Definitions of key tax terms in introduction to Accounting 430: Taxes and Business
Decisions
1. Taxable Income:
Definition: The portion of an individual or entity's income that is subject to
taxation after various deductions, exemptions, and credits have been applied.
2. Deduction:
Definition: An amount that can be subtracted from an individual's or business's
taxable income, reducing the amount on which income tax is calculated.
3. Tax Credit:
Definition: A direct reduction in the amount of income tax owed, usually offered
by governments to incentivize specific behaviors, such as education, energy
efficiency, or adoption.
4. Withholding:
Definition: The amount of income tax that is deducted from an employee's wages
by their employer and sent directly to the government on behalf of the employee.
5. Filing Status:
Definition: A taxpayer's legal status, such as Single, Married Filing Jointly, Head
of Household, etc., which determines the tax rates and standard deduction
applicable to their income.
6. Standard Deduction:
Definition: A fixed dollar amount that reduces the taxpayer's adjusted gross
income, providing a basic level of tax-free income. Taxpayers can choose between
taking the standard deduction or itemizing their deductions.
7. Tax Bracket:
Definition: The range of income levels to which a specific tax rate applies. As
income increases, taxpayers may move into higher tax brackets, resulting in a
higher percentage of income being taxed.
8. Tax Exemption:
Definition: An amount of money that can be excluded from an individual's taxable
income, typically based on factors such as dependents or specific circumstances.
9. Capital Gains:
Definition: Profits from the sale of investments or assets, such as stocks, real
estate, or other capital assets. Capital gains are often subject to special tax rates.
10. Adjusted Gross Income (AGI):
Definition: Total income from all sources minus certain deductions, such as
business expenses, student loan interest, and contributions to retirement accounts.
AGI is used as a starting point for calculating taxable income.
11. Depreciation:
Definition: The gradual decrease in the value of an asset over time, used for tax
purposes to allocate the cost of a tangible asset over its useful life.
12. Tax Shelter:
Definition: A legal strategy or investment that provides taxpayers with a reduction
in their taxable income, often used for the purpose of minimizing tax liability.
13. Tax Return:
Definition: A document filed with the government, usually annually, that reports
an individual's or entity's income, expenses, and other relevant financial
information. The tax return is used to calculate the amount of taxes owed or
refunded.
14. Tax Liability:
Definition: The total amount of taxes a taxpayer owes to the government, which is
based on their taxable income, deductions, and credits.
15. Estimated Tax:
Definition: Quarterly payments made by individuals and businesses to the tax
authorities, estimating their annual tax liability. This is often required for those
who do not have taxes withheld from their income, such as self-employed
individuals.
16. Audit:
Definition: An examination of a taxpayer's financial records and activities by tax
authorities to ensure compliance with tax laws. Audits can be random or triggered
by specific red flags.
17. Tax Evasion:
Definition: The illegal act of deliberately underreporting income, inflating
deductions, or engaging in other fraudulent activities to avoid paying taxes owed.
18. Tax Deductible:
Definition: Expenses that can be subtracted from one's taxable income to reduce
the overall tax liability. Common examples include mortgage interest, charitable
contributions, and certain business expenses.
19. Dependent:
Definition: A person, such as a child or relative, who meets specific criteria and
qualifies the taxpayer for certain tax benefits, such as exemptions or credits.
20. Alternative Minimum Tax (AMT):
Definition: A parallel tax system designed to ensure that high-income individuals
and corporations pay a minimum amount of taxes, even if they have numerous
deductions and credits.
21. State Income Tax:
Definition: Income tax levied by individual U.S. states on residents and
businesses within their jurisdiction. Each state has its own tax rates and rules.
22. Value Added Tax (VAT):
Definition: A consumption tax levied on the value added to a product or service at
each stage of its production and distribution. Common in many countries outside
the United States.
23. Tax Treaty:
Definition: An agreement between two or more countries to prevent double
taxation on the same income. Tax treaties often establish rules for the taxation of
cross-border income.
24. Tax Refund:
Definition: The amount of money returned to a taxpayer when their total tax
payments, through withholding or estimated tax payments, exceed the amount of
tax owed.
25. Estate Tax:
Definition: A tax imposed on the transfer of an individual's wealth upon their
death. The tax is applied to the estate's total value before distribution to heirw
26. Tax Planning:
Definition: The process of organizing financial affairs to minimize tax liability.
Tax planning involves strategic decisions to take advantage of deductions, credits,
and other incentives within the legal framework.
27. Tax Shelter:
Definition (Alternative): Any legal strategy or investment that provides taxpayers
with a reduction in their taxable income, often used for the purpose of minimizing
tax liability.
28. Tax Code:
Definition: The collection of laws and regulations that define the rules and
procedures for the assessment and collection of taxes. It is the legal framework
within which taxation operates.
29. Form W-2:
Definition: A tax form provided by employers to employees, reporting the
employee's annual wages, tax withholdings, and other relevant financial
information.
30. Form 1099:
Definition: A series of tax forms used to report various types of income, such as
interest, dividends, and freelance income, to the IRS.
31. Cost Basis:
Definition: The original value of an asset, used to determine capital gains or
losses when the asset is sold. It is often adjusted for factors like depreciation or
improvements.
32. Tax Jurisdiction:
Definition: A geographical area or political entity with the authority to levy and
collect taxes. Different jurisdictions may have distinct tax laws and rates.
33. Tax Levy:
Definition: A legal seizure of property by the government to satisfy a tax debt.
This typically occurs after other attempts to collect the debt have failed.
34. Tax Lien:
Definition: A legal claim by the government on a taxpayer's property as security
for a tax debt. A tax lien may be filed when the taxpayer fails to pay taxes owed.
35. Form 1040:
Definition: The standard U.S. individual income tax return form used by
taxpayers to file their annual income tax returns with the IRS.
36. Excise Tax:
Definition: A tax imposed on specific goods, services, or activities, often used to
discourage or regulate certain behaviors or to fund specific government programs.
37. Tax Filing Deadline:
Definition: The date by which individuals and businesses must submit their tax
returns to the government. In the United States, the typical deadline is April 15th,
unless it falls on a weekend or holiday.
38. Tax Software:
Definition: Computer programs designed to assist individuals and businesses in
preparing and filing their tax returns electronically. Popular tax software includes
TurboTax and H&R Block.
39. Advance Tax:
Definition: Payments made on estimated future tax liabilities before the end of the
tax year, common for self-employed individuals or those with substantial non-
wage income.
40. Tax Audit Defense:
Definition: Services provided by professionals to assist taxpayers in responding to
and defending against a tax audit initiated by tax authorities.
41. Tax Haven:
Definition: A jurisdiction with favorable tax laws and financial secrecy
regulations, often attracting individuals and businesses seeking to reduce their tax
liability.
42. Tax Year:
Definition: The annual accounting period for which a taxpayer calculates their
income and tax liability. The tax year may not necessarily align with the calendar
year.
43. Enrolled Agent (EA):
Definition: A tax professional licensed by the IRS who is authorized to represent
taxpayers in dealings with the IRS. EAs often specialize in tax preparation and
planning.
44. Tax Organizer:
Definition: A document or tool provided by tax preparers to clients to help them
gather and organize the necessary information for their tax return. It typically
includes sections for income, deductions, and other relevant details.
45. Power of Attorney (POA):
Definition: A legal document that grants someone the authority to act on behalf of
another person, often used by taxpayers to authorize tax professionals to represent
them before the IRS.
46. E-file:
Definition: The electronic filing of tax returns directly with the IRS or other tax
authorities using specialized software or through authorized tax professionals.
47. Tax Preparer Identification Number (PTIN):
Definition: A unique identification number assigned by the IRS to tax
professionals who prepare federal tax returns for compensation.
48. Due Diligence:
Definition: The careful and thorough review of a taxpayer's financial information
by tax preparers to ensure accurate reporting and compliance with tax laws.
49. Engagement Letter:
Definition: A formal agreement between a taxpayer and a tax professional
outlining the scope of services, fees, and other terms related to the tax preparation
or advisory services.
50. Estimated Tax Voucher:
Definition: A form provided by tax authorities that taxpayers use to make
estimated tax payments throughout the year, especially applicable for self-
employed individuals and those with significant investment income.
51. Refund Anticipation Loan (RAL):
Definition: A short-term loan provided by a financial institution based on the
anticipated tax refund, often with high fees and interest rates.
52. Tax Organizer Software:
Definition: Software tools or applications designed to assist tax preparers in
organizing client information and streamlining the tax preparation process.
53. Tax Transcript:
Definition: A summary of a taxpayer's tax return information as reported to the
IRS. Tax transcripts can be used for verification purposes, especially when
applying for loans or financial assistance.
54. Innocent Spouse Relief:
Definition: A provision that allows a spouse to be relieved of joint tax liability if
their partner made errors or committed fraud on the tax return without their
knowledge.
55. Tax Resolution:
Definition: Services provided by tax professionals to help individuals or
businesses resolve tax issues, negotiate with tax authorities, and develop strategies
for settling outstanding tax debts.
56. Tax Consultation:
Definition: A meeting or discussion between a taxpayer and a tax professional to
assess their financial situation, discuss tax strategies, and address specific tax-
related concerns.
57. Form 8862:
Definition: A form used by taxpayers to claim the Earned Income Tax Credit
(EITC) after it has been denied in a previous year and the issues causing the
denial have been resolved.
58. Tax Compliance:
Definition: The adherence to tax laws and regulations by individuals and
businesses, ensuring accurate reporting and timely payment of taxes.
