This glossary provides clear and practical definitions of common tax terms to help individuals and businesses better understand tax concepts and make informed financial decisions.
A
Above-the-Line Deduction
A deduction applied before calculating adjusted gross income (AGI), reducing total gross income.
Example: You contribute $3,000 to a traditional IRA.
Result: Your gross income is reduced before AGI is calculated.
Adjusted Gross Income (AGI)
Gross income minus eligible above-the-line deductions.
Example: You earn $80,000 and have $5,000 in adjustments.
Result: Your AGI is $75,000.
After-Tax Income
Income remaining after all taxes have been paid.
Example: You earn $60,000 and pay $10,000 in taxes.
Result: Your after-tax income is $50,000.
Audit
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.
B
Below-the-Line Deduction
A deduction applied after AGI to reduce taxable income.
Example: You claim the standard deduction.
Result: Your taxable income is reduced.
C
Capital Gains Tax
A tax on profits earned from the sale of assets such as stocks or property.
Example: You buy stock for $1,000 and sell it for $1,500.
Result: You pay tax on the $500 gain.
Corporate Income Tax
A tax imposed on the net profits earned by corporations.
Example: A company earns profit during the year.
Result: It pays tax on that profit.
D
Deduction
An expense that reduces taxable income.
Example: You donate $1,000 to charity.
Result: Your taxable income is reduced.
Double Taxation
The taxation of the same income twice.
Example: A corporation pays tax on profits, then shareholders pay tax again on dividends received.
E
Effective Tax Rate
The average rate at which income is taxed.
Example: You earn $100,000 and pay $18,000 in taxes.
Result: Your effective tax rate is 18%.
Estate Tax
A tax on the transfer of assets after a person’s death.
Example: A large estate is taxed before assets are distributed to heirs.
Excise Tax
A tax applied to specific goods or activities.
Example: Fuel prices include excise taxes per gallon.
Exempt Income
Income that is not subject to tax.
Example: Interest earned from certain municipal bonds is tax-exempt.
F
Filing Status
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.
Fiscal Year
A 12-month accounting period used for financial reporting.
Example: A business may operate on a fiscal year from July to June.
G
Gift Tax
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.
Gross Income
Total income earned before any deductions or taxes.
Example: Salary, bonuses, and rental income all contribute to gross income.
I
Income Tax
A tax on earnings from wages, business activities, or investments.
Example: Taxes are withheld from your paycheck based on your income.
Interest Expense
The cost incurred from borrowing money.
Example: Mortgage interest may be deductible, reducing taxable income.
Itemized Deduction
Specific expenses claimed instead of the standard deduction.
Example: Medical expenses, mortgage interest, and charitable donations may be itemized.
L
Liability
A financial obligation or debt owed.
Example: A loan balance is considered a liability.
Tax Liability
The total amount of tax owed to the government.
Example: After filing your return, you owe $4,000 in taxes.
M
Marginal Tax Rate
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%.
N
Net Income
Income remaining after all expenses and taxes have been deducted.
Example: Revenue minus expenses and taxes equals net income.
Nonrefundable Tax Credit
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.