Taxes

"Sin" Taxes

A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. These type of taxes are levied by governments to discourage individuals from partaking in such activities without making the use of the products illegal.

Tax Bracket

A tax bracket is a range of income amounts that are taxed at a particular rate.

Estate Tax

A tax on property (cash, real estate, stock, or other assets) transferred from deceased persons to their heirs.

Excise Tax

A tax paid on purchases of a specific good, like gasoline.

Allowances

Employee-claimed exemptions on the W-4 to determine how much of an employee's pay to subtract from his or her paycheck. The more allowances you claim, the less income tax will be withheld from your paycheck. The fewer allowances you claim, the more income tax will be withheld from each paycheck.

W-2

Form that an employer must send to an employee and the IRS at the end of the year. The W-2 form reports an employee's annual wages and the amount of taxes withheld from his or her paycheck.

1099

Form that details all "non-employee" compensation. This includes income for completing specific jobs, like freelancers or contractors who are effectively self-employed.

Income Tax

Taxes paid by employees to federal and state government. Collected or withheld from one's paycheck.

Filing Status

A category that defines the type of tax return form an individual will use. Closely tied to marital status, it determines the size of your tax brackets and how much of your income is taxed at each rate.

Dividends

A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.

Paycheck Stub

A document attached to every paycheck that details your earnings and the amount withheld for taxes, health insurance, retirement funds, etc.

W-4

A form completed by an employee to indicate his or her tax situation (exemptions, status, etc.) to the employer. The W-4 form tells the employer the correct amount of tax to withhold from an employee's paycheck.

Medicare

A government-run insurance program that provides healthcare assistance to elderly Americans.

Medicaid

A government-run insurance program that provides healthcare assistance to poor Americans.

Corporate Income Tax

A percentage of profits paid by a business to the federal and state government.

Social Security

A program that provides monthly benefits to almost 60 million Americans, including retirees, military families, surviving families of deceased workers, and disabled individuals.

Real Estate Tax

A tax assessed on real estate by the local government. The tax is usually based on the value of the property (including the land) you own.

Progressive Tax System

A tax that takes a larger percentage from the income of high-income earners than it does from low-income individuals. Basically, taxpayers are broken down into categories based on taxable income; the more one earns, the more taxes they will have to pay once they cross the benchmark cut-off points between the different tax bracket levels.

"Safety Net" Programs

A variety of government programs that benefit individuals and families with low incomes. These include food stamps, education assistance (grants and loans), housing vouchers, tax credits, job training, child care and more.

Exemption

An exemption is an amount of money you can subtract from your taxable income, just for having dependents. Personal and dependent exemptions for yourself and qualifying family members reduce the amount of income on which you will be taxed.

Audit

An inspection of a filer's tax return by the IRS

Payroll Tax

Federal and state taxes that all employers must pay, based on a percentage of the employee's salary. They go to such things as Social Security and Medicare/Medicaid.

I-9

Form used by an employer to verify an employee's identity and to establish that the worker is eligible to accept employment in the United States.

Interest Income

Income earned through interest in savings accounts, bonds, CDs, etc.

Capital Gains

Profits that an investor gains when he or she sells the capital asset (like a stock, or piece of property) for a price that is higher than the purchase price.

Dependent

Someone you financially support who can be "claimed" on a tax return to reduce your taxable income and lower your taxes. There are specific rules governing who qualifies, but generally they fall into two categories: a child or a relative.

Discretionary Spending

Spending by the federal government determined by legislative action. In other words, spending approved through votes by elected officials (i.e. Congress).

Mandatory Spending

Spending by the federal government required by previously existing laws. This includes funding programs like Social Security and Medicare/Medicaid.

Vehicle/Property Tax

Taxes usually assessed as a percentage of the value of items you own (cars, boats, etc.). They can fall under county or state taxes, depending on where you live. Not all states tax personal property, however, and what is subject to personal property tax varies widely from state to state.

1040-EZ

The 1040EZ is an alternative to the Internal Revenue Service's (IRS) 1040 income tax form and offers a faster and easier way to file taxes, meant for taxpayers with rudimentary tax situations. In order to be eligible to use this form, the individual must have a taxable income of less than $100,000, interest income of $1,500 or less, possess no dependents and fulfill other requirements set by the IRS.

Effective Tax Rate

The actual rate you pay on your taxes, as a percentage of your overall income.

Taxable Income

The amount of income that is used to calculate an individual's or a company's income tax due. Taxable income is generally described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments that are allowable in that tax year.

Cost of Living

The amount of money needed to sustain a certain level of living, including basic expenses such as housing, food, taxes, and healthcare. Cost of living is often used when comparing how expensive it is to live in one city versus another.

Tax Rate

The percentage at which taxes are paid on a dollar of income.

Withholding

The portion of an employee's wages that is not included in his or her paycheck because it goes directly to federal, state and local tax authorities.

1040

The standard Internal Revenue Service (IRS) form that individuals use to file their annual income tax returns.

Standard Deduction

The standard deduction is a dollar amount that reduces your taxable income. It is a benefit that eliminates the need for many taxpayers to itemize actual deductions, such as medical expenses, charitable contributions, and taxes, on a 1040.

Marginal Tax Rate

The tax bracket that your last dollar of income falls into, and therefore the highest tax rate you pay.

Dependent Exemption

You are allowed one exemption for each person you can claim as a dependent. You can claim an exemption for a dependent even if your dependent files a return.

Personal Exemption

You are generally allowed one exemption for yourself. If you are married, you may be allowed one exemption for your spouse.