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Tax Terms

Here is a great list of terms to help your class understand the importance of taxes.
Grades:
7 |
8 |
9 |
10 |
11 |

1040PC
A 1040PC is a paper tax return prepared on a computer using the approvedIRS tax preparation software. Taxpayers mail the form (return) to theIRS and the IRS can directly deposit refunds into savings and checkingaccounts. It's that simple.


A

ABILITY TO PAY
Jane makes a ton of money each year, and flies (on her private jet) toand from her houses in Miami and New York. Tough life. John earns a moremodest salary and rents a small apartment. Jane and John do NOT pay thesame amount in taxes. Their ability to pay differs vastly. John paysless, for his amount of income (wages, interests, profits) and assets(houses, cars, stocks, savings accounts) is less than Jane's.

ADJUSTED GROSS INCOME
A person's entire income reduced by adjustments including a deductionfor an IRA (Individual Retirement Account), medical savings accounts,and alimony paid to an ex-spouse. Note to the wise: Saving money now inan IRA for your retirement (yes, even though it seems like a millionyears away) could be one of your smartest moves yet.

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B

BENEFITS RECEIVED
When people pay taxes according to the amount of government aid(benefits) they receive. Examples of benefits the American publicreceives include (to name only a few): welfare, child care, Medicare,Medicaid. Some people believe it's only fair that people pay taxes basedon the amount of government aid they receive.

BUSINESS TAXES
Are you a budding entrepreneur? Just remember that businesses pay taxesto federal, state and local governments. Businesses pay taxes on theirprofits. Businesses also pay unemployment insurance, worker'scompensation, social security and Medicare insurance.

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C

CREDITS
If you have a store credit, you can use the credit to purchasemerchandise free of charge. If you have a tax credit, your taxes arereduced by the amount of your credit. You can get tax credits forpurposes such as child care expenses and the earned income credit forlow-income taxpayers.

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D

DEPENDENT
A person who relies on someone else for financial support. Sound like amooch? Not really. Think about it- most "young adults" (under 21 yearsold) are supported by their parents. Is this you? If it is, your parentscan claim an exemption for you-their adorable dependent-if dependencytests are met.

DIRECT DEPOSIT
When you give the IRS the go-ahead, they'll send your refund directly toyour bank account. It's the fastest way to get your cash.

DIRECT TAX
A direct tax cannot be shifted to others (unlike an indirect tax). Agood example of a direct tax is the Federal income tax. You just gottapay it.

DIVIDENDS
Are you a stockholder? If you are, you receive dividends, or a portionof a company's earnings and profits.

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E

EARNED INCOME
In simple English: All the money you earn. This includes any wages,salaries, tips, net earnings (if you're self-employed), and any otherincome received for personal services. Add it all up, it's all earnedincome.

EARNED INCOME CREDIT
Not exactly rolling in dough? Low-income workers can file a tax returnto get an earned income credit, even if no income tax was withheld fromthe worker's pay.

ELECTRONIC FILING (IRS e-file)
It pays to be computer savvy! Taxpayers can now file their taxinformation with personal computers and tax preparation software. Theinformation goes directly to the IRS and the IRS can directly depositrefunds into the taxpayer's bank account. Electronic filing allowstaxpayers to get their refunds quickly. Check out IRS e-file.

ELECTRONIC FILING (IRS e-file) OPTIONS
IRS e-file options allow you to file Federal income tax returns (and some state returns) through a tax professional, through your home computer or even through your telephone. It may also be available in many other places in your local community.

EXCISE TAXES
Excise taxes are taxes on the sale or use of certain products ortransactions. So every time you make a telephone call, buy a planeticket, or ride in a car (to name but a few) you'll be paying excisetaxes.

EXEMPT (from withholding)
Have you ever been exempt from taking an exam because your average washigh enough? What a feeling! Well, taxpayers can be exempt from paying acertain amount of federal income tax if they meet certain income, taxliability, and dependency requirements. In fact, you could be exemptfrom having certain taxes taken out of your paycheck. If you have a job,be smart and check into this.

EXEMPT (from tax liability)
Before a taxpayer pays taxes, he/she can claim a set amount of taxdeductions for him/herself, a spouse and eligible dependents. The totalamount is subtracted from the adjusted gross income. Then the tax on theremaining income is figured out.

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F

FICA (Federal Insurance Contributions Act)
The Federal Insurance Contributions Act (FICA) consists of both a SocialSecurity (retirement) payroll tax and a Medicare (hospital insurance) tax. Thetax is levied on employers, employees, and certain self-employed individuals.

FEDERAL EMPLOYER IDENTIFICATION NUMBER (EIN)/FORM SS-4
EINs are used to identify the tax accounts of businesses. You need to getan EIN if you have employees or operate your business as a partnership orcorporation. An EIN is also needed if you have a Keogh retirement plan or file certaintax returns.Form SS-4, An Application for Employers Identification Number,is used to request an EIN.

FEDERAL/STATE ELECTRONIC FILING
Cutting edge! Certain states allow taxpayers to file tax information forboth federal and state income tax returns with home computers and taxpreparation software.

Federal Employer Identification Number (EIN)/Form SS-4
EINs are used to identify the tax accounts of businesses. You need to get an EIN if you have employees or operate your business as a partnership or corporation. An EIN is also needed if you have a Keogh retirement plan or file certain tax returns.Form SS-4, An Application for Employers Identification Number, is used to request an EIN.

FILE A RETURN
To file a return is to send in your completed tax forms, or return("return" is the official term-use it, you'll sound smarter). All yourtax information appears on the return, including income and taxliability.

FILING STATUS
Your filing status determines your tax bracket and amount of taxes youmust pay. Factors such as marital status affect your filing status.

FORM 1040EZ
This form is great if you're single or married, don't have any dependentsand aren't rolling in dough. If your income is $50,000 or less and yourinterest income is $400 or less --- use this easy (get it, EZ) IRS form to fileyour return.

FORM W-2
By January 31 of each year --- your employer (even if you don't workthere anymore) will provide you with a statement of how much youearned in wages, tips and other compensation from the previous year.This form will reflect state and federal taxes, social security,Medicare wages, and tips withheld. It also includes a lot of otherreally important information you will need to file your return.

FORM W-4 (Employee's withholding allowance certificate)
If you have or had a part-time or summer job, you probably completedthis form on your first day of work. This form determines how much ofyour paycheck is withheld for federal income taxes.

FORMAL TAX LEGISLATION PROCESS
There are strict steps (that involve the President and Congress) that aproposed tax must pass through before it becomes a law.

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G

GROSS INCOME
This deals with all the money, goods and property you receive that mustbe included as taxable income. Fact: people who use the barter system(exchanging non-monetary goods/services as payment) have to includewhatever they've bartered for as part of their gross income.

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H

HORIZONTAL EQUITY
Horizontal equity says that people in the same income groups should betaxed at the same rate. "Equals should be taxed equally."

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I

INCOME TAXES
These are taxes on income, both earned income (salaries, wages, tips,commissions) and unearned income (interest from savings accounts,dividends if you hold stock). Individuals and businesses are subject toincome taxes.

INDIRECT TAX
You might not think you're paying this tax, but you probably are. It'sthe type of tax that can be shifted to others: hence the name. Forexample: A company might have to pay a specific tax to the government,let's say a fuel tax. The company pays the tax but can increase the costof their products so consumers are actually paying the tax indirectly bypaying more for the company's products.

INFORMAL TAX LEGISLATION PROCESS
Ever joined a book club? What about a study group? Well, if you'reinterested, there are also informal tax legislation meetings whereindividuals and interest groups get together to discuss tax issues. Onceyou become a steady wage earner, these are meetings you probably won'twant to miss.

INTEREST INCOME
You deposit your money into a savings account for a reason, right? Soyou can earn interest on your money. People also earn interest fromlending money to people. We're not talking about you lending your buddyDave a couple bucks to buy lunch, we're talking about lending lots ofmoney so the interest really accumulates on the loan. Well, add up allthat interest you accumulate and there's your interest income. Not toburst your bubble, but that interest income is all fully taxable.

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L

LOCAL TAXES
In addition to federal and state taxes, your local town or city may alsoneed tax money to operate services such as garbage pick-up, watertreatment, and street-cleaning.

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M

MEDICARE
The Medicare program funds the federal health program for people over65. It helps out people at a time in their lives when they may havehealth problems but may not have a lot of money.

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P

PAYROLL TAXES
Your employer deducts a certain amount from yourpaycheck to pay for taxes. This tax money funds many finance specificprograms, including social security, health care and worker'sdisability. These programs might not mean a whole lot to you now, butyou may likely benefit from them when you're older.

PERSONAL INCOME TAX
Everyone pays a tax on his/her yearly total amount of taxable income.Remember that the personal income tax is not a tax on the taxpayerstotal income (the taxpayer can take deductions). Deductions aresubtracted first from the taxpayer's income and then he/she pays thetax on the remaining amount.

PROGRESSIVE TAX
This type of tax takes a larger percentage of income from higher incomegroups than from low-income groups. Is this fair?

PROPERTY TAXES
It's likely you've landed on "property tax" when playing Monopoly. Inreal life, people pay taxes on property, including real estate, boats,cars, recreational vehicles, and business inventories. Something tothink about before you buy that new car.

PROPORTIONAL TAX
Proportional taxes take the same percentage of income from everyoneregardless of how much (or little) a person earns. This type of tax isnot currently in use, but some feel it's the way to go. What do youthink?

PUBLIC GOODS AND SERVICES
Do you attend a public school? Ever wonder who pays for your education?Taxpayers! Tax money is used for a variety of public goods andservices-all available for use by the public (that includes you and yourfriends). Some examples of public goods are national defense, streetlights, and roads and highways. Public services include welfareprograms, sanitation, law enforcement, and education.

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R

REDEVELOPMENT OR ENTERPRISE ZONE
The government can designate an area as a redevelopment or enterprisezone, meaning that the area is in desperate need of some seriousimprovements. No, your room probably wouldn't make the cut-you'll haveto do that restoration on your own. A neighborhood in complete disarray(burned out buildings, broken sidewalks, potholes in the street, etc.),on the other hand, could qualify as such an area and taxpayer moneycould help fund the restoration process.

REFUND
When your employer deducts too much money from your paycheck, thegovernment owes you that money back. When they pay it, it's called arefund.

REGRESSIVE TAX
This is the tax that takes a smaller percentage from those with highincome than from those with lower income. Is this fair? What do youthink?

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S

SALES TAXES
You gotta have that new CD, but do you have enough cash? Don't forget toadd the sales tax to the price. Depending on the state you live in, youpay an extra percentage of sales tax for items purchased.

SCHEDULE
Your class schedule essentially organizes your day, right? Taxpayershave to be organized too. They use certain schedules (or forms) toitemize specific sources of income or specific expenses they claimshould be deducted from their taxes. It can pay to be organized!

SOCIAL SECURITY
Social Security is America's government-run retirement plan. One day,when you're your grandparents' age, you'll get the money back.

STANDARD DEDUCTION
Some taxpayers choose to take a standard amount instead of itemizing allof their deductions. This is a fixed amount that is generally based on aperson's filing status.

STATE TAXES
There are all kinds of taxes which are used to pay for all sorts ofthings. Some of our money goes to the Federal government, which paysfor services like Interstate highways, the armed forces, the FBI, and alot more. Your state also needs money for schools, roads, statetroopers-to name just a few. At the end of the tax year, you will needto send one form to the Federal government, and another to your stategovernment.

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T

TARIFF DUTY (Customs Duty or Import Duty)
Ever travel abroad and do a little duty-free shopping at the airport?You're buying tax-free products. When you buy that same product at yourcorner store (assuming it's not a duty-free shop), you're paying atariff duty or tax on the product.

TAX CREDITS
The amount of money that tax payers can deduct directly from theirtaxes.

TAX DEDUCTIONS
The amount that a person or business can subtract from their taxableincome.The more you can deduct, the less you pay.

TAX EXEMPTIONS
Pretty excited when you're exempt from gym class? Taxpayers are prettyhappy when they see there's a part of their total income on which no taxis imposed. That's a tax exemption.

TAX LIABILITY (or total tax bill)
There's no getting out of it- tax liability is the total amount of taxthat a person must pay. Taxpayers pay this through withholdings,estimated tax payments, and payments attached to their yearly tax forms.

TAX PREPARATION SOFTWARE
This is software created specifically with the IRS in mind. It'sdesigned to help you prepare your taxes on a computer. The softwareworks with the e-filing system to let you file quickly and accurately.Check the IRS Website for software recommended by the IRS.

TAX SHIFT
One lucky person or group is able to shift a tax that they're supposedto pay to someone else.

TAX WITHHOLDING
There's a portion that your employer takes fromyour (and other employees) paycheck to pay part or all of your taxes.

TAXABLE INCOME
Everything you earn that can be taxed.

TAXES
Taxes are required payments of money to the government. This money isused to make your life better. You might not even realize it, but taxmoney provides public goods and services for the community as a whole(think roads, schools, law enforcement, public libraries, etc.). Show alittle gratitude, pay your fair share.

TELEFILE
The IRS knows that lots of people don't have access to a home computer.Most people do have a touch-tone phone, though. TeleFile lets you useyour phone to send tax information to the IRS computer. The IRS mustsend you the booklet. Check out

TIPS
Here's a tip on receiving tips: If you earn more than $20 a month intips, you must report the amount to your employer.To keep track of your tips keep a daily "tips-earned log" where youwrite down the exact amount of tips you earn each day. Share the monthlytotal with your employer who will make certain federal, state, and localtaxes are paid. Remember, it still pays to be nice . . . so don'tforget to smile.

Publication 1244 contains forms for daily record keeping of tips and for reporting tips to your employer. The freely available Adobe Acrobat Reader is required to view this publication.

TRANSACTION TAXES
The sale of all goods and services have transaction taxes. These taxescan be a set percentage of a sales value or a set amount of a physicalquantity. What's that all about? Let's say you buy a CD-you pay a setamount in sales tax, but when you fill up your tank with gas, you pay atax per gallon.

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V

VERTICAL EQUITY
Who said all taxpayers are created equal? Vertical equity states thatpeople in different income groups should pay different rates of taxes.Our current tax system is one of vertical equity.

VOLUNTARY COMPLIANCE
Your mom might order you to clean up your room. Well, the IRS doesn'thave time to tell every single taxpayer to file taxes correctly and ontime . . . there are millions of taxpayers in this country after all.This system relies on citizens to report their income, calculate taxliability and file tax returns on time. Everyone's gotta grow upsometime.

VOLUNTEER INCOME TAX ASSISTANCE (VITA)
Available in most communities are Volunteer Income Tax Assistance (VITA) sitesto help with tax return preparation. People volunteer their time to help theirneighbors. The service is free to those with limited or moderate incomepeople, non-English speaking, the elderly and the disabled. Some VITA siteseven offer free electronic filing. If you want to know more about a VITA sitein your community or volunteering your time, call your local District TaxpayerEducation Coordinator.

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W

WALK-IN ELECTRONIC FILING
If you need help preparing your taxes visit the Voluntary Income TaxAssistance (VITA) office nearest you. Many VITA offices have IRSrepresentatives who can help you fill out your forms and then transmitthe information on your forms electronically.

WITHHOLDING ("Pay-as-you-earn" taxation)
Your employer takes out a certain amount fromyour check for the government. You are credited for these taxes when youfile your return. This money is used to pay for your federal incometaxes, federal social security, and Medicare taxes, and state and localincome taxes.

WITHHOLDING ALLOWANCE
When you fill out the Form W-4 your employer can figure out the totalamount in taxes to deduct from your paycheck. Your withholding allowanceis the total number of allowances, or exemptions you claim. The employeralso uses your total amount of income earned and marital status tofigure out these allowances and exactly how much income tax to withholdfrom wages.