Tax Terms

1040

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

Audit

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

Dependent

Someone you financially support who can be claimed on a tax return to reduce your taxable income.

Earned Income

Any income (wages/salary) that is generated by working.

Effective Tax Rate

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

Exemption

The set amount of money, per dependent, you can subtract from your taxable income.

Federal Insurance Contributions Act (FICA)

A federal law that requires an employer to withhold taxes from the wages they pay their employees.

Filing Status

A category that defines the type of tax return an individual will use, primarily based on marital status.

Income Tax

Taxes paid by employees to federal and state government through a direct deduction from their paycheck.

Interest Income

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

Marginal Tax Rate

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

Paycheck Stub

A document attached to every paycheck that details your earnings and the amount withheld for taxes.

Payroll Tax

Federal and state taxes that all employers must pay, based on a percentage of the employee's salary.

Progressive Tax

A tax system that uses tax brackets to collect a larger percentage from high-income earners.

Social Security

A federal program that provides monthly benefits to retirees, military families, and disabled individuals.

Standard Deduction

A standardized dollar amount that reduces your taxable income.

Tax Bracket

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

Tax Credit

An amount subtracted directly from the tax owed.

Tax Deduction

An amount that can be subtracted from a person's tax liability that lowers taxable income.

Tax Rate

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

Tax Return

An annual report to the IRS summarizing total income, deductions, and taxes withheld.

Taxable Income

The amount of income that is used to calculate an individual's or a company's income tax due.

Tax Refund

An amount that a government gives back to a taxpayer who has paid more taxes than were due.

Unearned Income

Income received from sources other than employment.

W-2

A form that an employer must send to an employee and the IRS to report annual wages and taxes withheld.

W-4

A form completed by an employee to indicate tax situation to the employer for tax withholding.

Withholding

The portion of an employee's wages that is not included in their paycheck due to tax deductions.