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Financial Literacy - Taxes
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Tax glossary

23. Deduction -- A tax deduction is an amount that the IRS allows you to subtract from your income before computing your income tax. If you have taxable income of $30,000 and deductions of $3,000, then you would figure how much tax you owe on the difference -- $27,000. People may take a standard deduction on federal income taxes, an amount established each year by the IRS for each filing status. Or, if they have a greater amount of deductions than the standard amount, they can deduct them by itemizing expenses on Schedule A. Typical itemized deductions include mortgage interest, some loan points, property taxes and state income taxes. Some other items -- such as alimony payments, moving expenses, deductible IRA contributions and contributions for certain qualified retirement plans -- may be deducted directly on the long Form 1040.

24. Dependent -- A person who relies on someone else for financial support, usually unmarried children (adopted, step, foster or biological), up to a certain age. If you have dependents, you can claim them as exemptions, which will reduce the amount of your income that is taxed. To qualify as a dependent, the person must meet five tests: relationship or member of household test; citizenship test; joint return test; gross income test; support test.

25. Dependent care credit -- A tax break for expenses paid to provide care for a dependent. Most commonly used in connection with child care costs, but expenses to care for any qualified dependent (parent, disabled spouse) are eligible.

26. Depreciation -- The gradual loss of value of a building or other property because of age or natural wear. Automobiles in particular depreciate steeply in their first few years. In taxes, this is the deduction you are allowed for the wearing away and expensing over time of such items as office equipment, vehicles, buildings and furniture. For tax purposes, the IRS determines the amount of time such material is expected to last, and you depreciate, or spread the cost of, the asset over its estimated useful life rather than deducting the entire cost in the year you get it.

27. Disaster loss -- If you suffer damage or property loss from a storm in an area the president has declared eligible for federal disaster assistance, this is a disaster loss. Disaster losses get special tax treatment: You can choose to deduct the loss in the year it happened, or you can file an amended return and deduct the loss in the prior year. This gives you the option of receiving your tax benefit sooner.

28. Distribution -- Money a taxpayer withdraws from a retirement plan. All distributions must be reported, but not all are taxable; it depends upon the type of retirement account from which the money is withdrawn.

29. Dividend -- Distribution of earnings to shareholders. In credit unions, it's the money paid to members for deposits, similar to the interest banks pay to their customers for deposits.

30. Domicile -- A person's permanent residence.

31. e-file -- Shorthand for electronic filing. The submission of a tax return to the IRS via electronic, rather than paper, means. E-filing usually speeds IRS processing, reducing turnaround time for refunds.

32. Earned income -- All the money you earn. This includes any wages, salaries, tips, net earnings (if you're self-employed) and any other income received for personal services. Investment income, such as dividends and interest, is not counted as earned income.

33. Earned income tax credit -- A credit that low-income workers can receive. If you are eligible, you must file a tax return to get the credit, even if you didn't have any income tax withheld from your pay.

-- Posted: Dec. 17, 2007
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