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Tax Law Glossary

Alternative Minimum Tax (AMT) — The AMT is essentially a separate tax system that requires people to recalculate their taxes using income that would otherwise be exempt from regular taxation. Congress created the alternative minimum tax (AMT) over three decades ago to prevent wealthy taxpayers from paying little or no tax due to various deductions, exemptions and other preferences in the tax code.

Audit — An audit is the Internal Revenue Service’s (IRS) examination of a taxpayer’s tax return, and related books and records. After a taxpayer files a return, the IRS checks the return for form and mathematical accuracy. The IRS then passes it on to the Collection Division for classification, and then the Examination Division reviews the return to determine whether there will be an office audit, field audit or no audit at all.

Credit — A tax credit is subtracted from total tax liability and reduces the amount of taxable income. Various types of tax credits may be available to a taxpayer including child-care credits, education credits and foreign tax credits.

Deduction — When calculating adjusted gross income, various deductions can be subtracted from gross income. In addition, standard and itemized deductions can be subtracted from adjusted gross income to arrive at taxable income.

Estate Tax — The federal estate tax is a tax on the transfer of property from an individual to his or her beneficiaries at the time of the individual’s death and on other transactions that are determined to be the equivalent of transfers of property at death. Also called the death tax.

Excise Tax — An excise tax is a tax on the manufacture, sale or use of goods, or on the carrying on of an occupation or activity. The most common excises taxes imposed by the federal government are on fuel, communications, air transportation, gas-guzzler automobiles, sport-fishing equipment and vaccines.

Exemption — When calculating taxable income, an exemption is an amount that is subtracted from adjusted gross income. Taxpayers can claim personal exemptions for themselves, as well as for any dependents, such as children.

Gift Tax — The federal gift tax applies to any transfer of property, including money, by gift. The following gifts are not taxable: tuition or medical costs paid directly to an education or medical institution on behalf of someone else; gifts to a spouse, political organization or charity; and gifts that are less than the annual exclusion amount.

Gross Income — Section 61 of the Internal Revenue Code (IRC) defines gross income as all income from whatever source derived. Gross income includes such things as compensation for services, including fees, commissions, fringe benefits and similar items; interest; rent; royalties; dividends; alimony; pensions; income from life insurance and endowment contracts; and income from discharges of indebtedness.

Property Tax — A tax on real property, tangible personal property or intangible personal property that is generally based on the property value. States, counties, municipalities and other government units can all levy property taxes. Also known as ad valorem taxes.

Refund — A taxpayer will receive a tax refund from the IRS if the amount of taxes the taxpayer paid is more than the actual tax liability. A common situation in which a person is owed a refund is when the amount of taxes withheld throughout the year exceeds the taxpayer’s ultimate tax liability.

Sales Tax — A tax on the retail sale, lease or rental of tangible personal property. Sales tax is levied at the state and city levels. The tax rates and specific laws for sales and use taxes vary from state to state and town to town.

Tax Benefit Rule — The tax benefit rule states that if a deduction from a taxpayer’s gross income in one year is recovered in a subsequent year, the recovery of that amount is included in the taxpayer’s income in that subsequent year.

Tax Haven — Tax haven is a term used to describe a country that has a very low tax (or no tax at all) on income generated there or on transactions that take place there.

Tax Year — Federal and state income taxes are computed on a yearly basis. A taxpayer can use a tax year that is based on the calendar year or a 12-month fiscal year that ends the last day of any month except December.

Use Tax — A tax on the storage, use or other consumption of tangible personal property not otherwise subject to sales tax. A companion to the sales tax, the use tax allows a state to tax property brought in from another state and used in the state, but not subject to the state’s sales tax because not purchased there.

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