A deduction applied before calculating adjusted gross income (AGI), reducing total gross income.
Example: Contributing $3,000 to a traditional IRA reduces your gross income before AGI is calculated.
Gross income minus eligible above-the-line deductions.
Example: Earning $80,000 with $5,000 in adjustments results in an AGI of $75,000.
Income remaining after all taxes have been paid.
Example: Earning $60,000 and paying $10,000 in taxes leaves $50,000 in after-tax income.
A parallel tax system that ensures high-income earners pay a minimum level of tax, regardless of deductions.
Example: Taxpayers with many deductions may owe AMT if it exceeds their regular tax.
An examination of financial records to verify accuracy and compliance with tax laws.
Example: A tax authority reviews your return and requests documentation to verify deductions.
A corrected tax return filed to fix errors or omissions on a previously submitted return.
Example: Filing Form 1040-X to report income you forgot to include on your original return.
A deduction applied after AGI to reduce taxable income.
Example: Claiming the standard deduction lowers your taxable income.
The original cost or value of an asset, used to calculate gain or loss upon sale.
Example: Buying stock for $1,000 gives you a $1,000 basis; selling at $1,500 results in a $500 gain.
When inflation pushes income into higher tax brackets without a real increase in purchasing power.
Example: A small raise may move a taxpayer into the next tax bracket, increasing their marginal rate.
A tax on profits earned from the sale of assets such as stocks or property.
Example: Buying stock for $1,000 and selling it for $1,500 results in a $500 taxable gain.
A loss that occurs when an asset is sold for less than its purchase price.
Example: Selling stock bought at $2,000 for $1,500 results in a $500 capital loss, which can offset gains.
A tax imposed on the net profits earned by corporations.
Example: A company earns profit during the year and pays tax on that amount.
Tax credits directly reduce taxes owed dollar-for-dollar; deductions reduce taxable income before tax is calculated.
Example: A $1,000 credit saves $1,000 in taxes; a $1,000 deduction saves based on your tax rate.
An expense that reduces taxable income.
Example: Donating $1,000 to charity reduces your taxable income by $1,000.
A deduction for the gradual decline in value of a business asset over time.
Example: A business vehicle worth $30,000 may be depreciated over several years, reducing taxable income each year.
The taxation of the same income twice.
Example: A corporation pays tax on profits, then shareholders pay tax again on dividends received.
The average rate at which all income is taxed.
Example: Earning $100,000 and paying $18,000 in taxes gives an effective tax rate of 18%.
A tax on the transfer of assets after a person’s death.
Example: A large estate may be taxed before assets are distributed to heirs.
Quarterly tax payments made by self-employed individuals or those with income not subject to withholding.
Example: A freelancer pays estimated taxes four times a year to avoid underpayment penalties.
A tax applied to specific goods or activities.
Example: Fuel prices include excise taxes per gallon.
Income that is not subject to tax.
Example: Interest earned from certain municipal bonds is tax-exempt.
A classification that determines tax rates and eligibility for deductions and credits.
Example: Married Filing Jointly may result in lower taxes compared to filing separately.
A 12-month accounting period used for financial reporting.
Example: A business may operate on a fiscal year from July to June.
Federal Insurance Contributions Act taxes, which fund Social Security and Medicare.
Example: Both employees and employers contribute a percentage of wages toward FICA taxes.
A tax on transferring money or property without receiving equal value in return.
Example: Giving a large monetary gift may require reporting for tax purposes.
Total income earned before any deductions or taxes.
Example: Salary, bonuses, and rental income all contribute to gross income.
A tax on earnings from wages, business activities, or investments.
Example: Taxes are withheld from your paycheck based on your income.
The cost incurred from borrowing money, which may be deductible.
Example: Mortgage interest may be deductible, reducing taxable income.
Specific expenses claimed instead of the standard deduction.
Example: Medical expenses, mortgage interest, and charitable donations may be itemized.
A financial obligation or debt owed.
Example: A loan balance is considered a liability on a balance sheet.
The total amount of tax owed to the government.
Example: After filing your return, you owe $4,000 in taxes — that is your tax liability.
A tax-deferred transaction where one business or investment asset is exchanged for another similar asset.
Example: Swapping one rental property for another may defer capital gains tax.
The tax rate applied to the last dollar of income earned.
Example: If you are in the 22% bracket, your last earned dollar is taxed at 22%.
A payroll tax that funds Medicare health benefits, typically 1.45% for employees and employers each.
Example: An additional 0.9% Medicare surtax applies to high-income earners above a threshold.
Income remaining after all expenses and taxes have been deducted.
Example: Revenue minus expenses and taxes equals net income.
A tax credit that reduces tax owed but cannot result in a refund.
Example: A $1,000 credit reduces your tax from $800 to $0, but no refund is issued for the remaining $200.
Income earned with minimal active involvement, such as rental income or limited partnership earnings.
Example: Rental income from a property you own but do not actively manage is typically passive income.
Taxes withheld from employee wages and paid by employers to fund government programs.
Example: Social Security and Medicare are funded through payroll taxes split between employer and employee.
An additional charge imposed for failing to meet tax obligations, such as late filing or underpayment.
Example: Filing your return after the deadline without an extension may result in a late-filing penalty.
The return of excess taxes paid beyond what was actually owed.
Example: If your withholdings exceed your tax liability, you receive a refund after filing.
A credit that can reduce your tax below zero, resulting in a refund.
Example: The Earned Income Tax Credit may give you a refund even if you owe no taxes.
Accounts such as 401(k) or IRA that offer tax benefits for retirement savings.
Example: Contributions to a traditional 401(k) reduce taxable income; a Roth 401(k) grows tax-free.
A tax paid by self-employed individuals covering both the employee and employer portions of Social Security and Medicare.
Example: A freelancer earning $50,000 pays self-employment tax of approximately 15.3% on net earnings.
A fixed dollar amount that reduces taxable income, available to all taxpayers who do not itemize.
Example: A single filer may claim a standard deduction, reducing their taxable income without listing specific expenses.
An adjustment to the cost basis of an inherited asset to its fair market value at the time of inheritance.
Example: Inheriting stock originally worth $10,000 but valued at $50,000 at death means your basis is $50,000, reducing potential capital gains tax.
A range of income subject to a specific tax rate under a progressive tax system.
Example: Income between $44,726 and $95,375 (for single filers) falls in the 22% bracket.
A direct reduction of the amount of tax owed, dollar for dollar.
Example: A $500 tax credit directly reduces your tax bill by $500.
An expense that reduces taxable income before tax is calculated.
Example: A $1,000 deduction for a taxpayer in the 24% bracket saves $240 in taxes.
The illegal act of not paying taxes owed by hiding income or falsifying records.
Example: Failing to report cash income to avoid taxes is tax evasion and can result in criminal penalties.
The legal use of tax laws to reduce one’s tax liability.
Example: Contributing to a retirement account or claiming eligible deductions are forms of tax avoidance.
A form filed with the government reporting income, deductions, and taxes owed or refunded.
Example: Form 1040 is the standard U.S. individual income tax return filed annually.
Gross income minus all allowable deductions, on which tax is calculated.
Example: After subtracting deductions from $80,000 in gross income, your taxable income may be $60,000.
A form employers provide showing annual wages and taxes withheld.
Example: Employees receive a W-2 each January to file their tax return.
A form employees complete to tell employers how much federal income tax to withhold from their paychecks.
Example: A form employees complete to tell employers how much federal income tax to withhold from their paychecks.
Example: Updating your W-4 after a major life event, such as marriage, can adjust your withholding.
The portion of an employee’s paycheck that an employer remits directly to the government as prepayment of income tax.
Example: If too little is withheld throughout the year, you may owe taxes when you file.
A tax on the total net worth of an individual above a certain threshold.
Example: Some countries levy an annual wealth tax on assets exceeding a set value.
