Chapter 3

amended return

A tax return filed to adjust for information received after the filing date of the taxpayer's original return or to correct errors.

progressive tax structure

A tax structure in which the larger the amount of taxable income, the higher the rate at which it is taxed.

income shifting

A technique used to reduce taxes in which a taxpayer shifts a portion of income to relatives in lower tax brackets.

income taxes

A type of tax levied on taxable income by the federal government and by many state and local governments.

adjustments to (gross) income

Allowable deductions from gross income, including certain employee, personal retirement, insurance, and support expenses.

tax audit

An examination by the IRS to validate the accuracy of a given tax return.

standard deduction

A blanket deduction that depends on the taxpayer's filing status, age, and vision and can be taken by a taxpayer whose total itemized deductions are too small.

exemptions

Deductions from AGI based on the number of persons supported by the taxpayer's income.

tax credits

Deductions from a taxpayer's tax liability that directly reduce his or her taxes due rather than taxable income.

tax deferred

Income that is not subject to taxes immediately but that will be subject to taxes later.

itemized deductions

Personal expenditures that can be deducted from AGI when determining taxable income.

average tax rate

The rate at which each dollar of taxable income is taxed on average; calculated by dividing the tax liability by taxable income.

marginal tax rate

The tax rate that you pay on the next dollar of taxable income.

gross income

The total of all of a taxpayer's income (before any adjustments, deductions, or exemptions) subject to federal taxes; it includes active, portfolio, and passive income.

federal withholding taxes

Taxes—based on the level of earnings and the number of withholding allowances claimed—that an employer deducts from the employee's gross earnings each pay period.

tax avoidance

The act of reducing taxes in ways that are legal and compatible with the intent of Congress.

adjusted gross income (AGI)

The amount of income remaining after subtracting all allowable adjustments to income from gross income.

taxable income

The amount of income subject to taxes; it is calculated by subtracting adjustments, the larger of itemized or standard deductions, and exemptions from gross income.

taxes

The dues paid for membership in our society; a cost of living in this country.

tax evasion

The illegal act of failing to report income or deductions accurately and, in extreme cases, failing to pay taxes altogether.

Federal Insurance Contributions Act (FICA) or social security tax

The law establishing the combined Old-Age, Survivor's, Disability, and Hospital Insurance tax levied on both employer and employee.

estimated taxes

Tax payments required on income not subject to withholding that are paid in four installments.