Tax Terms Glossary: Tax Dictionary

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

Abate, Abatement: A reduction in the assessment of taxes, interest, and/or penalties when the assessment is incorrect.
Ability to Pay: The concept that taxpayers should have a tax liability consistent with their income level.
Abode: Sometimes called principal place of abode; a place of residence, usually a house or home.
Above-the-Line Deduction: Also called an adjustment to income. A type of deduction that you may take without having to itemize your deductions.
Abusive Tax Scheme: An illegal series of transactions designed to hide taxable income from the IRS.
Adjusted Basis: The original value of a piece of property plus the value of improvements and minus depreciation. The adjusted basis is used to figure your gain or loss on a sale.
Adjusted Gross Income (AGI): Your gross income reduced by adjustments to income, before exemptions and deductions are applied. See adjusted gross income.
Adjustment to Income: Also called an above-the-line deduction. A type of deduction that you may take without having to itemize your deductions.
Advance (Child Tax Credit, Recovery Rebate Credit, etc.): A tax credit which is paid ahead of the tax year in which it is due or owed. For example, advance payments of the 2021 Child Tax Credit were sent out during 2021 in advance of the 2021 Tax Return which was filed in 2022. Stimulus checks were advance payments of the Recovery Rebate Credit and the Premium Tax Credit is paid in advance throughout a year.
Alimony: Regular payments made to an ex-spouse or to a legally separated spouse. Alimony is considered income for the payee and is tax deductible for the payer for divorce agreements finalized before January 1, 2019. As of that date, alimony is no longer taxable for the payee and is no longer tax deductible for the payer.
Allowances: A number on your Form W-4 used by your employer for 2019 and prior W-4 forms to calculate how much income tax to withhold from your pay. The greater the number of allowances, the less income tax will be withheld.
Alternative Minimum Tax (AMT): A special tax system which was originally intended to prevent wealthy taxpayers from taking advantage of so many tax breaks that they end up paying little or no taxes. The AMT affects more and more middle class taxpayers every year. See alternative minimum tax.
Amendment / Amended Return: A corrected tax return (using Form 1040X) filed to revise a previous year's tax return. See tax amendments.
Amount Due: Your total tax bill; the amount of money you owe in taxes.
Annuity: An annual payment, such as from a retirement plan.
Appeal: To request the review of an IRS decision or adjustment.
Archer Medical Savings Account (MSA): A tax deductible savings account containing funds for medical expenses not covered by insurance. Interest and qualified withdrawals are generally nontaxable. See health or medical savings accounts.
Audit: An IRS review or examination of a tax return. Many audits are random, but returns may also be deliberately chosen for audit based on a number of red flags.
Avoidance, Tax: Tax avoidance is the ability of one to use legal means to avoid paying taxes or reduce their tax burden; not to be confused with tax evasion.

B

Basis: The amount a piece of property is worth when you first acquire it; sometimes called the base cost.
Beneficiary: A person entitled to benefits from certain acts, often from a trust or insurance policy.
Blind: For tax purposes, a person is considered blind if they cannot see better than 20/200 with their best eye using contacts or glasses, or if they have a field of vision which is 20 degrees or less.
Bracket(s): The thresholds set by the IRS and state to determine the rate at which a person's income is taxed - see tax brackets and rates.
Break(s): A general term for tax savings; usually made up of tax deductions or write-offs.

C

Canceled Debt: Forgiven debt on a mortgage or other loan. Canceled debt is generally considered taxable income.
Capital Asset: Property held by a taxpayer solely for the investment (of a company, property, etc.).
Capital Gain: Profit from the sale or trade of an investment property such as stock or real estate. A capital loss is the opposite.
Casualty Loss: A deduction taken for property damage suffered during a disaster or other such event.
Child Support: Payments made to an ex-spouse or legally separated spouse for the care of a child. Child support payments are generally neither taxable nor deductible.
Child Tax Credit: A tax credit given to a parent or parents to offset the expenses of raising children. Read important details about the Child Tax Credit or CTC.
COBRA: The part of the Consolidated Omnibus Budget Reconciliation Act of 1985 that, in many cases, provides continuation of employer sponsored health insurance for workers who have lost their jobs.
Combat Pay: Income earned while serving in a federally declared combat zone. Combat pay is generally nontaxable.
Community Property: A law in certain states pertaining to married couples which stipulates that income and property are owned equally by both spouses.
Constructive Receipt: The legal concept that income is taxed at the time it is received, whether or not you have actually cashed the check or withdrawn the funds from your account.
Coverdell Education Savings Account (ESA): A tax deductible savings account containing funds for educational expenses. Interest and qualified withdrawals are generally nontaxable.
Credit: A dollar-for-dollar reduction of your taxes owed. Some tax credits are refundable.

D

Decedent: An IRS term for a person who has died.
Deduction: An amount subtracted from your taxable income for certain expenses. See tax deductions.
Deficiency: The amount of taxes owed after paying too little, assessed during an audit.
Dependency Exemption: An exemption claimed for a dependent.
Dependent: A child or relative whom you support and who qualifies you to take an exemption.
Depreciation: A deduction taken for the business use of certain items which lose value over time, such as office furniture, a computer, or a vehicle. See details on depreciation.
Direct Deposit: When a tax refund or other payment is sent electronically to your bank account.
Direct Tax: A tax paid directly to the federal government, or to state or local governments, such as income tax and property tax.
Direct Transfer: Moving funds from one Individual Retirement Account to another.
"Dirty Dozen": An annual IRS list which summarized a variety of scams commonly encountered by taxpayers during a tax year to help raise awareness and lower victim rate.
Disaster Loss: A tax deduction taken by taxpayers who suffered the loss or damage of property during a federally declared disaster.
Dividend: A stock distribution given to stockholders in the form of cash, property, services, stock rights, or more stock.
Due Diligence: Steps or a procedure taken to satisfy a legal argument, often in buying or selling something; similar to an audit or review.

E

Earned Income: Money or other compensation given to you for working, whether you receive a paycheck or you are self-employed.
Earned Income Credit (EIC): A refundable tax credit targeted at workers who make low to moderate incomes. Learn more about the earned income credit.
Economic Impact Payment (EIP): See stimulus (check, payment). One-time payments sent to Americans during the COVID-19 Pandemic intended to help with the impact of the declining economy during 2020 and 2021. Stimulus checks were sent three times and included additional funds for those with dependents.
eFile; e-file: To electronically file a tax return; to file your taxes online.
EIN: Employer Identification Number used by employees to identify their employers to the IRS.
Elderly: For tax purposes, a person is considered elderly if they are age 65 or older on the last day of the tax year. See the Elderly and Disabled tax credit.
Electronic Filing: Filing your tax return online, also known as efiling or e-filing. This is generally more secure, more accurate, and faster than filing your taxes by paper through the mail.
Employment Tax: Also called a payroll tax. A tax paid by employers for FICA and FUTA.
Entity: A person or group of people that pays taxes. Types of tax entities include individuals, businesses, estates, trusts, and charitable organizations.
Estate: A tax entity that receives and reports a person's income and pays taxes after that person's death.
Estate Tax: A tax, targeted at the wealthy, on the total value of an estate if it exceeds a certain amount. See estate tax rates.
Estimated Tax: Quarterly down-payments toward your annual tax bill, required if you expect to make more than a certain amount of income for the year and if your income taxes are not covered by withholding.
Evasion, Tax: The illegal act of evading paying taxes; see details on tax evasion.
Examination: Another term for audit.
Excise Tax: A special tax on using or selling certain products or services. One example of excise taxes is luxury taxes.
Exemption: A type of deduction claimed for yourself, your spouse (if filing jointly), and each your dependents.
Extension: A tax extension, obtained by filing or e-filing Form 4868, will delay your filing deadline, typically from April of a tax season to October of the same season (6 months). Note that this extends your time to file, but not your time to pay, and interest and penalties may apply to any late tax payments.

F

Fair Market Value: The price for which you could sell a piece of property on the open market under current economic conditions.
Fellowship: A grant generally received for educational or scholarly purposes. Funds are nontaxable when used for qualified expenses. See education and taxes.
FICA Tax: A tax on employment required by the Federal Insurance Contributions Act. This payroll tax is used to fund Social Security and Medicare.
Filing Status: A category for taxpayers; each taxpayer must select a filing status on their tax return: Single, Head of Household, Married Filing Jointly, Married Filing Separately, or Qualifying Widow(er). Filing status determines things such as your overall tax rate and your eligibility and income limits for various credits and deductions.
Flat Tax: A tax based on the same percentage of income for all taxpayers, regardless of income level.
Flexible Spending Account (FSA): Also called a reimbursement account. A special employer sponsored account which is generally used for approved medical expenses. Your contributions are taken directly from your paycheck before taxes are applied and are sometimes matched by an employer dollar for dollar. Funds contributed to some FSA's may become unavailable at the end of the year. See various types of savings accounts.
Foreclosure: The legal process by which a lender takes possession of a home when the homeowner has defaulted on the mortgage.
Fringe Benefit: A fringe benefit is compensation given to you by your employer in addition to your regular pay. The value of any fringe benefit is generally taxable. Examples of fringe benefits include: employee discounts, stock options, services, transportation, access to facilities, group term life insurance, expense reimbursement, etc.
FUTA Tax: A tax on employment required by the Federal Unemployment Tax Act. This payroll tax is used to fund state unemployment insurance programs and state job agencies.

G

Garnishment: Typically referred to as a wage garnishment, this is money withheld from a paycheck which is sent to another party to pay off unpaid debt (taxes, fines, child support, etc.).
Generation Skipping Transfer (GST) Tax: Sometimes called the "Grandparent Tax", the GST tax is a special tax on the transfer of an estate to your grandchildren, to another relative more than one generation removed from you, or to a non-relative who is more than 37 and 1/2 years younger than you. The GST tax is paid in addition to any applicable gift or estate taxes.
Gift Tax: A special tax paid by the giver of a gift (of money or property) worth more than a certain amount ($16,000 in 2022, for example). Some transfers of money are exempted from the gift tax, such a gift to a spouse or a gift used to pay medical or educational expenses.
Gross Income: The total amount of income you must report on your tax return. Your income before applying adjustments, exemptions, credits, and deductions.

H

Head of Household: A filing status claimed by taxpayers who are single but have qualifying dependents.
Hobby: An activity pursued not primarily for financial gain. You may generally deduct hobby expenses up to the amount of hobby income earned.
Home Office: An area of your home used primarily or exclusively for business purposes for which you may be able to take certain deductions. See Office Deduction.
Household Employee: A person you pay to cook, clean, care for a dependent, etc. in your home. If you pay a household employee over a certain amount, you will be responsible for paying Social Security and Medicare taxes, and possibly Federal Unemployment taxes.

I

"In Care of": An entry on a tax return to identify a person who may be responsible for collecting your mail while you are away.
Income Taxes: Taxes paid by individuals and businesses based on earned and unearned income.
Independent Contractor: A self-employed person who performs services for others in exchange for money or other compensation.
Indirect Tax: A tax which is not paid directly, but which is paid through a cost increase, such as sales tax.
Inflation: A decrease in the value of money and credit as consumer prices increase.
Innocent Spouse Relief: A petition filed by a divorced taxpayer (who formerly filed jointly) to be relieved of responsibility for their ex-spouse's unpaid tax bill. This applies to current and past spouses. See innocent spouse relief.
Injured Spouse Relief: Not to be confused with innocent spouse relief, a form filed by a spouse on a married filing joint income tax return to assure the spouse is not responsible for their partner's tax debt. It is used to request that one spouse's refund is not used to pay the past-due tax of their spouse. See injured spouse relief or allocation.
Insolvency: The inability to pay debts at their due date (taxes, loans, etc.).
Interest: Money gained from investments, such as bank accounts, bonds, or trusts. Interest is unearned income. See 1099 forms for interest reported on 1099-INT.
Internal Revenue Code (IRC): Legislation, as passed by United States Congress, which specifies the types of income to be taxed, how the income is taxed, and what is deductible from income.
Internal Revenue Service (IRS): A bureau of the Department of the Treasury, the IRS is the government agency responsible for collecting taxes and for enforcing the tax code.
Investment Income: Money or other compensation received from profitable investments, generally in the form of interest or dividends.
Individual Retirement Arrangement (IRA): Also called an Individual Retirement Account or a Traditional IRA. A special account designed to encourage saving money for retirement. Contributions up to a certain amount are generally tax deductible and any interest the account earns is not taxed until you withdraw funds. Withdrawals of funds before you reach a certain age (generally, 59^1/2 are usually penalized. In many cases, it is possible to convert a Traditional IRA to a Roth IRA.
Itemized Deduction: A deduction for a specific expense that may be claimed if the total amount of all itemized deductions is greater than the standard deduction. See itemized tax deductions.
ITIN: Individual Taxpayer Identification Number. A number used to identify foreign taxpayers to the IRS. Only taxpayers who do not have a Social Security Number must obtain an ITIN.

J

"Jock Tax": A state or local tax targeted at traveling professionals who work in multiple states, such as athletes.
Joint Return: A return filed by a married couple combining both spouses' income and includes a higher standard deduction and potentially other benefits.

K

Keogh Plan: A retirement plan for self-employed taxpayers. Contributions are generally tax deductible.
"Kiddie Tax": The tax paid by parents, at their tax rate, on the unearned income of a child which is in excess of a certain amount.

L

Lien: A public record of your property; the IRS right to seize property in lieu of a payment of taxes.
Levy: To impose a tax; to tax someone or to put a tax on something.
Like-Kind Exchange: A nontaxable or tax-deferred trade of similar properties.
Local Tax: A tax charged by a local government, such as a city or county. See states and localities.
Luxury Tax: An indirect tax targeted at the wealthy which is attached to certain expensive, nonessential goods or services like luxury cars or jewelry.

M

Marginal Tax Rate: The tax rate that applies to the last dollar of income earned. See past and present tax rates.
Married Filing Jointly: A filing status claimed by married couples who wish to combine income and file a single tax return together in order to take advantage of various tax benefits.
Married Filing Separately: A filing status claimed by married couples who do not wish to file a joint return and agree to report their income separately.
Modified AGI: An adjustment to your adjusted gross income; this is the AGI after taking into account deductions and penalties.
Mortgage: A loan made to purchase property, generally real estate. The borrower pledges the property to the lender as collateral to guarantee repayment of the loan. See mortgage and tax information.
Medical Savings Account (MSA): A tax deductible savings account containing funds for medical expenses not covered by insurance. Interest and qualified withdrawals are generally nontaxable. See Archer Medical Savings Account.
Multiple Support Agreement: When two or more taxpayers who provide financial support for a particular person agree to officially designate that person as the dependent of one of the supporting taxpayers, to allow that taxpayer to claim dependency exemptions and various credits and deductions.

N

"Nanny Tax": Social Security and Medicare taxes paid for a household employee such as a child care provider.
Nonresident: A person who did not live in a particular state, but worked or did business there and so must file a state income tax return. Also may refer to nonresident aliens of the United States who may have different tax implications.
Nontaxable: A kind of income which is not subject to taxation.
Not Collectible: A label given by the IRS to taxpayers who are unable to pay their tax debt.

O

Office Deduction: An above-the-line deduction for the self-employed to claim if they use part of their home as an office solely for work. Office deductions are calculated by the eFile Tax App and are based on the dimensions of the space in relation to the size of the home. See home office deductions.
Ordinary Dividend: A type of dividend - most common - which is paid out from the earnings of a corporation to qualifying stockholders and taxed as ordinary income. See dividends and taxes.

P

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.
Passive Income: Income - typically taxable - earned through activities in which the earner of the income does not actively participate in business, employment, etc. The most common form of passive income is from investments, such as stocks.
Payroll Tax: See Employment Tax.
Penalty: Charges added to your tax bill for late filing and late payment. The IRS may also charge interest for late tax payments.
Pension: A retirement plan that pays an annuity. See Individual Retirement Arrangement or pension and taxes.
Permanent and Total Disability: As defined by the IRS, a person is permanently and totally disabled if they cannot engage in any substantial and gainful activity due to a physical or mental condition and it has been determined by a physician that their condition has lasted or is expected to last continuously for at least a year or could lead to death.
Personal Exemption: An exemption claimed for yourself and, if married filing jointly, for your spouse.
Phishing: The action or practice of sending emails, text messages, or other communications impersonating a reputable company in order to convince an individual to reveal personal information, such as login credentials.
PIN: Personal Identification Number. A five digit number used to securely "sign" an electronically submitted or e-filed tax return.
Points: Additional charges paid during the financing or refinancing of a mortgage. A point is equivalent to 1% of the mortgage amount. Payments or points are generally tax deductible.
Premium: In health insurance, the premium is the monthly payment made towards a company to provide health insurance coverage, typically paid monthly. See health insurance and taxes.
Principal Residence: Also called a Primary Residence; the place where a taxpayer lives for the greater part of the year.
Progressive Tax: A tax based on a percentage of income. The higher your income, the larger a percentage you pay. This is our current federal income tax system.
Property Tax: A tax paid for valuable property such as real estate and vehicles.
Proportional Tax: Another term for Flat Tax.
Proprietor: The owner of a business or property; may also be a sole proprietor if they are the only member of the business.

Q

Qualifying Widow(er): A filing status claimed by a taxpayer whose spouse has died during the tax year. This status entitles the taxpayer to the tax rates and benefits of a joint return. If a widow(er) has dependents and does not remarry, that person may be allowed to claim Qualifying Widow(er) status for 2 more years.
Qualifying Dividend: Dividends which are taxed as capital gains instead of ordinary income.

R

Recapture: The repayment of a tax credit if requirements were not met by the taxpayer since claiming the credit.
Recovery Rebate Credit (RRC): See also: Economic Impact Payment (EIP). A tax credit introduced during the COVID-19 Pandemic for Americans to claim, regardless of income, to help with bills and expenses. This credit was paid in advance as stimulus checks during 2020 and 2021. See details on the Recovery Rebate Credit.
Rebate: Similar to a refund or refundable credit; a payment made directly to you for the purchase of something, sometimes paid in advance of filing your taxes. See Recovery Rebate Credit and Residential Energy Efficient Rebates.
Refund: The amount of money you receive back from the IRS when you have paid more taxes (usually through paycheck withholding) than you owe. See tax refunds.
Refundable: A tax credit which will paid to you as a refund if you owe no tax or added to your tax refund.
Report: To give information to the IRS, generally by filling out a form.
Resident Alien: A citizen of a foreign country who lives and works legally in the U.S.A., but is not a United States citizen. Resident aliens are subject to U.S. tax laws. See foreign earned income and taxes.
Roth IRA: A special kind of Individual Retirement Account named after Senator William Roth of Delaware. Contributions are not tax deductible, but interest and qualified withdrawals (after reaching retirement age) are completely tax-free.
Return: A collection of tax forms which summarizes and calculates a taxpayer's tax liability for a given year beginning with Form 1040 and accompanied by other forms. The tax return is not another word for tax refund; a tax return is used to calculate a tax refund or taxes owed.

S

Sales Tax: A state tax on retail products, goods, and services. It is based on a certain percentage (generally set by the state) of the price.
Schedule: Certain IRS forms which are used to summarize income and deductions; see IRS forms and schedules.
Scholarship: Money awarded for educational purposes. Scholarship funds used to pay for qualified expenses such as tuition, required fees, books, and supplies are generally considered nontaxable income. See education and taxes.
Self-Employment Tax: The tax paid by self-employed taxpayers to support Social Security and Medicare. The self-employment tax rate is 15.3% of self-employment profit or income, composed of 12.4% for Social Security and 2.9% for Medicare.
SEP (Simplified Employee Pension): A retirement plan designed for self-employed taxpayers. Contributions are generally tax deductible.
Severance Pay: Also called separation pay; money and/or benefits given to a laid-off or retiring employee upon termination of employment. Severance is generally considered taxable income.
Short Sale (Real Estate): When a home is sold for an amount that falls short of the amount still owed on the home's mortgage.
Short Sale (Stocks): When someone borrows shares of stock and sells them in the hopes that the stock's price will fall before the original loan must be repaid.
SIMPLE (Savings Incentive Match Plan for Employees): An employer-sponsored retirement plan designed for employees of small businesses (but also available to self-employed taxpayers). Contributions are generally tax deductible and up to 3% of contribution amounts are generally matched by the employer.
"Sin Tax": An excise tax attached to certain goods, collected at the point of sale, intended to discourage their use (such as cigarettes and alcohol).
Single: A filing status claimed by those who are unmarried, divorced, or legally separated and who do not qualify for the head of household status.
Standard Deduction: A specific amount that differs by filing status. You may deduct this amount from your taxable income if you do not itemize deductions. See standard deduction information.
Standard Mileage Rate: A specific amount per mile driven for business, charitable, or medical purposes, which may be deducted form your taxable income.
Statement: A form or summary; in tax terms, these are forms like the W-2 income form or 1099 income form which summarize gross pay, taxes withheld, retirement contributions, etc.
Stimulus (Check, Payment): See also: Economic Impact Payment (EIP). Payments created following the COVID-19 Pandemic in 2020 and 2021 to help Americans pay bills and other living expenses. As part of various bills, three stimulus payments were paid.

T

Tariff: A tax on imports.
Tax Avoidance: Using legal tax planning strategies to reduce your tax bill.
Tax Base: All resources available to the government for taxation. All of the nation's taxable income added together.
Tax Bracket: A range of incomes that is taxed at a specified tax rate; the bracket into which the last dollar of one's income falls.
Tax Break: A general term for exemptions, credits, deductions, or any legal way to reduce your taxes.
Tax Burden: The total amount of taxes owed by the American people or by a particular segment of the population.
Tax Code: The entire body of tax laws, regulations, and procedures.
Tax Cut: A reduction of tax rates.
Tax-Deferred: When taxes levied now are owed at a later time, such as interest on IRA contributions.
Tax Evasion: Illegally hiding income from the IRS. Deliberately underpaying taxes or using an abusive tax scheme. See tax evasion and cheaters.
Tax Liability: The total amount of taxes you owe.
Tax Rate: The percentage of income that is owed as tax. See tax rates.
Tax Shelter: An investment, business, or other activity designed primarily to avoid or evade taxes.
Tax Shift: When a tax is levied on one group of people but is in practice paid by another group. Tax shift can also refer to the process of lowering some taxes and making up the revenue by raising or implementing other taxes.
Tax Year: The 12-month period covered by a tax return. Returns for a specific tax year are usually filed in the subsequent year. For example, Tax Year 2022 Tax Returns are due to the IRS in 2023.
Taxable Income: Your Adjusted Gross Income reduced by all applicable exemptions, credits, and deductions. The amount of income that is taxed.
Taxpayer Advocate: The Taxpayer Advocate Service is an independent organization within the IRS in charge of resolving problems that may arise between a taxpayer and the IRS. Taxpayer advocates provide free and confidential advice, guidance, and representation. The IRS calls the Advocate Service "your voice inside the IRS." There is at least one taxpayer advocate stationed in every state, as well as in Washington, D.C. and Puerto Rico.
Trust: A type of tax 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.

U

Undue Hardship: A financial loss resulting in circumstances that may partially or fully exempt a person from certain tax rules, such an extension via Form 1127 or a reduction of one's tax liability.
Unearned Income: Income which was not earned by working, such as investment income or gifts.
Use Tax: A special tax levied by a state on goods used in that state but purchased in another state.

V

Value-Added Tax (VAT): A tax, popular in Europe, levied on a product at each stage of production, depending on the overall value added to the product at each stage. The consumer pays the accumulated taxes at the point of sale. For example, taxes may be attached to a car when the body is assembled, when the engine is added, and when the car is painted--and the buyer will pay all of these taxes to the car dealer, who passes them on to the government.
Voluntary Compliance: The concept that our tax system relies on taxpayers to pay the correct amount of taxes on time of their own free will.

W

"Wealth Tax": Another name for the Alternative Minimum Tax.
Withdraw: Taking funds or investments from an account, typically from a savings or retirement account. See tax implications on withdrawals from retirement.
Withholding: Money held back from your paycheck and used to pay taxes. This amount is applied to your annual tax liability. See tax withholding via Form W-4.
Withholding Allowance: Allowances are no longer used on the W-4 since 2020. You enter the IRS tax withholding amount per W-4 and per employer and on the associated state tax withholding form.
Worksheet: Part of most IRS forms used to determine the amounts for taxes, deductions, and credits.
Write-off: A general term for tax savings; usually a tax deduction or tax break.

X

Y

Z

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