Common Tax Term Glossary

Learn the language of the IRS

Below is an A to Z list of definitions for a number of common terms and phrases related to income tax.

ADJUSTED GROSS INCOME: Gross income minus allowable reductions.

ADJUSTMENT TO INCOME: An expense that can be deducted even if the taxpayer does not itemize deductions.

ADOPTION CREDIT: A nonrefundable credit for qualified adoption expenses.

ADVANCE EARNED INCOME CREDIT: Prepayments of the earned income credit by an employer to an employee.

AUDIT: When the IRS examines and verifies your return or any other transaction with tax consequences.

CASUALTY LOSS: A loss caused by the complete or partial destruction of property that results from an unexpected event, i.e., floods, storms, fires, etc..

CHARITABLE CONTRIBUTION: Money or property donated to a qualified charity.

CHILD AND DEPENDENT CARE CREDIT: A tax credit in the amount of a percentage of the amount expended on child or dependent care by an employed individual.

CHILD TAX CREDIT: A tax credit available to people with children under the age of seventeen.

COMPENSATION: Wages, commissions, tips, fees, or self-employment income from services rendered.

CREDITS: Reductions of tax liability allowed by Congress for various purposes.

DEDUCTION: A subtraction from taxable income.

DEPENDENT: A person who meets the five tests of dependency and thereby qualifies to be claimed as a dependent for tax purposes.

DEPRECIATION: Deduction for the wear and tear of an item used for business.

EARNED INCOME: Income derived from personal services – wages, tips, bonuses, and any other type of compensation.

EARNED INCOME CREDIT: A tax credit allowed to employed individuals whose income and modified gross income is less than a certain amount.

EMPLOYMENT EXPENSES: Ordinary and necessary expenses necessary to perform the duties for which an employee was hired.

ENTERTAINMENT EXPENSES: Employment expenses that have an element of entertainment that is directly related to conducting business.

ESTIMATED TAX: What the taxpayer expects to owe in taxes over the course of the year, generally paid quarterly with vouchers.

EXEMPTION: A reduction of income that would otherwise be taxed.

FOSTER CHILD: A child other than a natural or adopted child who lived with the taxpayer for the entire year and whom the taxpayer treated as his or her own child.

HEAD OF THE HOUSEHOLD: A filing status used by an unmarried taxpayer who pays over half of the cost of maintaining the home of a qualified individual.

HOBBY LOSS: A nondeductible loss from a hobby.

HOME OFFICE EXPENSE: Expenses arising from operating a business in a qualified manner in your home.

INTERNAL REVENUE SERVICE: The Treasury Department division responsible for collecting taxes.

ITEMIZED DEDUCTIONS: Expenditures that the tax code deems appropriate for reducing adjusted gross income.

MARRIED FILING JOINTLY: A filing status used by a couple that is married at the end of the tax year and uses one tax return.

MARRIED FILING SEPARATELY: The filing status used by a couple that is married at the end of the year and chooses to file separate tax returns.

MODIFIED ADJUSTED GROSS INCOME: There are different definitions for different purposes. It is usually the adjusted gross income with various items added back in.

NONTAXABLE INCOME: Income that is not taxed.

PERMANENT AND TOTAL DISABILITY: A disability that is expected to last at least a year and keeps an individual from any gainful activity.

PROPRIETORSHIP: A business that is owned and controlled by one person.

QUALIFYING WIDOW(ER): The filing status used by a qualified person for the two years following a spouse’s death.

SCHEDULES: IRS forms that are used to report various kinds of income, deductions, and credits.

SELF-EMPLOYED: A person who individually decides when and where to work and pays his or her own expenses. Self-employed individuals must pay self-employment taxes.

STANDARD DEDUCTION: A predetermined amount of income that is not subject to taxes and is claimed when an individual does not itemize deductions.

TAXABLE INCOME: Adjusted gross income minus deductions and exemptions.

UNEARNED INCOME: Income that is not derived from services performed, such as interest, dividends, and royalties.

WORKSHEET: An IRS document that is provided to the taxpayer to compile information and is not usually filed with the return.

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