10 key tax terms to know
This is an amount the IRS lets you subtract from your income to reflect all the people who count on your income. You can claim as tax exemptions yourself, your spouse and your dependents. The IRS allows a set amount for each exemption and, as with deductions, this total is subtracted from your adjusted gross income to come up with your final, lower earnings amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any tax deductions, either standard or itemized, that you claim.
7. Progressive taxation
This is the system in which higher tax rates are applied as income levels increase. The U.S. tax system uses progressive taxation with tax brackets starting at 10 percent and rising to39.6 percent for the wealthiest taxpayers.
8. Taxable income
Taxable income is your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions. It is the final amount of income you use to calculate how much you owe in taxes.
9. Voluntary compliance
This describes the philosophy upon which our tax system is based: U.S. taxpayers voluntarily comply with the tax laws and report their income and other tax items honestly.
Also known as pay-as-you-earn taxation, the withholding method enables taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck. These withheld taxes are deposited in an IRS account and you are credited for the amount when you file your return. In some cases, taxes also may be withheld from other income such as dividends and interest.