Understanding Taxes: Tax and Investing Terminology
401(k): A 401(k) plan is a retirement plan sponsored by employers that allows employees to save part of their income in an investment account. Some employers offer contribution matching for their employees. Earnings from these investments are tax-deferred.
Audit: An audit is a process conducted by the Internal Revenue Service (IRS) to review tax returns and ensure that they are accurate and error-free.
Certified Professional Accountant (CPA): This type of licensed professional is authorized to prepare and submit tax returns, examine financial statements, and provide guidance on accounting issues.
Child Tax Credit: The Child Tax Credit is a partially refundable credit that can be claimed for each qualifying dependent child on your tax return. This allows low- and moderate-income families to reduce their tax liability.
Dependent: This is any person who qualifies to be claimed on a tax return by someone else. The taxpayer provides financial support for this person, usually a child.
Earned Income: This is money derived from employment. Earned income excludes income from investments, such as the sale of stocks or dividends.
Electronic Filing (E-Filing): E-filing is the online filing of tax returns. Either professional tax preparers or taxpayers can file tax returns online.
Exemption: An exemption is a reduction in the amount of revenue subject to income tax.
FICA: FICA stands for the Federal Insurance Contributions Act. It is a tax deducted from all employees’ paychecks to fund Social Security and Medicare.
Gross Income: This is the total money an individual has received from all sources of income before taxes and other deductions are taken out.
Head of Household: Head of household is a tax return filing status that can be used by someone who is unmarried and has at least one financially dependent person in their household. This can apply to a single parent or an adult taking care of their parent.
Income Tax: This is a tax imposed on an individual’s income, including wages, salaries, and income from investments.
Individual Retirement Account (IRA): An IRA is a tax-advantaged savings plan that allows individuals to save for retirement.
Internal Revenue Service (IRS): The IRS is the government agency responsible for collecting taxes from individuals and businesses, enforcing tax laws, performing audits, processing tax filings each year, and offering assistance to taxpayers.
Net Income: Net income is what’s left after an individual or business has deducted all costs of operation, taxes, and any allowances from their gross income.
Progressive Tax: A progressive tax is assessed based on a person’s ability to pay. In simple terms, as a person’s income increases, the percentage they have to pay also increases.
Refund: A refund is a reimbursement from the government if you overpay your taxes throughout the year.
Salary: A salary is a fixed amount of money paid to an employee per week, month, or year, regardless of the number of hours worked.
Tips: Tips are optional extra income given to service workers by their customers. Tips are a form of taxable income.
Wages: Wages are payments for work or services, usually paid at an hourly rate.
Further Help and Reading on Taxes, Finances, and Investing
This page was last updated by Steven Jefferies