Glossary of Tax Terms

The following is a list of the most common terms and phrases used in relation to tax, and their definitions:




Adjusted gross income

Gross income minus allowable deductions
Adjustment to Income

Expenses that can be deducted even to the taxes of those who use standard deduction
Adoption credit

Nonrefundable credit for qualified adoption expenses
Advance earned income credit

Prepayments made by an employer to an employee for earned income credit

The examination and verification done by the IRS of returns or any transaction with tax consequences.
Casualty loss

Loss caused by complete or partial destruction of property as a result of an unexpected event
Charitable contributions

Money or property given to a qualified charity as a donation
Child and dependent care credit

A tax credit in the amount of a percentage of the amount expended on child or dependent care by an employed individual
Child tax credit

Tax credit available to people with children under the age of seventeen

Wages, commissions, tips, fees, or self-employment income from services rendered

Reductions of tax liability allowed by Congress for various purposes

A subtraction from taxable income

A person who meets the five tests of dependency and thereby qualifies to be claimed as a dependent for tax purposes

Deduction on the value of an item used for business for its wear and tear
Earned income

Income derived from personal services – wages, tips, bonuses, and any other type of compensation
Earned income credit

A tax credit allowed to employed individuals whose income and modified gross income is less than a certain amount
Employment expenses

Ordinary and necessary expenses necessary to perform the duties for which an employee was hired
Entertainment expenses

Employment expenses that have an element of entertainment that is directly related to conducting business
Estimated tax

What the taxpayer expects to owe in taxes over the course of the year, generally paid quarterly with vouchers

A reduction of income that would otherwise be taxed
Foster child

A child other than a natural or adopted child who lived with the taxpayer for the entire year and whom the taxpayer treated as his or her own child
Head of the household

A filing status used by an unmarried taxpayer who pays over half of the cost of maintaining the home of a qualified individual
Hobby loss

A nondeductible loss from a hobby
Home office expense

Expenses arising from operating a business in a qualified manner in your home
Internal Revenue Service

The Treasury Department division responsible for collecting taxes
Itemized deductions

Expenditures that the tax code deems appropriate for reducing adjusted gross income
Married filing jointly

A filing status used by a couple that is married at the end of the tax year and uses one tax return
Married filing separately

The filing status used by a couple that is married at the end of the year and chooses to file separate tax returns
Modified adjusted gross income

There are different definitions for different purposes. It is usually the adjusted gross income with various items added back in
Nontaxable income

Income that is not taxed
Permanent and total disability

A disability that is expected to last for at least a year and keeps an individual from any gainful activity

A business that is owned and controlled by one person
Qualifying widow(er)

The filing status used by a qualified person for the two years following a spouse’s death

IRS forms that are used to report various kinds of income, deductions, and credits

A person who individually decides when and where to work and pays his or her own expenses. Self-employed individuals must pay self-employment taxes
Standard deduction

A predetermined amount of income that is not subject to taxes and is claimed when an individual does not itemize deductions
Taxable income

Adjusted gross income minus deductions and exemptions
Unearned income

Income that is not derived from services performed, such as interest, dividends, and royalties

An IRS document that is provided to the taxpayer to compile information and is not usually filed with the return

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