Income Tax

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Ability to Pay

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a creiterion of tax fairness that people with different amounts of wealth or defferent amounts of inocme should pay different amounts of taxes. Wealth may include assets and property such as houses, cars, stocks, bonds, savings accounts, or valuables. income includes wages, rents, interest, profits, or other payments.

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adjusted gross income

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total income reduced by certain adjustments such as the IRA deduction and the deduction of alimony paid.

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benifits received

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a creierion of tax fairness that people should pay taxes in rough proportion to the benefits they receive from government goods and services.

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business taxes

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taxes levied on businesses by federal, state, or local goernments. these may include, in additon to corporate income taxes on earnings and profits, unemployment insurance, workmens compensation, contrubutions to social secruity, and Medicare insurence

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credits

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a direct reduction of the tax owed. credits may be allowed for purposes such as child care and the earned income credit for low-income taxpayers

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dependent

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a person who relies on someone esle for support. a dependent generally may not be the taxpayers or his or her spouse. a taxpayer may claim an exemption for a dependednt if the dependency tests are met.

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direct tax

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a tax cannot be shifted to others. The federal income tax is a good example of a direct tax

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dividends

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ordinary dividends are a corporations distributions to its shareholders from its earnings and profits

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earned income

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includes wages, salaries, tips, and net earnings from self-employment and other income received for personal services

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earned income credit

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a refundable credit for low-income workers with children. this credit may be paid to the wroker even if no income tax was withheld from the wrokers pay. to receive the earned income credit, a taxpayer must file a tax return

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excise taxes

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taxes on the sale or use of specific products or transactions

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exempt (from withholding)

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free from federal income tax withholding requiremetns by meeting certain income, tax, liabiltiy, and dependeny creiteria.

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exempt (from tax liability)

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tax law provides for a set amount which taxpayers can claim for themseves, their spouses, and eligible dependents. teh total of these amounts is subtracted form adjusted gross income before any tax is cmputed on the remainging income.

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file a return

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to file means to mail or otherwise convey to a regional IRS service center the appropriate IRS forms-the return-on which a taxpayer has entered information about income and tax liabiltiy

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filing status

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based on taxpayers marital status and other fcators, the filing status determines the tax bracket and rate at which income is taxed

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form w-4 (employees withholding allowance certifiacte)

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a form that helps an employer determince how much to withhold from an employees paycheck for federal income tax pruposes

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fromal tax legislation process

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the strict constitutional steps taht a proposed tax msut pass through before it becomes law

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gross income

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money, goods, and property you received that must be included in taxable income

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horizontal equity

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the concept that people in the same income group should pay the same amount of taxes

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income taxes

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taxes on income, both earned and unearned. income taxes an be levied both on individuals and businesses

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indirect tax

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a tax taht cna be shifted to others. the one who pays the tax to the governemt may be able to shift it to others. business property taxes are examples of indirect taxes.

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infroma tax legislation process

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individuals and interset groups expressing and promotiong their opinons about tax legislation

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interest income

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income received from savings accounts or form lending money to someone else

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payroll taxes

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taxes collected from employers and employees to finace specific programs; levied on earned income such as wages, salaries, and self-employment earnings

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personal income tax

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a tax on the amount of taxable income that people recieve annually. taxable income is less than total income because of exemptions and tax deductions

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progressive tax

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a tax taht takes a large percentage of income from high-income groups than from low-income groups

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property tax

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taxes on property, especially real state, and also boats, automobliles, recreatioanl vehicles, adn business inventories

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proportional tax

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a tax that takes the same percentage of income from all income groups

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public goods and services

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a public good is one that cannot be withheld form those who dont pay for it, and one that may be consumed by one person without reducing the amount of the product availabel for others. examples include national defense, street lights, and roads and highways. public services include welfare programs, law enforcement, montoring, and regulation of trade and th eeconomy, and education

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redevelopment or enterprise zone

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a government-designated area that is declared in need of restoration and revitalization. to encourage restoration, tax reductions may be available

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regressive tax

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a tax that takes a larger percentage of income from low-income groups than from high-income groups

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sales taxes

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taxes on retail products, based on a set percentage of retail cost

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schedule

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a form on which taxpayers list specific sources of inocme, or specific expenses for which they claim deductions or credits

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standard deduction

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an amount fixed by law and based on filing status and age, which taxpayer may deduct form their adjusted gross income before tax is determined

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tariff (duties; customs duties ro improt duties)

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taxes on products imported fro foreign countries

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tax credits

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amounts based on certain expenditures, that a taxpayer cna dedcut from taxes owed.

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tax deductions

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a persons or a business expenses that can be deducted in determining taxable income

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tax exemptions

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a part of a persons total income on which no tax is imposed

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tax liability (total tax bill)

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the amount of tax that must be paid. taxpayers meet their federal income tax liability through withholding estimated tax payments, and payments attached to the tax forms they file with the govenment

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tax shift

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the process taht occures when a tax taht has been levied on one person or group is fact paid by others

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tax withholding

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money that an employer takes from an employees paycheck and that is used to pay part or all of the employees taxes

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taxable income

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the income on which tax is computed

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taxes

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required paymetns of money to govrnmetns that are used to provide public goods and services for the benefit of the community as a whole

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transaction taxes

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taxes on economic transactions, such as the sale of goods and services. such taxes can be based on a set percentage of the sales value or they can be a set amount on physical quantities

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vertical equity

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the concept that people in different income groups should pay differnet amounts of taxes, or differnet percetages of the income as taxes.

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voluntary compliance

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a system of compliance that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly, and file a tax return on time

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wtihholding (pay-as-you-earn taxation)

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money that employers withhold from employees paychecks. this money is deposited for the government. it will be credited against the employess tax liability when tehy file their returns. employers withhold money for federal income taxes, federal social security taxes, and state and local income taxes in some states and localities

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withholding allowance

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claimed by an employee on form w-4. an employer uses the number of allowances claimed, together with income earned and marital status to determine how much income tax to withhold from wages