40 Essential Terms to Get You Through Tax Season

Written By Accounting-Degree.org Staff


Depending on how you plan to file this year, you might be ready to send in your tax return. And as complicated as your taxes might have seemed last year, there's always a chance you'll have a whole new set of laws, deadlines, and jargon to put up with this year, especially if you got married, had a baby, changed jobs, started your own business, or invested in a new energy-efficient home. If you didn't major in accounting in college or aren't even very good with numbers, we've collected 40 essential tax terms to get you through the season.

General

These tax terms generally affect everyone who files in the U.S.

  1. IRS: Yes, it's obvious, but you still need to know who's taking your money. The Internal Revenue Service, the official and national tax collecting service in the U.S.

  2. e-file: The IRS now allows taxpayers to file their taxes online, via e-file. If your income is $58,000 or less, you can do it for free on IRS.gov.

  3. Adjusted Gross Income: Often shortened to AGI, this includes all income you generated during the year, from salary to interest to alimony to dividends.

  4. Deductions: Tax deductions are write-offs that you can cut from your overall income. Standard amounts are set for certain types of deductions, but if you believe your spending was higher, you'll have to itemize your expenses -- and back it up.

  5. Tax credits: Credits cut your tax bill, not your taxable income (as deductions do). Existing tax credits include child tax credits, retirement savings contributions credit, earned income tax credit, and others.

  6. Exemption: Exemption refers to lowering your income, or lessening an amount of income that would normally be taxed.

  7. Compensation: Compensation refers to your wages and payments for services rendered.

  8. Audit: Big trouble. If you get audited, the IRS is coming to dig through all your receipts and files to make sure your taxes are in order and that every deduction you claimed can be backed up.

  9. Combat pay: Pay awarded to military personnel and support personnel, even during peacetime, is tax-free. If you contribute some of that money to an IRA or Roth IRA, it may be taxable, however.

  10. Charitable contribution: You'll need a receipt for any cash gifts or property you donated to a qualified charity if the amount is $250 or more, otherwise you won't get a deduction.

  11. W-2: This is the tax form that reports your wages to the IRS, sent in by your employer.

  12. Progressive taxation: As your income level increases, you'll have to pay a higher tax rate. That's called progressive taxation.

  13. Taxable income: This term refers to both your income that is taxable -- wages, etc -- as well as your income listed on your tax return after you've taken out all deductions and exemptions.

  14. Tax bracket: This is the section you belong to that determines your tax rate. Your income denotes which tax bracket you belong to (see progressive taxation).

  15. Energy credits: A trendy credit right now is an energy credit, which subtracts tax payments if you have energy-saving home improvements like efficient air conditioners, windows or doors.

  16. Tax refund: If you've overpaid the IRS, either through quarterly taxes or your paycheck, the IRS will send you a check after you've filed your return for the difference.

  17. Unearned income: This term refers to income besides payment for services rendered. Examples include interest or royalties.

  18. Worksheet: The IRS sends you this paper to figure out your income and other filings, but you don't have to turn it in with your return.

Small Businesses

Small business owners and accountants can educate themselves on depreciation, forms and certain expenses here.

  1. Accelerated depreciation: Business owners who acquire property -- not including real estate -- can depreciate the cost faster than normal. Computers and company cars can be depreciated at a higher rate after the first year, for example.

  2. 501c: This subsection determines whether or not your nonprofit agency is exempt from paying federal income tax.

  3. Business expense: You can deduct certain business expenses, or expenses that are necessary -- but not necessarily indispensable -- to run your business. These include supplies, airfare, business cards, and any other standard expenses for your industry.

  4. Employee forms: These are the tax forms you'll turn in for your employers: W-2s for in-house employees and 1099s for contractors.

  5. Withholding: You'll reserve part of your employees' salary each pay period for taxes. This system is called withholding, and allows their payments to be credited to their tax return when they file.

  6. Fixed assets: Provide your accountant with a list of all your fixed assets -- all the equipment and items you need to run your business.

  7. Cash method: Cash method refers to the accounting method your business uses if you do not have inventory. You'll report income during the year you receive it, and deduct expenses the same year you pay them.

  8. Accrual method: If your business maintains inventory, you'll use this accounting method, in which you report income the same you earn it but report expenses the year you incur them, not pay them.

  9. Non-deductible items: Even if you run your own business, you can't write everything off. Lunches and regular commutes don't count.

  10. Chapter 11: Hope it never comes to this. This form of bankruptcy is a reorganization plan. You'll still get to keep your business, but will have to come up with a reasonable plan for paying back creditors and making good with the government.

Freelancers

For freelancers and the self-employed, there are a whole set of tax rules just for them.

  1. Self-employed: If you're your own boss -- take and decline jobs as you please -- then you're self-employed and must pay self-employment taxes.

  2. Depreciation: Your office supplies, including computers, depreciate over time, and you this deduction allows for normal wear and tear.

  3. 1099: If you are self-employed or need to report non-employee compensation, you'll use this form. There are many versions of this form -- for example, a 1099-DIV will report dividends and distributions and 1099-R signifies income from retirement plans, pensions and annuities.

  4. Business Use of the Home: Also called "home office expense," this allows freelancers and those who work out of their homes to deduct a portion of their household expenses on their return if they are not reimbursed by their employers.

  5. Estimated tax: Freelancers have to pay estimated taxes each quarter since employers aren't taking taxes out of their paychecks. This system will help keep you organized and on-track with payments so that you don't owe thousands and thousands of dollars each April.

Individuals and Families

From dependents to basic tax forms, you'll find more everyday tax terms here.

  1. Dependents: If you support someone -- like a child -- financially, then you can claim him or her as a dependent so that you can get a break on taxes.

  2. 1040: This is the tax form individuals send in, and what will determine if you still owe taxes or if you get a refund.

  3. Married filing jointly: If you and your spouse use one tax return for the two of you, this is called marriage filing jointly. If you file your own return, this is called marriage filing separately.

  4. Child: Anyone under 18 years old who is under your care falls into the "child" category and can be your biological, step, adopted or foster child, or a relative for whom you're financial responsible.

  5. Innocent-Spouse Rule: If your spouse reported his or her taxes incorrectly, you won't be held responsible if you can prove that you didn't benefit from the mistake and that it wasn't your fault.

  6. Death of a Taxpayer: If your spouse dies, you'll still have to file a special return on behalf of them.

  7. Estate tax: An heir's assets are taxed if they exceed a set amount, not including surviving spouses.