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Glossary of Common Tax Terms

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.

Next Steps
Contact a qualified tax attorney to help you navigate
your federal and/or state tax issues.
(e.g., Chicago, IL or 60611)

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