with their spouse; or it would be unfair, given the facts and circumstances, to hold the taxpayer liable for the tax debt.
An installment agreement, also known as a payment plan, is arrangement with the IRS to pay taxes owed over an extended period of time.
Interest is money charged for the use of borrowed money, like a credit card or personal loan.
Interest income is money earned from investments, such as a savings account or trust.
The federal agency responsible for collecting income taxes in the United States.
Investment income is compensation received from an investment, typically in the form of interest income or a dividend.
IP PIN is a six-digit code assigned to taxpayers who have been victims of identity theft. The IRS uses the IP PIN to verify a taxpayer’s identity and prevent the misuse of their Social Security number on fraudulent tax returns.
Itemized deductions are tax deductions a taxpayer may take to help reduce their taxable income. The deductions are reported on Schedule A (Form 1040).
Individual Taxpayer Identification Number (ITIN). This nine-digit tax processing number is available to certain non-resident and resident aliens, as well as their spouses and dependents. Those requesting an ITIN must complete Form W-7, Application for IRS Individual Taxpayer Identification Number.
A state income tax levied against individuals who travel to other states for part of their employment. It is called “jock tax” because professional athletes are commonly subjected to this tax.
A joint return is one that is filed by married taxpayers or those who were recently widowed.
A tax-deferred retirement plan for self-employed taxpayers, as well as unincorporated businesses. Contributions to a Keogh plan are typically tax deductible.
The kiddie tax is a tax imposed on persons under the age of 18 whose investment and unearned income is higher than the allowed threshold. See IRS Form 8615, Tax for Certain Children Who Have Unearned Income, for additional information.
The legal seizure of a taxpayer’s property to satisfy their tax debt.
The government’s legal claim against a taxpayer’s property when they neglect or fail to pay their tax debt.
The Lifetime Learning Credit is a nonrefundable tax credit available for those (taxpayer, taxpayer’s spouse, or taxpayer’s dependent) enrolled in undergraduate, graduate or professional degree courses. The maximum credit is $2,000, and it may not be combined with the American Opportunity Tax Credit (AOTC).
A limited liability company (LLC) may be formed by one or more people. Unlike a sole proprietorship, however, personal assets are protected from lawsuits brought against the company. Depending on the number of members, an LLC may file taxes as a sole proprietorship (one member), or as a partnership or corporation (two or more).
Taxes charged by a local government.
Taxes pain on expensive goods and services that the government has deemed non-essential or unnecessary, such as private jets, yachts, high-end cars, and jewelry.
Marginal tax rate refers to the rate a taxpayer pays at each level (bracket) of income. There are seven (7) marginal tax brackets, which vary annually. The taxpayer’s income is taxed at different rates, and the rate rises as they reach the various levels. Essentially, there are several tax rates that actually determine how much a taxpayer will owe the IRS.
Married filing jointly is a tax filing status where a married taxpayer and their spouse agree to file a joint tax return.
Married filing separately is a tax filing status where married taxpayers elect to file their tax returns separate from one another.
Medicare tax is a payroll tax that U.S. employers are required to withhold from employees’ paychecks. The taxes help cover the costs of the Medicare program, which provides medical benefits to eligible individuals who are 65 or older, as well as people with disabilities.
A mortgage is a loan that is used to purchase property, such as a primary residence or an office building.
When two or more taxpayers provide support for a dependent, they may enter into a multiple support agreement to officially designate which one may claim the dependent on their tax return.
Nanny tax refers to the federal and state taxes a taxpayer must pay for, as well as withhold from, certain household employees. Learn more about the nanny tax here.
Net income is the amount a taxpayer earns after subtracting taxes and other deductions from their gross income. For businesses, net income is the amount of revenue left after expenses, taxes, and other costs are subtracted.
Nonresident refers to taxpayers who work or do business in a state where they do not live/reside, but must file a state income tax return for that state.
When a tax credit is greater than the amount of tax owed, and the taxpayer cannot receive a refund of any amount in excess, it is considered to be a nonrefundable credit. This type of credit may only reduce the tax owed to zero.
Any income that is not subject to taxation.
A taxpayer will receive a Notice of Deficiency (CP3219A Notice) when the information provided on their tax return is different from the information the IRS has received from an employer, financial institution, or other third party. The notice will explain how the new tax amount was calculated, as well as options for challenging the decision.
See “Currently Not Collectible.”
When a taxpayer owes the IRS more money than they can afford to pay, the IRS may agree to settle the tax debt for less than the amount owed. This is known as Offer in Compromise.
A taxpayer who must file a state income tax return, but only lives within the state for a portion of the year is known as a part-time or part-year resident.
A simple business structure where profits are passed through the owners’ personal income tax returns. Partnerships must file Form 1065, U.S. Return of Partnership Income, to report their income, losses and other financial details.
See “Installment Agreement.”
Payroll tax refers to the Social Security and Medicare taxes that an employer withholds from an employee’s paycheck and pays to the government on behalf of the employee. It is part of the employment taxes an employer must pay.
A taxpayer may be assessed a penalty (an additional charge) if they fail to file or pay their taxes on time.
Under certain circumstances, the IRS may waive penalties associated with late tax returns or tax payments. This is known as penalty abatement.
An employer-sponsored retirement plan that provides a specified payment amount when the taxpayer retires.
A personal exemption may be claimed for a taxpayer and their spouse. It reduces the income subject to tax by the amount of the exemption.
Written authorization for an individual to receive confidential information from the IRS, as well as perform certain actions on behalf of a taxpayer.
The place a taxpayer lives for majority of the year is known as their primary or principal residence.
The U.S. federal income tax system uses progressive tax to determine a person’s tax rate. The higher the taxpayer’s income, the larger percentage of tax they will pay.
Taxes on property, such as real estate, vehicles, and business inventory.
Proportional tax is a tax percentage that is the same, regardless of income level.
A qualifying child is a child who meets the IRS requirements to be considered a taxpayer’s dependent for tax purposes.
A qualifying relative is a person who meets the IRS requirements to be considered a dependent for tax purposes. The person can be of any age and does not have to be related to the taxpayer.
Qualifying widow(er) is a filing status available to taxpayers for up to two years after their spouse has died, if the following apply: (1) the taxpayer would have been entitled to file a joint return in the year the spouse died, (2) the taxpayer did not remarry, (3) the taxpayer has a qualifying child who lives with them for the majority of the year, and (4) the taxpayer has paid more than 50% of the costs to maintain the home for the year.
Money owed a taxpayer when their total tax payments exceed the total tax due.
A refundable credit is a tax credit that is greater than the tax owed, allowing the taxpayer to receive a “refund” for the unused portion.
A resident alien is a foreign person who legally lives and works in United States and is subject to U.S. income taxes.
Revenue, also referred to as “gross sales,” is income that is generated by the sale of goods and services through a company’s primary operations.
A tax levied on imported goods to raise revenue for the government.
Taxpayers with a Roth IRA must pay taxes on contributions, but enjoy tax-free withdrawals after retirement. Unlike a traditional IRA, which allows taxpayers to deduct contributions, but they must pay taxes on withdrawals.
A business structure similar to a C corporation, except that it is not subject to double taxation. All profits, and some losses, are passed directly to the shareholders. S corporations do not pay corporate income taxes and are typically treated like a partnership for tax purposes.
A salary is a fixed sum of money (compensation) paid for a specific period of time.
Sales tax is a tax on retail goods and services. The percentage is typically set at the state level.
Money awarded for educational use. If scholarship funds are used for qualified educational expenses, they are typically nontaxable.
A taxpayer who is self-employed my have self-employment loss if their expenses were greater than their income.
Self-employed taxpayers who have more income than expenses have self-employment profit.
The amount a self-employed taxpayer must pay in Social Security and Medicare taxes, similar to those withheld from the pay of regular employees. The current self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare).
Severance pay is money paid to employee upon separation or termination from employment. In most cases, the money received is taxable income.
In real estate, a short sale is when property is sold for less than the amount due on the mortgage.
A tax on certain goods, like tobacco and alcohol, which is meant to discourage their use.
A filing status for unmarried taxpayers who do not qualify for Head of Household status.
Social Security Tax, also known as Federal Insurance Contributions Act (FICA) tax, benefits retired and disabled taxpayers, as well as their dependents.
A sole proprietorship is an unincorporated business owned and operated by one person. It is one of the most common business entities. Business income, losses, and expenses are reported on Schedule C and filed with Form 1040.
The standard deduction reduces a taxpayer’s income that is subject to tax. It is used by those who don’t want to itemize their deductions. The amount taken for the standard deduction varies by taxpayer.
The standard mileage rate is a set per-mile amount that taxpayers can use instead of deducting actual expenses for the business use or other eligible use of their vehicle. The standard mileage rate is determined by the IRS.
Per the IRS, for dependency purposes, support may include the following: food, clothing, shelter, education, medical and dental care, recreation, and transportation. It may also include welfare, food stamps, and housing provided by the state. Support includes both taxable and nontaxable income.
A tax assessed to products imported from a foreign country.
Tax abatement refers to the temporary reduction or elimination of the amount of property tax a homeowner is required to pay on new construction, rehabilitation, and/or major improvements.
A legal or tax professional who stands in on behalf of a taxpayer during a tax audit (federal or state). Also known as audit defense.
Tax avoidance is the legal methods used to minimize a taxpayer’s tax liability and maximize their after-tax income.
A range of incomes subject to a certain tax rate.
A tax break is anything that can legally reduce taxes, such as deductions, credits, and exemptions.
Taxes paid by an individual or business.
The official body of tax laws, regulations, and procedures.
A tax credit provides a dollar-for-dollar reduction in tax, which can be deducted directly from taxes owed.
A reduction in government tax rates.
Tax debt forgiveness refers to the various IRS programs available to help a taxpayer reduce or eliminate their tax debt, such as Offer in Compromise.
A tax deduction reduces a taxpayer’s income that is subject to tax.
Tax deferred typically refers to investment earnings (interest, dividends, or capital gains) that accumulate tax-free until the taxpayer takes constructive receipt of the profits, such as IRA contributions. A delay in paying taxes.
Tax evasion is the illegal action of an individual or business entity to deliberately underpay or refuse to pay their taxes. Those who evade paying their taxes are subject to criminal charges and substantial penalties.
Interest income not subject to tax, such as interest earned from municipal bonds and some savings bonds.
The portion of a taxpayer’s income in which no tax is imposed.
Tax fraud is the intentional action of a taxpayer to fail to file a tax return or pay taxes, or to provide false information on a tax return, such as using another person’s Social Security number. It is a federal crime and can result in fines up to $250,000 for individuals and $500,000 for corporations. Tax evasion is a subset of tax fraud.
A tax holiday is the temporary reduction or elimination of a tax. For example, many states offer tax holidays for back-to-school shopping, eliminating sales tax on certain items during a specific period of time.
The amount of taxes a taxpayer must pay.
Tax negotiation is a tactic used to reduce a taxpayer’s tax debt by getting the IRS to agree to accept a lower amount. This is typically done through Offer in Compromise.
Computer software designed to assist taxpayers with completing their tax returns. The software works with the IRS electronic filing system.
The percentage rate at which an individual taxpayer or business is taxed.
Tax relief refers to the various programs available to help taxpayers deal with their tax debt.
The approved reduction or elimination of a taxpayer’s tax debt.
A tax shelter is the legal strategy employed to reduce the amount of income taxes owed by a taxpayer.
Tax shift refers to the process where a tax that is levied on an individual or entity is in fact paid by a different person or entity.
The 12-month period covered on a tax return.
The amount of income used to determine how much a taxpayer or company owes in a given tax year.
Money earned on investments, such as bonds and mutual funds, for which a taxpayer must pay taxes.
Money and/or goods received for services performed by certain workers, such as bartenders, servers, and beauty technicians. Tips are given voluntarily and are in excess of any amount billed for services rendered. Tip income is taxable income.
Income from investments and other sources unrelated to employment.
A tax return that has not been filed, including those for previous years.
Excise taxes levied to fund a public service, such as a fee to visit a national park or a toll on a highway.
A tax on the storage, use, or consumption of a taxable goods and/or services brought in from another state where no sales tax was paid in the state where the goods or services were purchased.
A concept where people of different income levels should pay different tax rates or percentages of their incomes as taxes. “Unequals should be tax unequally.”
A concept where individuals freely and voluntarily report their income, calculate their tax liability, and file their taxes on time. The U.S. tax system relies on voluntary compliance.
Wages are compensation received by employees for services performed.
Money legally withheld from a person’s wages to satisfy a debt, such as delinquent child support payments, defaulted student loans, or unpaid taxes.
See “Alternative Minimum Tax (AMT).”
Money withheld from a person’s paycheck to help cover their tax liability, such as Social Security, Medicare, and federal income tax.
An exemption previously claimed on Form W-4 that reduced the amount of income tax an employer deducted from an employee’s paycheck. In 2020, however, the allowances section was eliminated.
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