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Glossary: Accounting & Tax Terms

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This glossary of accounting & tax terms will hep you understand basic accounting vocabulary. Click on any of the terms for a expanded definition and examples.

Accounting & Tax Terms

After-tax income: The amount of disposable income that a person or company has left over after all federal, state and withholding taxes have been deducted from the taxable income. You can spend your after-tax income on future investments or on present consumption.

Business Tax Credits: Business Tax Credits are a group of credits available to business owners. These tax credits are grouped together and submitted through IRS Form 3800. There is a limit on how many credits you can claim. It is based on your tax liability. Use IRS form 6251 to find out how many credits you can claim.

Charitable Donations: Charitable donations are gifts given to nonprofit organizations. Common gifts include: money, real estate, vehicles, clothing, securities, jewelry or other assets or services. Most charitable donations are tax deductible. It’s important to get a receipt from the organization that you donate to in order to claim it on your taxes.

Tax Credit: A tax credit reduces the amount of tax a business or individual has to pay. The government uses tax credits to encourage or reward behavior that they find beneficial. For example, the government can give a tax credit to people for replacing old appliances with new, energy efficient ones. Most tax credits are given to benefit the economy or environment; however, the government can create tax credits for any reason.

Tax Deductions: A tax deduction is a credit that is subtracted from your income, which lowers your taxable income. The Internal Revenue Service (IRS) allows taxpayers to take a standard deduction or an itemized deduction.

Earned Income Credit: The Earned Income Credit (EIC) is a tax credit for low to moderate income earners. In order to qualify for the Earned Income Credit, you must file a tax return, even if you are not required to file taxes. Those who file for an Earned Income Tax Credit may receive a tax refund if their taxable income is less than the credit.

Federal Tax LienA federal tax lien is used to put a lien on property, or any other assets, as collateral for unpaid back taxes. The Internal Revenue Service (IRS) can issue federal tax liens to secure payment of those unpaid back taxes.

Gifts of EquityA gift of equity is when family members sell property to other family members for less than market value. The gift of equity is specifically the difference between the market value and what the buyer pays. A gift of equity can be for any amount, up to the total value of the home.

Hobby Loss Rule: If your business goes too many years without making a profit it can be classified as a hobby. When it becomes a hobby you can no longer claim losses as business deductions.

Itemized Tax Deduction: An itemized tax deduction is the alternative to taking the standard tax deduction. An itemized deduction counts all of your tax deductions in order to lower your taxable income. It requires more work than claiming the standard deduction, but it can also pay off if your itemized tax deduction is greater than the standard deduction

Kiddie Tax: The Kiddie Tax is a tax applied to a child’s unearned income. When children under the age of 18 make $2,100 or more in unearned income, that income is taxed at the guardian’s tax rate. Unearned income is considered any gifts of stock or other investments. The Kiddie Tax does not apply to earned income (income made through employment.)

Mileage Allowance: The Internal Revenue Service (IRS) allows people who use their vehicles for business, charity, moving or medical expenses to take deductions on those expenses; this is called mileage allowance. The IRS deducts a certain cent-per-mile; the IRS determines the deduction each year. This is also referred to as the “standard mileage rate.”

Nanny Tax: The Nanny Tax is a federal (and sometimes state) tax paid by people who have household help and pay them over a certain threshold. The nanny tax applies to nannies, housekeepers, gardeners or any other household help.

Pretax Earnings: Pretax earnings can be applied to individuals or businesses. In each case, pretax earnings refer to the amount of money an individual or business earns before income tax is taken out. Pretax earnings are also referred to as pretax income or earnings before tax.

Rehabilitation Tax Credit: The rehabilitation tax credit is a federal tax credit that encourages real estate developers to renovate or restore older buildings. Buildings built before 1936 are the target of the rehabilitation tax credit.

Sales Tax: Sales tax is a consumption tax on goods and services. State governments, along with county and local governments, set the sales tax; however, not every state has sales tax.

Underwithholding: Underwithholding is when you haven’t had enough income taxes withheld during a year. If a tax payer’s incomes taxes are underwithheld, it does not mean that tax payers doesn’t have to pay the taxes. Tax payers pay the underwithheld taxes when he or she files a tax return.

Withholding Tax: Withholding taxes are a form of income taxes. These taxes are taken out, or withheld, from an employee’s paycheck, which the employer pays directly to the government.

Ben Sutton

Ben Sutton

Ben Sutton is the founder of Mazuma USA, an accounting firm providing tax, bookkeeping and payroll services to small businesses. Since founding Mazuma, Ben has established himself as an expert in the small business world. He’s still driven by that same desire to provide accounting help to all small businesses – from photographers, bloggers and creatives to lawyers, doctors, and dentists, everyone needs affordable accounting help. Ben is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants. But Ben considers his greatest achievement and credential to be his happy wife and four children.

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