A

-Adjusted Gross Income (AGI): Your total gross income minus specific deductions (such as contributions to retirement accounts). AGI is important because it determines eligibility for various tax credits and deductions.

- Audit: An examination of an individual’s or organization’s financial records by the IRS or state tax authority to ensure compliance with tax laws. Audits can be random or triggered by discrepancies in reported income.

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B

- Basis: The original value of an asset, used to determine capital gains or losses when the asset is sold. Adjustments to basis can occur due to improvements or depreciation.

- Business Expense: Ordinary and necessary costs incurred in the course of business operations, such as rent, utilities, and salaries, which can be deducted from income to reduce taxable profit.

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C

- Capital Gains: Profits from the sale of assets or investments. Short-term capital gains (from assets held for one year or less) are taxed at ordinary income rates, while long-term capital gains (from assets held for more than one year) are taxed at reduced rates.

- Charitable Contribution: Donations made to qualified organizations that can be deducted from taxable income. Contributions must be documented, and there are limits on how much can be deducted based on AGI.

 

D

- Deduction: An expense that can be subtracted from gross income to reduce taxable income. Deductions can be standard (a fixed amount) or itemized (specific expenses).

- Dependent: A person who relies on another for financial support, which can affect tax filing status and eligibility for certain deductions and credits. Dependents can be children or qualifying relatives.

 

E

-Exemption: A deduction that reduces the amount of income subject to tax, often for dependents. Prior to the Tax Cuts and Jobs Act of 2017, personal exemptions were available; however, they were eliminated for tax years 2018 through 2025.

- Estimated Tax: Payments made to the IRS based on expected income, typically for self-employed individuals or those with significant income not subject to withholding. Payments are usually made quarterly.

 

F

- Filing Status: A category that determines the rate at which income is taxed, such as single, married filing jointly, married filing separately, head of household, or qualifying widow(er).

-Fringe Benefits: Additional benefits provided by an employer, such as health insurance, retirement contributions, and bonuses, which may be taxable or non-taxable.

 

G

-Gross Income: All income received in the form of money, goods, or services before any deductions or taxes. This includes wages, dividends, capital gains, and interest.

-Gift Tax: A tax on the transfer of property from one individual to another without receiving something of equal value in return. There are annual exclusion limits and lifetime exemption amounts.

 

H

-Home Office Deduction: A tax deduction for expenses related to the use of a portion of a home for business purposes. The deduction can be calculated using the simplified method or the actual expense method.

-Health Savings Account (HSA): A tax-advantaged account that can be used to pay for qualified medical expenses. Contributions are tax-deductible, and withdrawals for eligible expenses are tax-free.

 

I

- Itemized Deductions: Specific expenses that can be deducted from adjusted gross income, such as mortgage interest, state and local taxes, medical expenses, and charitable contributions. Taxpayers can choose between taking the standard deduction or itemizing.

- **IRS (Internal Revenue Service): The U.S. government agency responsible for tax collection and enforcement of tax laws. The IRS provides guidelines, forms, and assistance for taxpayers.

 

J

-Joint Return: A tax return filed by a married couple together, allowing them to combine income and deductions. This often results in a lower tax liability compared to filing separately.

 

K

-K-1 Form: A tax document used to report income, deductions, and credits from partnerships, S corporations, and estates. Each partner or shareholder receives a K-1 to report their share of income on their personal tax return.

 

L

-Limited Liability Company (LLC): A business structure that provides personal liability protection to its owners (members) while allowing for flexible tax treatment. LLCs can choose to be taxed as sole proprietorships, partnerships, or corporations.

-Loss Carryforward: A tax provision that allows taxpayers to apply a net operating loss to future tax years to offset taxable income.

 

M

- Marginal Tax Rate: The rate at which the last dollar of income is taxed. The U.S. tax system is progressive, meaning that higher income levels are taxed at higher rates.

-Modified Adjusted Gross Income (MAGI): AGI adjusted for certain deductions and exclusions, such as student loan interest or foreign earned income. MAGI is used to determine eligibility for various tax benefits, including contributions to Roth IRAs.

 

N

-Net Income: Income remaining after all expenses and deductions have been subtracted from gross income. For businesses, this is often referred to as net profit.

-Nonprofit Organization: An organization that operates for a purpose other than making a profit and may be exempt from certain taxes. Nonprofits must meet specific criteria to maintain their tax-exempt status.

 

O

- **Overpayment**: When a taxpayer pays more tax than is owed, which can result in a refund. Taxpayers can apply for a refund by filing an amended return or waiting for the IRS to process their return.

- **Offset**: A reduction in tax liability due to credits or other adjustments. For example, if a taxpayer owes money but is eligible for a tax credit, the credit can offset the amount owed.

 

P

-Passive Income: Earnings derived from rental properties, limited partnerships, or other enterprises in which a person is not actively involved. Passive income may be subject to different tax rules.

-Pre-tax Contributions: Contributions made to retirement accounts or other plans before taxes are deducted, reducing taxable income for the year. Examples include contributions to a 401(k) or traditional IRA.

 

Q

-Qualified Charitable Distribution (QCD): A direct transfer of funds from an IRA to a qualified charity that can count toward required minimum distributions (RMDs) for individuals over age 70½. QCDs are not included in taxable income.

-Qualified Medical Expenses: Medical expenses that can be paid for with tax-advantaged accounts like HSAs and FSAs, including deductibles, copayments, and some over-the-counter medications.

 

R

-Refund: The amount returned to a taxpayer when they have overpaid their taxes. Taxpayers can check the status of their refund through the IRS website.

-Retirement Account: A savings account with tax advantages for retirement savings, such as a 401(k), Traditional IRA, or Roth IRA. Contributions may be tax-deductible or made with after-tax dollars.

 

S

-Standard Deduction: A fixed dollar amount that reduces the income on which you are taxed, available to all taxpayers. The amount varies based on filing status and is adjusted annually for inflation.

-Self-Employment Tax: A tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is calculated on net earnings from self-employment.

 

T

-Tax Credit: An amount that taxpayers can subtract directly from the taxes they owe, reducing their tax liability. Examples include the Earned Income Tax Credit (EITC) and Child Tax Credit.

-Tax Liability: The total amount of tax owed to the government based on taxable income and applicable tax rates.

 

U

-Unemployment Tax: A tax that employers pay to fund unemployment benefits for workers who lose their jobs. Employees do not pay this tax; it is solely the responsibility of employers.

-Underpayment Penalty: A penalty imposed on taxpayers who do not pay enough tax throughout the year, either through withholding or estimated tax payments.

 

V

-Voluntary Compliance: The principle that taxpayers are responsible for reporting their income and calculating their tax liability accurately. The IRS relies on this compliance for effective tax collection.

-Value Added Tax (VAT): A type of indirect tax imposed at each stage of production on the value added to goods and services. VAT is not commonly used in the U.S. but is prevalent in many other countries.

 

W

-Withholding: The portion of an employee’s earnings that is withheld by the employer for tax purposes. This amount is based on the employee's W-4 form and is credited against the employee's annual tax liability.

-W-2 Form: A tax form that employers must send to employees and the IRS, detailing annual wages and tax withheld. Employees use this form to file their income tax returns.

 

X

-Exempt Interest: Interest income that is not subject to federal income tax, such as interest from municipal bonds. While exempt from federal tax, it may still be subject to state and local taxes.

 

Y

-Year-End Tax Planning: Strategies employed at the end of the tax year to minimize tax liability, such as maximizing retirement contributions, harvesting tax losses, or adjusting withholding.

 

Z

-Zero Tax Bracket: The income level at which a taxpayer pays no federal income tax. For example, in the U.S., individuals with income below the standard deduction amount may fall into this bracket.

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