Glossary of Tax Terms

There are many tax term definitions which you need to understand in order to fully understand your tax matters. We have compiled a tax glossary of all important terms for you so that you can easily understand the key terms.

ABILITY TO PAY

It’s a concept of tax fairness which states that people from different amount of wealth should pay different rates of tax. Wealth comprises of assets that a person owns such as houses, cars, stocks, bonds, and savings accounts. Income includes wages, interest and dividends, and other payments.

ADJUSTED GROSS INCOME

It’s the amount of gross income left after deductions such as deductible IRA contribution or student loan Interest

AMOUNT DUE

Amount of money that taxpayer should pay to government when there total amount of tax is more than their tax payments.

APPEAL

To request to review the IRS decision.

AUTHORIZED IRS E-FILE PROVIDER

IRS allows few businesses to participate in the IRS e-file Program. The business can be of any type; sole proprietor, partnership, corporation or an organization. Authorized IRS e-file providers include Electronic Return Originators (EROs), Transmitters, Intermediate Service Providers, and Software Developers. Any of these categories can overlap. For example, an ERO can at the same time, be a Transmitter, a Software Developer, or an Intermediate Service Provider, depending on the function being performed.

BENEFITS RECEIVED

It is a tax fairness concept; it states that people should pay amount of taxes depending upon the benefits they receive from government goods and services.

BONUS

It is the amount of money received by an employee for their services in addition to the employee’s basic salary. It is given on the basis of the quality services provided by the employee.

BUSINESS

It is the unit which comprises of continuous and regular activity that has income or profit as its primary purpose.

CITIZEN OR RESIDENT TEST

If all other test are met properly, the citizen or resident test allows taxpayers to claim a dependency exemption for persons who are U.S. citizens for some part of the year or who live in the United States, Canada, or Mexico for some part of the year.

COMMISSION

It is the money received by employee in exchange of the services they perform. Commissions are paid based on a percentage of sales made or a fixed amount per sale.

COMPULSORY PAYROLL TAX

It is the automatic tax collection method, it is collected from employers and employees to finance specific programs.

DEFICIT

Deficit occurs when the government gets less money than they spend.

DEPENDENCY EXEMPTION

It is the amount that taxpayers can claim for a “qualifying child” or “qualifying relative”. These exemptions help to reduce the taxable income. The amount exempted amount is based on set standards and is subject to change every year. One exemption is allowed for each qualifying child or qualifying relative claimed as a dependent.

DEPENDENT

Dependent is the term used to determine the qualifying child or qualifying relative, other than the taxpayer or spouse, for whom the taxpayer can claim a dependency exemption.

DIRECT DEPOSIT

Through this method the refund can be directly deposited to the taxpayer’s bank account. It is a safe, fast and simple method of tax refund. Inorder to receive the tax deposit the taxpayer must have a saving account. Banks or Financial institution give the account number and transit number to the tax payer for direct deposit.

DIRECT TAX

It’s a tax that cannot be shifted to others, such as the federal income tax.

EARNED INCOME

This includes wages, salaries, tips, including gross income, and net earnings from self-employment earnings.

EARNED INCOME CREDITS

A tax credit for certain people who work, meet certain requirements, and have earned income under a specified limit.

ELECTRONIC FILING (E-FILE)

It is the method of transmission of tax information directly to IRS using telephones and computers. Electronic filing options include:

  • Online self-prepared using a personal computer and tax preparation software
  • Using a tax professional

Electronic filing can be done from anywhere; it can be from taxpayer’s home, volunteer site, the library, a financial institution, the workplace, malls and stores, or a tax professional’s place of business.

ELECTRONIC RETURN ORIGINATOR (ERO)

ERO is the authorized IRS e-file Provider that originates the electronic submission of an income tax return to the IRS. EROs may originate the electronic submission of income tax returns they either prepared or collected from taxpayers. Some EROs charge a fee for submitting returns electronically.

EMPLOYEE

Term used for a person who works for an employer, employers decide the task employee has to carry out and the location where they need to work.

EXCISE TAX

It’s a tax applied on sale of specific products or transactions.

EXEMPT (FROM WITHHOLDING)

A taxpayer can be exempted from the withholding of federal income tax. There are few income liability, tax liability and dependency criteria which the applicant has to fulfill. This exemption does not exempt a person from other type of tax withholding for example social security tax.

EXEMPTIONS

This term is used to determine the amount of money that the taxpayer can for themselves, their spouses, and eligible dependents. The two basic exemptions include personal exemption and dependency exemption. Both exemptions help to reduce the amount of taxable income. Although both types of exemptions help to exempt the same amount but the rules to apply are different for each exemption.

FEDERAL INCOME TAX

The federal government levies a tax on personal income. The federal income tax provides for national programs such as defense, foreign affairs, law enforcement, and interest on the national debt.

FEDERAL INSURANCE CONTRIBUTIONS ACT (FICA) TAX or Social Security Tax

This form of tax provides benefits for retired workers and their dependents as well as for disabled workers and their dependents.

FEDERAL/STATE E-FILE

A program sponsored by the IRS in partnership with participating states that allows taxpayers to file federal and state income tax returns electronically at the same time.

FILE A RETURN

To submit the files containing the records of taxes filled via a mail or email, it may contain tax information or any other liability information.

FILING STATUS

Status of the filer and the subsequent rate at which the tax will be charged. Five major statuses are:

  • Single
  • Married (filing a joint return)
  • Married (filling individual returns)
  • Head of family
  • Qualified widow(er) with dependent child or children

FINANCIAL RECORDS

Paychecks, bonuses, tips given, gifts, statement of interest and the amount of dividends earned are the types of records that must be kept them to handle the tax records, these are referred to as spending and income records.

Spending records include cancelled checks, cash registers, and statements of credit cards.

FLAT TAX

This is another term for a proportional tax.

FORM W-4, EMPLOYEE’S WITHHOLDING ALLOWANCE CERTIFICATE

This is the form which should be completed by the employee and used by the employer to determine the amount of income tax to withhold.

FORMAL TAX LEGISLATION PROCESS

This is another term for a proportional tax.

FOSTER CHILD

A foster child is any child placed with a taxpayer by an authorized placement agency or by court order. Eligible foster children may be claimed by taxpayers for tax benefits.

GASOLINE EXCISE TAX

An excise tax paid by consumers when they purchase gasoline. The tax covers the manufacture, sale, and use of gasoline.

GROSS INCOME

Complete information of monetary gains such as money, goods, services and property that a person receives must be given in the tax return. It includes any compensation such as scholarships or unemployment benefits; however it does not include the welfare benefits and other social security benefits that are non taxable.

HEAD OF HOUSEHOLD FILING STATUS

Following are the requirements for filing in this status:

  • Applicant must be unmarried or considered unmarried at the end of the year i.e. last day of that year.
  • More than half of the annual cost of maintaining home is paid by the applicant.
  • A qualifying person must have lived with the applicant for more than 6 months; however it is not necessary for the dependant parents to fulfill this requirement.

HORIZONTAL EQUITY

This concept determines that people in similar income group should be taxed at the same rate.