Understanding Taxes

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Ability to Pay

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A criterion of tax fairness that people with different amounts of wealth or differents amount of taxes. Wealth may include assets and property such as houses, cars, stocks bonds, savings accounts, or valuables. Income includes wages, rnts, interest, profit, or other payments.

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Adjusted Gross Income

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Total income reduced my certain adjustments such as the IRA deduction and the deduction for alimony paid.

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Benifits Recieved

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A criterion of tax fairness that people should pay taxes in rough proportion to the benefits they recieve from government goods and services.

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Business Taxes

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Taxes levied on business by federal, state, or local governments. These may include, in addition to corporate income taxes on earnings and profits, unemployment insurance, workmen's compensation, contributions to social security, and Medicare insurance.

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Credits

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A direct reduction of tax owed. Credit 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 else for support. A dependent generally may ot be ther taxpayer or his or her spouse. A taxpayer may claim an exemption for a dependent of the dependency tests are met.

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Direct Tax

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

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Dividends

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Ordinary dividends are corporation's distributions to its shareholders from its earnings and profits

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Earning Income

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Includes wages, salaries, tips, and net earnings from self-employment and other income recieved 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 worker even if no income tax was withheld from the worker's pay. To recieve the earned income credit, a taxpayer mucst file a tax return.

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Excise Taxes

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

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Exemption 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 spuses, and eligible dependents. The total of these amounts is subtracted from adjusted gross income before any tax is computed on the remaining income.

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Filing Status

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Based on taxpayer's marital status and other factores, the filing status determines the tac bracket and rate at which income taxed

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

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A form that helps an employer determine how much to withhold from an employee's paycheck for federal income tax purpose

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Formal Tax Legislation Process

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The strict constitutional steps (involving Congress and the president) that a proposed tax must pass through before it becomes law.

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Gross Income

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Money, goods, and property you recieved 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. "Equals should be taxed equally."

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Income Taxes

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Taxes on income, both earned(e.g., salaries, wages, tips, commisions) and unearned (e.g., interest, dividends0. Income taxes can be levied both on individuals (personal income tax) and businesses (business and corporate income taxes).

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Indirect Tax

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A tax that can be shifted to others. The one who pays the tax to the government may be able to shift it to others. Business property taxes are examples of indirect taxes.

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Informal Tax Legislation 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 recieved from savings accounts or from 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; 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 beased on the amount of taxable income that people recieve annually. Taxable income is less than total income becouse of exemtions and tax deductions

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Progessive 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, and also boats, automobiles (often paid along with license fees), recreational vehicles, and business incentories.

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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. Examples include national defense, street lights, and roads and highways.
Public services include welfare programs, law enforcement,monitoring, and regulating of trade and the economy, and education.

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Redevelopment or Enterprise Zone

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A government-designated area(usually in a city) 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 ("itemize") specific sources of income, 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 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 business's expences 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 is imposed.

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Tax Liability (or Total Tax Bill)

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The amount of tax that must be paid. Taxpayers meet (or pay) their federal income tax liability through withholding, estimated tax payments, and payments attached to the tax forms they file with the government.

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Tax Shift

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

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Tax Withholding

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Money that an employer taks from an employee's paycheck and that is used to pay part or all of the employee's 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 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. Such taxes can be based on a set percentage of th esales value (ad valorem--sales taxes) or they can be set amount on physical quantities ("per unit"--gasoline taxes).

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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 taxes. "unequals should be taxed unequally."

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Voluntary Compliance

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A system of comliance 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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Withholdig ("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 employees' tax liability when they file their returns. Employers withhold money for federal income taxe, 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 used the number of allowances claimed, together with income earned and marital status to determin how much income tax to withhold from wages.