Understanding Taxes

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Ability to Pay

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Acriterion of tax fainess that people with different amounts of wealth or different ammounts of income should pay different amounts of taxes.

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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 for alimony paid.

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Benefits Received

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A criterion of tax fairness that people should pay taxes in rough proportion tot he benefits they receive from gonernment goods and services.

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Business Taxes

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Taxes levied on businesses by federal, state, or local governments.

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Credits

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A direct reduction of taxes owed.

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Dependent

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A person who relies on someone else for support.

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Direct Tax

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A tax that cannot be shifted to others.

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Dividends

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Ordenary dividends are a corporation's distributions to its sharholders 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.

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Excise Taxes

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Taxes on the cale or use of specific products or transactions.

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Exempt (from Withholding)

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Free from federal income tax withholding requirements by meeting certain income,tax liability, and dependency criteria.

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Exempt (from Tax Liability)

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Tax law provides for a set amount which taxpayers can claim for themselves, their spouses, ad eligible dependents.

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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 form(s)-the return-on which a taxpayer has entered information about income and tax liability.

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Filing Status

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Based on taxpayer's martial status and other factors, the filing status determines the tax bracket and rate at which income is taxes.

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Form W-4 (Emploee's Withholding Allowance Certificate)

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A fomr that helps an employer determine how much to withhold from an employee's paycheck for federal in come tax purposes.

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Formal Tax Legislature Process

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The strict constitutional steps that a propsed tax must pass through before it becomes law.

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Gross Income

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Money, goods, and property you receive that muct 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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Incomes Taxes

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Taxes on income, both erned and unearned.

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Indirect Taxes

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A tax that can be shifted to others.

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Informal Tax Legisltion Process

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Individuals and interest groups expressing and promoting their opinions 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 finance specific programs.

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Personal Income Tax

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A tax based on the amount of taxable income that people receive annually.

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Progresssive Tax

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

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Property Taxes

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Taxes on property, especially real estate.

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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 from those who don't pay for it and one that may be "consumed" by one person without reducing the amount of the product available for others.

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Redevelpment or Enterprise Zone

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A government-designated area that is declared in need of restoration and revitalization.

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Regressive Tax

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A tax that takes a larger percentage of insome from low-income groups than form 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 lis specific soures of income or spacific expenses for which they claim deductions or credit.

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Standard Deduction

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An amount, fixed by law and based on filing status and age, which taxpayers may deduct from their adjusted gross income before tax is determined.

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Tariff (Duties; Customs Duties or Import Duties)

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Taxes on products imported from foreign countries.

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Tax Credits

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Amounts, based on certain expenditures, that a taxpayer can deduct from taxes owed.

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Tax Deductions

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A person's or a business's expenses that can be deducted in determining taxable income.

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Tax Exemptions

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A part of a person's total income on which no tax in imposed.

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Tax Liability (or Total Tax Bill)

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The amount of tax that must be paid.

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Tax Shift

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The process that occurs when a tax that has been levied on one person or group is in fact paid by others.

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Tax Withholding

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Money that an employer takes from an employee's paycheck and that is used to pa part or all of the employee's taxes.

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Taxable Income

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The income on which tax in computed.

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Taxes

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Required payments of money to governments 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.

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Vertical Equity

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The concept that people in different income groups should pay different amounts of taxes or different percentages of the income as taxes.

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Withholding ("Pay-as-you-earn" Taxation)

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Money that employers withhold from employees' paychecks

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Withholding Allowance

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Claimed by an employee on Form W-4.