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 and lower your taxes

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; the funds go toward Social Security and Medicare

Filing Status

A category that defines the type of tax return an individual will use, primarily based on marital status; it also determines the size of your tax brackets and how much of your income is taxed at each rate

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, health insurance, retirement funds, etc.

Payroll Tax

Federal and state taxes that all employers must pay, based on a percentage of the employee's salary, toward social services such as Social Security and Medicare

Progressive Tax

A tax system that uses tax brackets to collect a larger percentage from the income of high-income earners than it does from low-income earners

Social Security

A federal program that provides monthly benefits to millions of Americans, including retirees, military families, surviving families of deceased workers, and disabled individuals

Standard Deduction

A standardized dollar amount that reduces your taxable income, specifically for individuals who do not receive additional benefit by itemizing their deductions into medical expenses, donations, etc.

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 their 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 the taxes withheld by employers

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 at the end of the year to report the employee's annual wages and taxes withheld from their paycheck

W-4

A form completed by an employee to indicate his or her tax situation (exemptions, marital status, etc.) to the employer, who then withholds the corresponding amount of taxes from each paycheck

Withholding

The portion of an employee's wages that is not included in their paycheck because it goes directly to federal, state and local taxes