Taxes
An abatement is a reduction in a tax rate or tax liability. Property taxes are a common subject of abatement (though the term is often used when discussing overdue debt). For example, John Doe owns ...
Ability-to-pay taxation is a tax that's assessed based on the taxpayer's ability to pay the tax. John Doe earns $40,000 a year. Jane Doe earns $100,000 a year. The federal government wants more mone...
An above-the-line deduction is a tax deduction that reduces adjusted gross income.   For example, let's assume that John Doe had $100,000 of total income for 2012. He begins to fill out his IRS Fo...
An abusive tax shelter is an investment strategy that illegally shields assets from tax liability.   For example, let’s say John Doe and his wife have a child who begins college this year. Thou...
An ad valorem tax is a property tax levied based on the value of the property in question. Ad valorem (Latin for "according to the value") taxes are levied solely as a percentage of a property's mar...
Adjusted cost base (ACB) is an income tax term that refers to an adjustment in an asset's book value resulting from the cost of improvements, payouts, and similar improvements or dispositions. Let's...
Adjusted gross income (AGI) is the figure used by the Internal Revenue Service to determine a taxpayer's eligibility for certain tax benefits. AGI is calculated by adding together all qualified inco...
The alternative minimum tax (AMT) is income tax owed using a parallel tax code designed to ensure that every taxpayer, particularly rich ones and corporations, pay at least some income tax each year....
An amended return is a Form 1040X filed by a taxpayer to correct mistakes made on a Form 1040, Form 1040A, Form 1040EX, Form 1040NR or Form 1040NR-EZ (U.S. Individual Income Tax Return) filed in the ...
The American Opportunity Tax Credit (formerly known as the Hope Tax Credit) is a tax credit available to college students or their parents to help pay for college expenses. Eligible taxpayers can qu...
Antitrust refers to federal laws disallowing companies from monopolizing markets, engaging in price discrimination or price fixing, or otherwise restraining free trade. Antitrust laws apply univers...
Back taxes are state, federal, or local taxes that are past due. For example, let’s assume that John Doe forgets to file his tax return for 2011. He does not file for an extension past the April 1...
Backup withholding is a way for the Internal Revenue Service to withhold taxes from a taxpayer who does not provide or have a taxpayer identification number or Social Security number. In general, th...
Basis refers to the original price of an asset. It is sometimes called cost basis or tax basis. Let's assume you purchase 100 shares of Company XYZ stock for $5 per share and you pay a $10 commissio...
In the tax world, bracket creep occurs when inflation drives income up and into higher tax brackets. Let's say John Doe makes $100,000 a year and is in the 28% federal income tax bracket. Let's furt...
The Buffett Rule is a tax rule change included in President Barack Obama's 2013 budget proposal. If implemented, the rule would ensure that individuals who earn more than one million dollars per ye...
A capital gains tax is a tax on the increase in the value of an investment. A capital gain is the difference between the purchase price (the basis) and the sale price of an asset. The formula for ca...
Capital gains treatment refers to whether capital gains are taxed as short-term capital gains, long-term capital gains, or in another manner. Let's assume you purchase 100 shares of XYZ Company for ...
The child tax credit is a tax-bill reduction given to people with qualifying children under 17 years old. The Internal Revenue Service (IRS) allows taxpayers to reduce their federal income taxes by ...
Cost basis refers to the original price of an asset. Cost basis is sometimes called tax basis. Let's assume you purchase 100 shares of XYZ Company stock for $5 per share, and you pay a $10 commissio...
In the finance world, deductible is usually short for tax-deductible, which refers to an expense that reduces the amount of income that is subject to tax. In the insurance world, a deductible is a re...
A deduction is a reduction in taxable income, which thereby lowers the amount of taxes owed. Federal, state, and local tax codes determine what kinds of items or expenses are deductible and which tax...
Deferred income tax refers to a portion of income earned by a company during a given year for which the associated income tax has not yet been paid. Certain accounting practices and tax laws often r...
A dependent relies on someone else for most or all of his or her financial support.   In general, dependents are exemptions that reduce a taxpayer's taxable income. Taxpayers typically can take an...
A direct tax is any tax levied on companies or individuals that cannot be transferred to another party. It is the opposite of indirect tax. Direct taxes affect individuals and companies to the amoun...
The dividend tax credit generally refers to a Canadian tax program whereby Canadian residents receive a reduction in taxes owed on dividends received from Canadian corporations. In Canada, dividends...
Double taxation occurs when a tax is imposed more than once on the same asset, income stream, or transaction. The most well-known example of double taxation in the U.S. is the income tax levied once...
In the tax and import/export world, a duty (or customs duty) is money collected under a tariff.   A duty is a federal tax on imports or exports. For example, Americans who travel abroad can bring ...
Earned income is an IRS term for income that is obtained by participating in a business or trade. Earned income typically includes salaries and bonuses, wages, commissions and tips. Union strike bene...
The earned income tax credit (EIC) is a tax credit for low-income workers.  Earned income is an IRS term for income obtained by participating in a business or trade -- typically, this means salarie...
An education credit is a tax credit associated with the payment of education expenses during the tax year. Currently, there are three major education credits in the United States (amounts subject to...
The educator expenses deduction is an IRS deduction that allows teachers to exclude out-of-pocket teaching expenses from income. In order to qualify for the educator expenses deduction, a person mus...
The effective tax rate is the average rate at which an individual is taxed on earned income, or the average rate at which a corporation is taxed on pre-tax profits. The formulas for effective tax ra...
Electronic filing, or e-File, is the online tax return filing system developed by the Internal Revenue Service (IRS) Individual taxpayers, businesses, large and mid-sized corporations, and non-profi...
An employer identification number (EIN) is a number assigned to businesses by the IRS. It is also known as the Federal Employer Identification Number (FEIN) or the Federal Tax Identification Number. ...
An enrolled agent (EA) is person who is authorized to represent a taxpayer before the Internal Revenue Service (IRS). To become an EA, a person has to pass a three-part comprehensive IRS test of ind...
An estate tax is levied on assets inherited by the heirs to a deceased person's estate.  The estate tax is applied differently according to U.S. Federal and state laws as well as international law....
Excise tax refers to an indirect type of taxation imposed on the manufacture, sale or use of certain types of goods and products. Excise taxes are commonly included in the price of a product, such a...
Federal income tax is a tax on a range of certain kinds of income. Taxpayers generally calculate and pay federal income tax by filing an IRS Form 1040 by April 15 of each year. The United States has...
A federal tax bracket is range of incomes for which a certain federal income tax rate applies. The United States has a progressive tax system, which means that different portions of a person's or co...
A flat tax is a system under which all taxpayers pay taxes at the same percentage rate of their total income. Let's assume that you had $100,000 of taxable income last year. Under a progressive tax ...
Mistakes happen, and the IRS understands that (though the jury is still out regarding how forgiving the IRS is about mistakes). For this reason, the IRS provides the Form 1040X, which requires a line...
Taxpayers must file a Form 1045 within one year after the end of the year in which the loss or unused credit occurred, and they will likely also have to file amended returns. It is important to note ...
Form 1065 is an IRS form used to report income, gains, losses, deductions and tax credits associated with partnerships. Let's say John Doe and Jane Smith operate a partnership that sells widgets. Wh...
Form 1078 is only for people who became resident aliens before 2001. In our example, that means John Doe would've filed a W-9 after 2001. Regardless, John's income is subject to U.S. taxes and may be...
Form 1098 is an IRS form that reports how much mortgage interest a taxpayer paid during the tax year. Let's say John Doe borrows $100,000 for a house from Bank XYZ. He makes the mortgage payments, a...
Form 1099-B is useful for reporting and calculating taxes that apply to capital gains. For instance, the form will disclose the proceeds of the sale and how much of those proceeds are capital gains, ...
Financial institutions must create Form 1099-DIV for dividends and distributions of at least $10 in a tax year. Taxable dividend distributions from life insurance contracts and employee stock ownersh...
Interest is taxable income. The Form 1099-INT shows how much interest a person earned from an institution in a tax year. The IRS requires brokerage firms, banks, mutual funds and other financial inst...
According to the IRS, a Form 1099-Misc is appropriate for reporting the following: Payments of $600 or more for services performed for a trade or business by people not treated as its employees (such...
Gambling income is any money that is earned from games of chance. Income from gambling is taxable money earned from games such as lotteries and keno or from institutions such as casinos or racetrac...
A gambling loss is any money lost in lottery tickets, slot machines, table games (craps, poker, blackjack, etc.), bingo games, racing bets and keno. For example, let's say John Doe goes on a bender ...
The purpose of the gas guzzler tax is to discourage the manufacture of inefficient cars. The sticker on a new car should disclose the amount of gas guzzler tax that a manufacturer has paid on a car. ...
A gift tax is a federal tax on anything of value that one person gives to another. Let's say Jane Smith gives her son John $25,000 because John is going through a tough time and just lost his job. ...
A goods and services tax (GST) is simply a tax on goods and services for domestic consumption. This tax system is in place in about 160 countries, including Canada, India, Vietnam, Australia, Uni...
Head of household is a formal IRS filing status for people who are single but provide financial support to at least one other person in his or her home.   Let's say Jane Doe is a single mother wit...
Highly compensated employees are usually limited in the amount of money they can set aside in their 401(k) plans and other retirement plans. Specifically, the federal government limits the amount of ...
Home office expenses are those costs incurred by working from a home-based office.  These expenses are tax-deductible. In order to qualify as fully tax-deductible, home office expenses must go towa...
Imputed Interest refers to interest that is considered by the IRS to have been paid for tax purposes, even if no interest payment was made. The IRS uses imputed interest as a tool to collect tax reve...
Income tax refers to taxes imposed by the government on individuals and businesses based on annual income. In the US, income tax is collected on taxable income by the Internal Revenue Service (IRS). ...
The Internal Revenue Service (IRS) is a bureau of the Department of Treasury that is tasked with the enforcement of income tax laws and oversees the collection of federal income taxes. In addition, i...
The IRS Form 1099 is used to report a variety of unique income payments to the IRS. This form is usually used when the taxpayer has received income from other sources besides a wage-paying job. Ther...
An itemized deduction is a reduction in taxable income that is dependent on calculations specific to the taxpayer's expenses or situation. Federal, state and local tax codes determine what is deducti...
A joint return is a tax return filed by two people based on their marital status at the end of the year or at the time of death of either one of the individuals. There are generally two ways for a m...
The joint return test is used by the IRS to determine whether or not a taxpayer may be validly claimed as a dependent by another taxpayer. This test also determines whether or not a married taxpayer ...
Kiddie tax is the colloquial term for certain taxes owed on interest, dividends or other investment income earned by children under 17 years old. Let's say John Doe has a son, Jake Doe, who is 16 ye...
A land value tax (LVT) is a tax on undeveloped property. Local governments that impose an LVT specifically target pieces of property that someone owns but has not developed or modified for residenti...
A long-term capital gain or loss is the profit or loss on the sale of an investment that has been held for longer than a certain IRS-defined period of time.   Let’s assume you purchase 100 shar...
A loophole is an exception that allows a system to be circumvented or avoided.  It usually refers to legal, taxation, or security strategies that are exploited for personal gain. Loopholes are fail...
The term "loss carryback" is where a company retroactively chooses to apply the net operating loss in the current year to the previous profitable year(s) to obtain a tax refund for monies already rem...
The term "loss carryforward" refers to an accounting practice whereby companies utilize their current year's net operating loss against future year's net operating profit to reduce the taxes owed in ...
Marginal tax rate is the rate at which an additional dollar of taxable income would be taxed. It is part of a progressive tax system, which applies different tax rates to different levels of income. ...
The marital deduction refers to the deduction the IRS allows for a taxpayer to transfer some or all of his assets tax free to his spouse prior to the calculation of estate tax owed by his estate. Th...
The marriage tax, also known as the "marriage penalty," refers to the higher taxes a couple pays when they file a joint tax return versus the amount a couple pays when filing two separate tax return...
Deciding to file jointly or separately is a personal decision for couples, and deciding which one is optimal depends on the couple's income and deductions. It is important to note that from a legal p...
The term mileage allowance refers to a variety of travel allowances allowed by the IRS at a specific rate per mile traveled while on business or for other purposes recognized by the IRS. For an indi...
Mortgage credit certificates (MCC) are issued by state or local governments and allow some taxpayers to receive a tax credit for the interest paid on a mortgage. A borrower pays a specific amount of...
A mortgage interest deduction allows mortgage borrowers to reduce their income tax liability by listing the amount of mortgage interest paid as an itemized deduction. Each year, a mortgage borrower ...
A nanny tax is a colloquial term for the Social Security, Medicare and federal unemployment taxes due on the pay to caregivers. For example, let's say John and Jane Doe hire Sally Smith to take car...
Negative income tax refers to transfer payments given to families whose reported household income fall below a predetermined amount and qualifies them for a supplemental payment from the government. ...
Net of tax simply means that the number in question is the amount left over after taxes. For example, let's say you win $1,000,000 on a game show. After the show, a nice person backstage will also g...
In economics, net taxes are taxes on production less subsidies received. Alternatively, net taxes are taxes paid to the government less transfer payments. Let's assume that the United States collect...
A notice of seizure is a bad thing. During this time, the IRS takes physical custody of the taxpayer's assets, which could range from cash accounts to homes, cars and other assets. Let's say John Do...
An offer in compromise is an arrangement between a taxpayer and a taxing authority, whereby the taxing authority agrees to let a taxpayer settle a tax debt for less than the full amount. For example...
An office audit is a type of audit by the IRS. For example, let's say John Doe gets a letter from the IRS saying that he is being audited. The audit is an office audit, meaning that the IRS likely w...
In the tax world, a parsonage allowance is income earned by members of the clergy but excluded from gross income. Let's say John Doe is a pastor at the XYZ Church. He earns $25,000 a year. The churc...
A progressive tax is one in which the tax rate increases as the amount being taxed increases. Most western countries use a progressive tax in one way or another. Federal income tax in America is con...
Qualified adoption expenses (QAEs) are costs associated with adopting a child. They are generally tax-deductible and may even qualify for a tax credit. For example, let's assume that Jane would like...
A qualified appraisal is a document that formally describes and estimates the value of a piece of property. Assume that John wants to donate a painting to his favorite charity. He believes the paint...
A qualified appraiser is a person authorized to produce a qualified appraisal.  A qualified appraisal is a document that formally describes the value of a piece of property, usually exceeding $5,00...
A qualified charitable organization is a charity to which donations are tax-deductible. According to the IRS, only certain types of organizations can be qualified charitable organizations:  Communi...
A qualified electric vehicle is powered by an electric motor that relies on rechargeable batteries or fuel cells. Specifically, and according to the IRS, a qualified electric vehicle must have a bat...
Generally, a qualified higher education expense is tuition or a tuition-related expense paid to a post-secondary institution. For example, let's assume that John pays $48,000 in tuition and fees for...
Qualified production activities income (QPAI) is certain income related to manufacturing that qualifies to be taxed at a lower rate. For example, let's assume that Company XYZ generated $10,000,000 ...
Qualified widow (or widower) is a tax-filing status similar to filing single, married filing jointly, married filing separately, or head of household. For example, let's assume the John and Jane Doe...
A qualifying relative is a person a taxpayer can claim as a dependent. For example, let's assume that John and Jane Doe took in Jane's mother because she ran out of retirement money and can no longe...
Realized gains are increases in the value of an asset that has been sold. This concept is the opposite of paper profit -- a paper profit only turns into a realized gain when you actually sell the sec...
A realized loss is a decrease in the value of an asset that has been sold. This concept is the opposite of paper loss or unrealized loss -- a paper loss only turns into a realized loss when you actua...
Refund can refer to the amount that the Internal Revenue Service will pay to a taxpayer based an overpayment of estimated tax or employer withholding taxes during the year.  A refund also refers to ...
A regressive tax is a tax that increases as a percentage of income as the amount of income declines. The United States has the opposite of a regressive tax system. That is, it has a progressive tax ...
Sales tax is a consumption tax levied on goods and services purchased at the retail level, paid by the consumer and submitted by the retailer to the governing tax authority. In the United States, th...
The same property rule is an IRS rule stating that money taken from an Individual Retirement Account must be placed into a similar type of account if the account holder is less than 59.5 years old. ...
The saver's tax credit, also called the savers credit, is a tax credit for making contributions to certain retirement accounts.   The savers credit gives taxpayers a tax credit of up to $1,000 ($2...
/*-->*/ An Internal Revenue Service (IRS) Schedule K-1 is used to report a beneficiary's share of income, deductions, credits, and other items from pass-through entities. These generally include ...
The self-employment tax refers to the Social Security and Medicare taxes paid on income earned by people who work for themselves. People who are self-employed must pay both the employee and employer...
Short-term gain usually refers to the profit on the sale of an investment that has been held less than a certain IRS-defined period of time. Let’s assume you purchase 100 shares of Company XYZ for...
Social Security tax is an employment tax that funds the Social Security program, a mandatory U.S. government program of retirement, disability, and life insurance. This tax pays for the benefits prov...
A standard deduction is a reduction in taxable income. Federal, state and local tax codes determine what is deductible and which taxpayers are eligible for deductions. There are two kinds of tax ded...
A step-up in basis refers to an increase in the price at which an investment is considered to have been purchased. Let's assume that your uncle purchased 100 shares of Disney in 1970 for $1 per shar...
A stock savings plan is a Canadian taxation system that offers tax benefits to Canadian residents who purchase the initial public offerings (IPOs) of local companies. Each Canadian province has its...
News stories over the past few years have focused on tariffs and rumors of “escalated trade wars” between the United States and another country. But what is a tariff? Are they taxes on all importe...
A tax advisor is a person who advises clients about tax laws and strategies. For example, a tax advisor might help a client structure his assets such that his estate taxes are lower. A tax advisor m...
Used primarily in the United Kingdom, a tax and price index measures the amount that a consumer’s income would have to increase to compensate for increases in inflation and taxes. Assume John Doe ...
A tax anticipation note (TAN) is a short-term note that a state or local government issues and expects to repay with imminent tax receipts. Let's assume Town XYZ wants to purchase a new building to ...
Tax arbitrage is the act of profiting from differences in how income or capital gains are taxed. Tax shelters are often used to take advantage of tax arbitrage opportunities. For example, a person o...
A tax attribute is a reduction that the IRS requires a taxpayer to make in a tax credit or tax loss when a lender cancels debt that the taxpayer owes. There are typically seven types of tax attribute...
Tax avoidance is the legal act of minimizing one's taxes. It is not the same as tax evasion, which is illegal. Practically every taxpayer engages in tax avoidance at some point in order to minimize ...
A tax base is the total amount of assets or revenue that a government can tax. Taxes can be based on any kind of asset or revenue stream. For example, to calculate the tax base for a sales tax, you ...
A tax benefit is any tax advantage given by the IRS to a taxpayer that reduces his or her tax burden. It's also the name of an IRS rule requiring companies to pay taxes on income that was previously ...
A tax break is a tax deduction, tax credit or reduction in tax rate. For example, let's say John and his wife had a baby in 2011. When John files his tax return for the year 2011, he will qualify fo...
In a tax clawback agreement, a company or organization agrees to repay government benefits via higher taxes at a later date. Company XYZ agrees to take $40 million from the federal government to pre...
Tax court is a court of law in which administrative law judges manage disputes between taxpayers and the IRS. The tax court handles a wide variety of tax matters but does not have a jury system. Art...
A tax credit is permission to reduce the amount of income that is subject to tax. A tax credit is not the same as a tax deduction.   For example, the Internal Revenue Service’s child tax credit ...
A tax deduction reduces the amount of income that is subject to tax. A tax deduction is not the same as a tax credit. For example, let's assume that John paid $10,000 in mortgage interest last year....
In the investment world, "tax deferred" refers to investments on which applicable taxes (typically income taxes and capital gains taxes) are paid at a future date instead of in the period in which th...
The tax differential view of dividend policy is the idea that capital gains are better than dividends because the tax rate on capital gains is lower than the tax rate on dividends. For example, let...
Tax drag is the reduction in returns attributable to taxes. For example, let's assume that John owns 100 shares of Company XYZ stock. He bought the stock at $10 per share, for a total of $1,000. The...
Tax efficiency involves making investing choices that reduce one's tax bill. For example, let's assume that John owns 100 shares of Company XYZ stock, which he bought six months ago for $5 a share. ...
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) became law on September 3, 1982. The TEFRA made it more difficult for individuals and corporations to reduce their tax liability. Represe...
Tax fairness is the concept of having an equitable tax system. Tax fairness is a subjective term with no single hard-and-fast definition. The U.S. federal tax system is a progressive tax system, mea...
Tax free means not taxable. For example, many states and municipalities do not charge sales tax on food items. These items are tax free. For many investors, the interest earned from municipal bonds ...
Tax Freedom Day is the day of the year by which the average American has earned enough money to pay his or her tax bill for the year. The average American spends about one-third of his or her income...
Tax gain/loss harvesting is a strategy for reducing taxes. John Doe made two major investment transactions this year: 1. Sold 1,000 shares of Company XYZ at $25 a share (originally purchased five ye...
A tax haven is a country or jurisdiction known for generating little or no tax liability. Tax havens exist because countries are usually not obligated to provide customer information to foreign taxi...
A tax holiday is a day or period of time during which a government does not tax certain transactions. Sales tax holidays are especially common. Typically, they involve suspending the collection of s...
A tax home is a taypayer's primary residence or place of business (if the taxpayer is an organization). Let's assume John lives in Montana during the summer and Arizona during the winter. He spends ...
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was signed into law on May 17, 2006. TIPRA was passed to achieve five primary goals: Prevent a scheduled increase in the number of ...
Tax indexing is method for adjusting tax rates to account for inflation-related increases in income. For example, let's say that John makes $100,000 a year and is in the 28% federal income tax brack...
Tax liability refers to the amount legally owed to a taxing authority as the result of a taxable event. A tax liability might also be called a "tax obligation." A tax authority -- such as a local, s...
A tax lien is a claim placed on a piece of real estate by a tax authority due to a taxpayer's failure to pay taxes.    When a taxpayer fails to pay either income taxes or property taxes, the taxin...
A tax loss carryforward is a "negative profit" for tax purposes. It usually occurs when a company's expenses exceed revenues, making the company unprofitable. Tax loss carryfowards reduce future tax...
Tax lot accounting is a method of record keeping that tracks the cost, purchase date, and sale date for every unit of every security in a portfolio. For example, let's assume that you purchase 50 sh...
Tax planning is the process of forecasting one's tax liability and formulating ways to reduce it. Tax planning entails creating portfolios or circumstances that are as tax efficient as possible. Thi...
A tax preference item is income that subjects a taxpayer to alternative minimum tax (AMT). These items are treated differently for regular tax and AMT purposes. According to U.S. tax code (26 USC se...
A tax rate is the percentage of income a person or company pays in taxes. The United States has a progressive tax system, which means that different portions of a person's income are taxed at differ...
The Tax Reform Act of 1986, signed by President Ronald Reagan, was one of the most significant changes to the American federal income tax system. The Tax Reform Act of 1986 had several noteworthy co...
A taxpayer gets a tax refund when he or she has overpaid taxes to the government. A tax refund is the difference between taxes paid and taxes owed. Each year (or each quarter, in some cases) a taxpa...
Tax relief is a tax deduction, tax credit, reduction in tax rate or forgiveness of a tax lien. For example, let's say John and his wife had a baby in 2011. When John filed his tax return for the yea...
A tax return is a set of forms that a taxpayer uses to calculate and report taxes owed to the Internal Revenue Service (IRS). April 15 is the annual deadline for filing a tax return, though some typ...
A tax sale is a sale of property by a taxing authority. For example, let's say that John owns a home and he owes $4,000 in property taxes. A year and a half goes by, and John doesn't pay the taxes. ...
Tax season is from January 1 to April 15 of each year. Tax season is the busiest part of the year for tax accountants, because the filing deadline for individual taxpayers is April 15. It is also a ...
Tax selling is a strategy used to reduce tax liability. Let's assume that John sold two different stocks that he originally bought five years ago: 1) He sold 1,000 shares of Company XYZ at $25 a sha...
A tax shelter is a means of minimizing one's tax liability. Tax shelters can be both legal and illegal. The most widely used tax shelter in the United States is the 401(k) employer sponsored plan. I...
A tax shield is a deduction, credit or other method used to reduce the amount of taxes owed. For example, let's say John and his wife have a baby in 2011. When John files his tax return for the year...
A tax swap is a strategy that involves selling one investment with capital losses and replacing it with a similar, but not identical, investment. Let's assume that John owns 1,000 shares of Mutual F...
A tax table shows the tax due for different income ranges. For example, according to the IRS 2011 tax table, if John makes a salary between $76,150 and $76,200 and is single, he owes $15,169 in taxe...
A tax umbrella is a negative profit that reduces a company's tax liability. It usually occurs when a company's tax deductions exceed its taxable income (often because expenses exceeded revenues, maki...
A tax wedge is the difference between gross income and after-tax income. In economics, it refers to the broader financial effects of a tax on a sector of the market. Technically speaking, the tax wed...
A tax year is the year for which a tax is calculated and paid. The United States has a January to December tax year for individual taxpayers. Let's say John files his tax return on April 15, 2012. T...
Tax-advantaged means that some or all of an investor's income is sheltered from taxation, allowing a taxpayer to minimize his or her tax burden. One of the best examples of tax-advantaged investing ...
Tax-exempt commercial paper is short-term debt for which the interest payments are tax-exempt at the federal, state or local level. Universities are some of the most common issuers of tax-exempt com...
Tax-exempt interest is interest income that is exempt from federal and/or state taxes. For example, let's assume that John Doe purchases a municipal bond. The bond pays 5% interest per year, or $50 ...
In investing, a tax-exempt sector is a group of financial instruments that pay tax-exempt interest. However, it also refers to nonprofit organizations, which are tax-exempt. Assume John Doe wants to...
Generally, tax-exempt securities are those whose interest, dividends or gains are free from federal income taxation. For example, let's assume that John purchases $1,000 of municipal bonds. The bond...
A tax-free spinoff occurs when a company divests a portion of its business in a manner that qualifies as a tax-free transaction under Section 355 of the Internal Revenue Code and thus does not requir...
A taxable estate is the portion of a person's net assets that are taxable upon his or her death. An estate tax is often levied on the assets that the deceased leaves to his or her heirs.  Living sp...
A taxable event is any occurrence that creates a tax liability. Many day-to-day financial activities are taxable events, but in the investing world the most common are the receipt of income, interes...
A taxable gain is an increase in the value of an investment. It is the difference between the purchase price (known as the "cost basis") and the sale price of an asset.  The formula for taxable gai...
At the beginning of every year, most individuals and families start collecting their annual pay statements and receipts in order to determine their taxable income. If you’ve ever done taxes on your...
Taxable preferred securities are typically preferred stocks whose dividends are not tax-exempt. Preferred securities (usually called "preferred stocks") have characteristics of both stocks and bonds...
A taxable wage base is the maximum annual wage on which a taxpayer must pay taxes. For example, let's assume that John earns $150,000 a year as CFO of Company XYZ. The United States government has s...
Taxes are required payments from citizens to governments. The payments fund projects and expenditures that serve the public interest.  Most taxes are legislated, meaning that representatives electe...
A taxpayer is a person or organization that must pay taxes to a federal, state, or local agency.  For example, let's assume that Jane is an employee of Company XYZ. She earns $150,000 per year.  I...
The Taxpayer Advocate Service (TAS) is an organization within the Internal Revenue Service that is designed to help taxpayers resolve problems with the IRS.  The TAS was first formed in 1978. Over ...
The Taxpayer Bill of Rights is a list of the protections available to all taxpayers when dealing with the Internal Revenue Service. In 1988, Congress passed the first Taxpayer Bill of Rights. Congre...
Also called an Individual Taxpayer Identification Number (ITIN), a taxpayer identification number (TIN) is a nine-digit number that the IRS uses to identify individuals who do not have and are not re...
Tele Tax is an automated phone service offered by the IRS. Tele Tax allows callers to select from a phone menu of 151 tax topics. The topics contain pre-recorded information. The information is avai...
A transfer tax is a tax on the value of goods that one party gives to another. Individuals and organizations frequently give and accept property with no exchange of monetary payment. Two prominent e...
Unearned income is an IRS term for income that is not obtained by participating in a business or trade (e.g., salaries and bonuses, wages, commissions and tips). It typically includes interest, divid...
Unrelated business taxable income (UBTI) is the tax placed on the income derived from unrelated business activities of an otherwise tax-exempt entity. For example, if an investor uses his Individual...
VAT is the most common type of consumption tax and currently used in more than 160 countries, including each member of the EU. The notable exception to this rule is the US.  For products or service...
Vertical equity is the concept of increasing tax rates on higher incomes. Vertical equity is similar to the concept of progressive taxes. The United States has a vertical equity tax system, which me...
A W-2 form is a tax form required from employers that reports wages paid and taxes withheld to the Internal Revenue Service (IRS), local state tax authorities and the Social Security Administration. ...
A W-4 form is a standard IRS form an employee uses to report federal taxability status to an employer. An employer is required by law to withhold taxes from an employee's pay based on information re...
The W-8 form is a standard IRS form that exempts non-U.S. citizens from specific federal income taxes. Individuals from abroad who live in the United States frequently work as legal residents and in...
The W-9 form is a standard IRS form that certifies an individual's Social Security number and taxpayer identification number. Employers and all types of brokers (for example, securities dealers and ...
A wealth tax is based on a person's net worth or the value of his or her assets. Let's say John Doe makes $100,000 a year. He also has $500,000 saved for retirement and a house that is paid off and ...
Withholding tax, also sometimes referred to as simply "withholding," is an amount that employers withhold from an employee's paycheck and remit to local and federal taxing authorities on behalf of ...
A zero capital gains rate is a 0% tax on gains from the sale of assets and property sold in an enterprise zone. For example, downtown ABCTown has decayed over the last 10 years. There are many vacan...
Zero-rated goods are goods that aren't subject to value-added (VAT) tax. A value added tax (VAT) is a consumption tax added to a product's sales price. It represents a tax on the "value added" to th...