Tax Terminology
The total amount of money earned before any deductions or taxes are taken out.
Gross Income
The annual income tax return form most common for simple tax situations (the simplest form).
Form 1040 (or previously Form 1040-EZ)
Gross Income is $50,000. The Standard Deduction is $14,600. What is the Taxable Income?
$50,000−$14,600=$35,400
Fact or Fiction: All U.S. citizens must pay federal income tax regardless of how much they earn.
Fiction. Only if income is above a certain threshold.
Define It!
The amount of income that you are actually taxed on, calculated by subtracting adjustments and deductions from your Gross Income.
Taxable Income
The form you get from your employer that shows your total wages and the amount of tax withheld from your pay during the year.
Form W-2
If you owe $5,000 in taxes and you received a $2,000 tax credit, how much tax do you actually owe?
$5,000−$2,000=$3,000
Fact or Fiction: FICA taxes primarily fund Social Security and Medicare.
Fact. FICA stands for Federal Insurance Contributions Act.
Define It!
A fixed amount set by the IRS that taxpayers can subtract from their Gross Income to reduce their Taxable Income, instead of itemizing.
Standard Deduction
A form you fill out when starting a job to tell your employer how much federal income tax to withhold from your paycheck.
Form W-4
If your employer withheld $4,500 in taxes, but your final tax liability is $3,800, what is the amount of your tax refund?
$4,500−$3,800=$700
True or False: A tax deduction is generally more valuable than a tax credit.
False. A tax credit reduces tax dollar-for-dollar, while a deduction only reduces the income subject to tax.
Define It!
A reduction in the amount of tax you owe (dollar-for-dollar) once your tax liability has been calculated.
Tax Credit (e.g., Child Tax Credit)
A person who must file taxes, even if they owe no money, because their income is above a certain threshold.
Taxpayer
A taxpayer has a Taxable Income of $40,000. If the tax rate for this income bracket is 12%, what is the tax on the entire amount for a simple estimate? (Simple rate estimate)
$40,000×0.12=$4,800
True or False: Sales tax is an example of an income tax.
False. Sales tax is a consumption tax; income tax is levied on wages, salaries, etc.
Define It!
The system where tax rates increase as a person's income increases.
Progressive Tax System
The government agency responsible for collecting federal taxes and enforcing tax laws.
IRS (Internal Revenue Service)
If your marginal tax rate is 22%, how much tax would you pay on the next $1,000 you earn? (This is a conceptual question about marginal rate.)
$1,000×0.22=$220
Legal Limits: What is the April 15th deadline related to in the U.S. tax system?
The deadline for filing federal income tax returns (or requesting an extension).