personal finance chapter 4

exemption

a deduction from adjusted gross income for yourself, your spouse, and qualified dependents

tax audit

a detailed examination of your tax return by the Internal Revenue Service

standard deduction

a set amount on which no taxes are paid

excise tax

a tax imposed on specific goods and services such as gasoline cigarettes alcohol tires and air travel

estate tax

a tax imposed on the value of a person's property at the time of his or her death

inheritance tax

a tax levied on the value of property bequeathed by a deceased person

exclusion

an amount not included in gross income

tax credit

an amount subtracted directly from the amount of taxes owed

tax deduction

an amount subtracted from adjusted gross income to arrive at taxable income

tax shelter

an investment that provides immediate tax benefits and a reasonable expectation of a future financial return

itemized deductions

expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses

adjusted gross income (AGI)

gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments

passive income

income resulting from business activities in which you do not actively participate

tax-exempt income

income that is not subject to tax

tax-deferred income

income that will be taxed at a later date

earned income

money received for personal effort, such as wages, salary, commission, fees, tips or bonuses

investment income

money received in the form of dividends, interest, or rent from investments. Aka portfolio income

capital gains

profits from the sale of a capital asset such as stocks, bonds or real estate

taxable income

the net amount of income, after allowable deductions, on which income tax is computed

marginal tax rate

the rate used to calculate tax on the last (and next) dollar of taxable income

tax evasion

the use of illegal actions to reduce one's taxes

tax avoidance

the use of legitimate methods to reduce one's taxes

average tax rate

total tax due divided by taxable income