Vocabulary: Federal Income Tax

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The Vocabulary:

1040 – The IRS individual tax filing form
1099 –  A form that reports income from self-employment earnings, interest and dividends, and government payments
Dependent exemption – Amount that taxpayers can claim for a “qualifying child” or “qualifying relative;” each exemption reduces the income subject to tax
Dependent –  A qualifying child or relative who entitles the taxpayer to claim a dependency exemption
Deduction – An amount that reduces the amount of income subject to tax
E-file – The preparation and transmission of tax return information to the IRS using telephone lines or a computer with a modem or internet access
Earned income – Money derived from paid work, this includes wages, salaries, tips, and net earnings from self-employment
Exemption – Amount that taxpayers can claim for themselves, their spouses, and eligible dependents; there are two types of exemptions – personal and dependency
Federal income tax (FIT) – A tax on personal income
Gross income – Total income earned
Medicare tax – A tax that provides medical benefits for workers, retired workers, and the spouses of workers upon reaching age 65
Net income – Income after deductions
Payroll tax – Taxes are taken from your paycheck, including federal income, Social Security, and Medicare taxes
Progressive tax –  A tax that takes a larger percentage of income from high-income groups than from low-income groups
Proportional tax (or flat tax) –  A tax that takes the same percentage of income from all income groups
Refund – Money owed to taxpayers when their total tax payments are greater than the total tax; refunds are paid by the government
Regressive Tax – A tax that takes a larger percentage of income from low-income groups than from high-income groups
Salary –  Compensation received by an employee for services performed; a fixed sum paid for a specific period of time worked, such as a week or month
Tax Evasion –  A failure to pay or deliberately underpaying taxes owed
Underground Economy – Money-making activities that people don’t report to the government, including both legal and illegal activities
Voluntary Compliance – The federal income tax system that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly and file a tax return on time
W-2 – A tax form that shows the amount of taxes withheld from your paycheck for the year and is used to file your federal and state taxes
W-4, Employee’s Withholding Certificate –  Completed by the employee and used by the employer to determine the amount of income tax to withhold
Wages – Compensation received by employees for services performed; computed by multiplying an hourly pay rate by the number of hours worked
Withholding – Money withheld from employee paychecks; this money is deposited for federal income taxes, Social Security taxes, and state and local income taxes in some states
Unearned Income –  Income not acquired through work or business activities, but from other sources such as allowance, interest, gifts, or dividends