Unit 1 - Income & Taxes

gross income or gross pay

all of your income from taxable sources, before subtracting any adjustments, deductions, or exemptions.

tax deduction

an amount that reduces your taxable income.

automobile for business use

the cost of driving your car on business can be deducted as a business or employee expense on your taxes.

interest income

the income you earn from certain bank accounts.

federal income tax

the tax that the federal government levies on personal income; it helps pay for national programs such as defense, law enforcement, etc.

deductions

write-offs that you are permitted to subtract from your gross income to calculate your taxable income.

IRA

Individual retirement accounts are basically savings plans with tax benefits (tax-deferred until you withdraw the funds) and special restrictions (penalty for early withdrawal).

Net pay - Gross pay - deductions

It is also known as "take- home" pay.

charitable contribution

a gift of cash or property to a qualified charity for which you may claim a tax deduction.

capital loss

a loss from the sale of assets such as stocks, bonds, mutual fund shares, and real estate.

audit

a review of your tax return by the IRS.

Gift taxes

a tax on the money or property that one living person gives to another

estate taxes

a tax on the total value of the money and property of a person who has died

IRS

Internal Revenue Service is the federal agency that collects income taxes.

Import taxes

Tariffs, or import taxes, are taxes placed on imported goods.

payroll taxes

a broad term that refers to Social Security and Medicare taxes.

child credit

a credit of $1,000 for each child under the age of 17 that you claim as a dependent on your tax return.

tax credit

a dollar-for-dollar reduction in the tax that can be deducted directly from taxes owed.

401k

an employer-sponsored retirement savings plan to which you contribute part of your salary to a tax deferred investment account.

use (or user) fees

an excise tax, often in the form of a license or supplemental charge, used to fund a public service.

financial records

canceled checks, cash register receipts, credit card statements, and any other spending and income records to keep for tax purposes.

wages

compensation received by employees for services performed.

tax evasion

failure to pay or a deliberate under-payment of taxes.

e-filing (electronic filing)

filing your federal and state income tax returns electronically; also the fastest way to get your returns.

adjusted gross income

gross income reduced by certain amounts such as a deductible IRA contribution.

investment income

includes taxable and tax-exempt interest, dividends, capital gains, net income, and certain rent and royalty income.

tax-exempt interest income

interest income that is not subject to income tax; earned by bonds issued by states, cities, counties, and the District of Columbia.

refund

money owed to taxpayers from federal and state governments when their total tax payments are greater than their total tax.

combat pay

pay received by members of the U.S. armed forces serving in combat zones or peace-keeping areas that is tax free.

child support

payments made as ordered by a divorce or separation agreement for the support of a child that are not deductible.

alimony

payments to an ex-spouse that can be deducted as adjustments to income.

capital gain

profit from the sale of stocks, bonds, mutual fund shares, and real estate.

Social Security tax

provides benefits for retired workers and their dependents; also known as FICA tax.

exemption

refers to a personal allowance that you may claim to reduce taxable income. You can claim a personal exemption for yourself; on joint returns, a personal exemption is claimed for each spouse and you can also get an exemption for each dependent you claim on your return.

FICA

refers to deductions from your paycheck under the federal Insurance Contribution Act that pays for Social Security and Medicare. It's a tax that is split 50 / 50 between employers and employees.

dependent

refers to someone you support and for whom you can claim a dependency exemption on your tax return.

W-4 form

refers to the employee's withholding allowance certificate that is filled out by the employee and used by the employer to determine the amount of income tax to withhold.

W-2 form

refers to the wage and tax statement your employer is required by the IRS to issue to you for tax-filing purposes. It lists your total wages and compensation along with taxes withheld for the previous year—the year for which you will file an income tax return.

taxes

required payments of money to governments that are used to provide public goods and services for the benefit of the community as a whole.

sales tax

tax levied by a state or city on the retail price of an item, collected by the retailer.

excise tax

tax on the sale or use of specific products or transactions.

property taxes

taxes on real estate, boats, automobiles, recreational vehicles, and business inventories.

withholding

the amount held back from your wages each payday to pay federal income tax and Social Security.

interest

the charge for the use of borrowed money.

taxable income

wages, interest, and dividends. On your tax return, your taxable income is your income after subtracting all deductions, adjustments, and exemptions.

earned income

wages, salary, commission, tips—anything you receive for paid work.

Medicare tax

provides funds for medical benefits for certain individuals when they reach age 65.

HSA

refers to a Health Savings Account to which tax-deductible contributions may be made to save for health care expenses; also earns tax-free interest.