Tax Glossary

AARP
American Association of Retired Persons

Adjusted Gross Income (AGI)
Income from all taxable sources minus certain adjustments to income, such as a deductible IRA contribution or student loan.

Alternative minimum tax (AMT)
A special tax imposed by the United States federal government required in addition to baseline income tax for certain individuals, corporations, estates and trusts that have exemptions or special circumstances for allowing lower payments of standard income tax. Under U.S. tax law, some tax benefits can substantially decrease a taxpayer’s regular tax amount. The alternative minimum tax (AMT) applies to high-income taxpayers by putting a limit on those benefits. It helps to make certain that those taxpayers pay at least a minimum amount of tax.

Amended return
This is a revised tax return, using Form 1040X, to correct an error on a return filed during the previous three years. An amended return may result in owing extra tax or getting a refund, depending on the updated information you provide.

Audit
A tax audit is a review of your tax return by the Internal Revenue Service (IRS) to verify the accuracy of your income and deductions. About one percent of all tax returns are audited each year, and most are done by mail and involve specific issues, not the entire return.

Business Expenses
Any expense made in the course of ordinary business. To be deductible, a business expense must be considered both necessary and ordinary.

Business Income
Income received in exchange for products or services.

Capital Gain
The profit from the sale of property or investment such as stock.

Capital Loss
The loss incurred when any capital asset, like an investment or real estate, decreases in value. A capital loss is the difference between the sale price and the purchase price of an asset.

Charitable contribution
A gift of money or other property to a qualified charity in which a tax deduction is allowed.

Corporations
A common form of business organization and one which is chartered by a state and authorized to act as a single entity. A corporation is sometimes referred to as a C-Corp. The “C” refers to the section of the IRS code that governs corporate taxes.

CPA
A Certified Public Accountant (CPA) is an accounting professional who has passed the CPA exam and fulfilled the state education and work requirements to become a licensed a CPA. Only CPAs are allowed to audit financial statements.

Credit
A dollar-for-dollar reduction of your taxes owed.

Deductions
Expenses you are allowed to subtract from your taxable income before figuring your tax bill. The amount of the standard deduction depends on the taxpayers’ filing status.

Depreciation
A deduction which reflects the gradual loss of value of business property as it wears out. For example, if a business determines that it will use a truck for three years and then replace it, the truck is depreciated over three years.

Earned Income Credit (EIC)
A refundable tax credit available to taxpayers between the ages of 25 and 65 with a a low-to-moderate-income. The amount of EIC depends on a recipient’s income and the number of children.

Filing status
Filing status is an important factor when figuring out taxable income under the federal income tax in the United States. The federal tax filing status determines which type of tax return form a taxpayer uses. Filing status is based on family situation and marital status.

Gross Income 
The total income from taxable sources, before subtracting any adjustments, deductions or exemptions.

Head of Household
A tax filing status with lower tax rates for taxpayers. This status also benefits from a higher standard deduction and wider tax brackets compared to the single filing status. A person may qualify for head of household if they are single and have a qualifying dependent living with them.

Health Savings Account
A health savings account (HSA) allows Americans under age 65 to save money, tax-advantaged, to be used for medical expenses. Contributions to an HSA reduce taxable income, and withdrawals from an HSA are tax-free when used for insurance policy deductibles, co-payments, and any other qualifying medical expenses. To qualify, you must meet specific requirements, such as being enrolled in a high-deductible health care plan. Money left in an HSA account at the end of a year can be rolled over to the next year.

Individual Retirement Account (IRA)
An individual retirement account (IRA) is a retirement account that is not part of an employer-provided retirement plan. Anyone can start and deposit money into an IRA. Those deposits may or may not be deductible, depending on the taxpayer’s income.

Joint Return
An income tax filing status that can be used by a married couple, in which the income and deductions for the two individuals are combined.

Limited Liability Company (LLC)
Limited liability companies are formed under state law. As with corporations, LLCs provide liability protection, but LLCs are typically easier to form and administer. One-person LLCs are automatically taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships by default, but an LLC can elect to be taxed as an S-Corporation or a C-Corporation.

Mutual Fund
A mutual fund is a regulated investment strategy that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio.

Net Income
An individual’s income after taxes and deductions are taken into account. Net income is also a company’s total earnings (or profit); net income is calculated by taking total revenues and subtracting the costs of doing business such as depreciation, interest, taxes and other expenses.

Net Loss
Net loss, also known net income, refers to what remains after expenses are accounted deducted. To calculate it, subtract expenses from gross income.

Ordinary Dividends
The portion of profits from a company that are passed along to the shareholders of that company. In most cases, dividends are deemed to be ordinary unless otherwise classified as qualified dividends. Dividends that are classified as being ordinary are generally taxed as being ordinary income to the shareholder who receives them.

Partnership
A business entity involving two or more people who are conducting business together but who are not incorporated.

Pension
Compensation received by an employee after retirement, paid in regular intervals.

Qualified Health Plan
A major medical health insurance plan that provides essential health benefits and meets other requirements of the Affordable Care Act.

Rollover
The transferring the holdings of one investment to another without suffering tax penalties.

Schedule A
The income tax form used to report itemized deductions to the IRS. Using this form may help reduce an individual’s federal tax liability.

S-Corporation
This special structure of business ownership pays no tax because profits and losses are passed on and taxed to the shareholders.

Sole Proprietorship
A business entity that involves one person and that is not incorporated. Results of sole proprietorship operations are reported on Schedule C, which is attached to the business owner’s personal Form 1040.

Tax-exempt
This term refers to income earning or transactions that are free from tax at the federal, state, or local level.

Taxable Income
Income that is subject to federal income tax.

Unearned Income
Income from investments rather than from work.

VITA
Volunteer Income Tax Assistance

Withholding
Refers to the income taxes and FICA taxes withheld from income before a recipient is paid.

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