Personal Finance Net Income Unit Vocabulary

Ability-to-Pay Principle

The idea that only those who can afford to pay a tax should pay it.

Regressive Tax

A tax where everyone pays the same % on goods but it impacts lower-income earners more. (Ex. Sales Tax).

Standard Deduction

The portion of income not subject to tax that can be used to reduce your tax bill.  (Hint: Everyone qualifies for this but some people choose to itemize instead.)

Withholding Allowance

The number of people in a household that will reduce the amount of federal income tax deducted from a paycheck.  (Hint: Think about completing a W-4).

Flat Tax

A tax where everyone pays the same % of income (Ex. PA State Income Tax at 3.07%) so the impact is the same across the board.

Assessed Value

The determination of the value of one’s home by the local government.  It should be close to the market value.

Federal Insurance Contribution Act (FICA)

The law that requires workers and employers to contribute to Social Security and Medicare.

Progressive Tax

The type of tax that works this way:  As you earn more, you pay a higher rate (Ex. Federal Income Tax).

Itemized Deductions

Expenses that may be subtracted from adjusted gross income (AGI) to reduce your taxable income and therefore reduce the amount of taxes you owe.  (Examples: Unreimbursed healthcare expenses, gambling losses, etc.)

Capital Gains Tax

A tax paid on any profits made from the sale of an asset and are usually applied to stock and bond transactions.

Excise Tax

A tax on specific goods.

Tax Fairness

The concept that stipulates a tax regime should be fair to everyone under its authority.

Internal Revenue Service (IRS)

The federal agency that collects taxes and administers tax law.

Sin Tax

An excise tax specifically levied on certain goods deemed harmful to society and/or individuals.

Luxury Tax

An excise tax levied only on products/services that are deemed non-essential and/or typically accessible only to the wealthy.

Taxable Income

Adjusted gross income that is used for tax calculations (after deductions are taken out).

Property Tax

A tax paid on the assessed value of one’s home.

Benefit Principle

The idea that only those who benefit from a tax should pay it.

Tax Return

A set of forms that taxpayers use to calculate their income tax obligation.  These forms are filed with federal, state and local governments every year.