Understanding Taxes: Tax Terminology
Written by: Daniel Gleich
401(k): This is an employer-sponsored retirement plan where the employer withholds money from the employee's paycheck and invests it for the employee's retirement. Some employers match their employees' 401(k) contributions. The gains on a 401(k) are considered tax-deferred.
Audit: This is a review of your previous tax returns by the IRS in order to discover any discrepancies and rectify any errors. As a general rule, being audited is not a good thing.
Certified Professional Accountant (CPA): A CPA is a professional who is licensed to perform certain functions, such as reviewing, preparing, and filing tax returns for others. This certification means the individual has proven that they have the necessary skills and capabilities to perform accounting duties.
Child Tax Credit: The Child Tax Credit is a credit that applies for each minor dependent claimed on your tax return. The amount of the tax credit can be up to $2,000 per child, but it decreases as your gross income rises.
Dependent: This is any individual, typically a minor child, who the taxpayer is financially responsible for.
Earned Income: This is income you have earned, such as salary, wages, tips, or commissions. Earned income does not include income from dividends or the sale of stocks.
Electronic Filing (E-Filing): Electronic filing is the fastest and most efficient way to file your taxes. You can either e-file your taxes yourself or have them prepared by a tax professional or accountant.
Exemption: In certain instances, individuals may be relieved from certain tax burdens, and this is called an exemption.
FICA: This acronym stands for the Federal Insurance Contributions Act. FICA tax is deducted from almost all paychecks. This tax funds Medicare and Social Security.
Gross Income: This is the total amount of yearly compensation a person has received in the form of income, dividends, grants, and unemployment. Your gross income is the total amount of earnings before taxes are deducted.
Head of Household: You may use head of household filing status for your taxes if you are responsible for covering more than half of the household expenses, you are unmarried on the last day of the calendar year, and a qualifying individual or dependent lived with you in the household for at least half of the year.
Income Tax: At its most basic, this is a tax levied on an individual's earned income, including money from dividends, bonds, and stocks as well as wages.
Individual Retirement Account (IRA): Other than a 401(k), an IRA is one of the most popular tools used to save for retirement. There are a variety of types of IRAs that can be tailored to each individual. Certain individuals are allowed to make tax-free contributions to their IRA of up to $6,000 per year, depending on qualifying conditions.
Internal Revenue Service (IRS): According to their website, "The Internal Revenue Service is the nation's tax collection agency and administers the Internal Revenue Code enacted by Congress." In simpler terms, the IRS is the agency in charge of collecting taxes for the federal government.
Net Income: This is the amount of true income earned after expenses, taxes, and other withholdings have been applied. Net income is always lower than gross income.
Progressive Tax: True to its name, a progressive tax levies a higher tax burden on individuals with a higher income and a lower tax burden on individuals with lower incomes.
Refund: When your total tax bill for the year is less than the amount that was deducted from your pay, you may be entitled to a tax refund from the IRS.
Salary: Any income paid out in set installments for work performed, rather than an hourly wage, is a salary. Salaries are typically expressed as yearly values and paid out either weekly, biweekly, or monthly.
Tips: This is any additional income given to service workers above and beyond their normal wage. For some workers, such as servers and delivery drivers, tips can make up the majority of their income. Tips are taxable income.
Wages: This is income paid out for hourly work. A person's wages are computed by multiplying the number of hours worked by their hourly rate of pay.
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