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Adjusted Gross Income (AGI)

Term used on federal income tax returns referring to your total income minus adjustments such as deductions.

Your previous year's AGI can be used to identify you to the Internal Revenue Service (IRS), as it is not available anywhere other than your tax return.

Alternative Minimum Tax

The amount of federal income tax you pay is based on the amount of income you receive minus any amounts you may legally deduct (for example medical expenses and mortgage interest). This system makes it possible for someone to have a very high income, yet pay very little in taxes by claiming a very large amount of deductions.

This is where the Alternative Minimum Tax (AMT) comes in. It essentially is a separate tax structure for those earning more than a certain amount (in 2013 that amount was $52,000 for single taxpayers and $80,000 for married couples). In calculating your AMT (if you make more than those amounts), most deductions are no longer allowed, meaning you will be taxed on a higher amount. To compensate, the maximum tax rate using the AMT structure is 28 percent.

You don't have a choice of which tax structure to use. You must use whichever would result in the higher amount of tax.

Due to inflation in previous years, people's income grew, while the threshold for the AMT did not grow as fast. That meant that more people found themselves needing to pay the higher Alternative Minimum Tax, even though their effective income had not increased. The American Taxpayer Relief Act fixed this by permanently allowing the threshold to increase with inflation.

Capital Gains Tax

How much of your income that goes to taxes depends on where that income comes from.

If you earn that income as a salary for your work, you'll pay one amount. But if the income comes from capital gains, you'll pay a different - usually lower - amount.

Child Tax Credit (CTC)

An income tax credit to help offset the cost of raising children. Depending on your income, you may be eligible for a credit of $1,000 for each child in your family.

Earned Income Tax Credit (EITC)

Annual cash assistance to low- and moderate-income families from the federal government. It is paid as a federal income tax refund.

Estate Tax

When someone dies, the money and property they owned (i.e. their estate) is distributed among others - usually according to the owners' wishes. First, however, estate's value (over a certain amount) is taxed by the federal government.

Excise Tax

A tax paid when purchasing a specific product, such as gasoline airline tickets, etc.

The seller is responsible for paying the tax. However, sellers may include the tax in the cost of the product.

Flat Tax

The term flat tax has been used to describe a tax policy in which everyone pays the same percentage on all of their income. The term is used to contrast it to our present graduated tax structure. But other than the numbers used, there is no real difference between the two. We explain why here...

The section on the left shows present tax structure, followed by two variations of a flat tax. If you understand how marginal tax rates work, you'll see that all three structures simply are marginal tax structures. It's just that a flat tax has fewer graduations. (If you don't understand how marginal tax rates work, see our explanation and five minutes from now you will.)

So is one better than another? That depends on who you are. Let's look at an comparison between a low-wage earner and high-wage earner...

As you can see, the low-wage earner might end up paying higher taxes under a flat tax system. It is the high-wage earners who would pay significantly less in taxes.

For more on arguments for or against a flat tax structure, click here.

Free File Program

A government program that allows most taxpayers to use commercial tax-preparation software (such as TurboTax) for free.

It is defined by an agreement between the Internal Revenue Service (IRS) and the Free File Alliance.

Referenced by...
You can file your taxes for free. But it could be better. (2019-May-16)

Income Tax Return

Each year by April 15 you must pay taxes based on your income in the previous year. You calculate the amount of your tax and report it Internal Revenue Service (IRS) on a form referred to as your income tax return.

The form helps you calculate your tax based on factors such as...

o How much you (or your family) earned in the previous year.

o How much you can deduct from that income in order to decrease the amount of your income tax.

That isn't when you actually pay your income tax though. If you're like most workers, you pay your taxes as a deduction from your regular paycheck (automatically done by your employer). The amount you pay is based on an estimate of how much income tax you'll owe at the end of the year.

When you fill out your tax return, what you actually are doing is reconciling the amount of your tax with the amount you paid throughout the year. This will determine whether you still owe money or are entitled to a refund.

IRS Form 1099 (1099)

A tax form used to report income other than wages or salaries, such as interest, dividends, or money earned outside of being an employee.

There are two aspects to 1099 forms. The payer files a 1099 with the IRS, and sends a copy to the person who earned the money. The recipient then reports the income on their tax return.

IRS Form 990 (990)

Tax form that all nonprofit organizations must file each year. Large nonprofits must provide information such as income and compensation of their highest paid executives.

Part of the form - Schedule B lists donors who contributed more than $5,000.

Nonprofits must make their Form 990s available to the public. Want to view Lobby99's? Click here.

Marginal Tax Rate

Different portions of your taxable income are taxed at different percentages. These were the income tax rates that you paid on your 2012 taxable income...

10% : Only on the first $8,700 of taxable income
15% : Only on the portion higher than $8,700 and lower than $35,350
25% : Only on the portion higher than $35,350 and lower than $85,650
28% : Only on the portion higher than $85,650 and lower than $178,650
33% : Only on the portion higher than $178,650 and lower than $388,350
35% : Only on the portion higher than $388,350

To see how it actually works, watch this short video...

The highest tax rate someone pays (i.e. the percentage on the chunk of their income above a certain level) is known as their marginal tax rate.

Again, keep in mind that nobody pays the marginal tax rate on all of their income. So when someone mentions a top (i.e. marginal) tax rate, they're talking about the rate paid only on the top portion of income.

Offer-in-Compromise (OIC)

An settlement between a taxpayer and the Internal Revenue Service (IRS) that allows the taxpayer to pay less than the full amount owed.

To qualify, the taxpayer generally must show they cannot afford other ways to pay, such as monthly installments.

Progressive Tax

A progressive tax is one in which someone with a higher income pays a greater percentage of whatever is being taxed.

Income taxes in the United States are an example of a progressive tax. To see how it works, read our explanation of marginal tax rates.

All of this might seem obvious - after all if someone earned more they should pay more. But it isn't always the case. To see an example of the opposite situation, read our explanation of regressive taxes.

Regressive Tax

A regressive tax is one in which someone with less money pays a larger percentage of their money than someone who has more. Though it sounds counterintuitive, there are many such regressive taxes.

A sales tax is an example of a regressive tax. Take two mothers buying diapers and baby food. If the sales tax comes to $5, the mom with $50 in the bank has just paid ten percent of her savings in taxes. The mom who has $50,000 in savings has paid only one hundredth of a percent of her savings.


Taxes are the way a government gets money to pay for services that benefit its constituents. Taxes are collected by the federal government, states, and cities.

A government is not the only way to obtain these services, as the following diagram shows...

Click on the diagram for a clearer understanding

Taxes are collected in several ways. For example, you might pay...

o A percentage of your income
o A percentage of the cost of things you buy
o A fee for using a road, bus, public park, etc.

For a more in-depth look some of the issues involving taxes, read our discussion of this issue

Tax Audit


Tax Deduction vs Credit

When you earn money, you pay an income tax based on the amount you earned.

For various reasons, such as to encourage you to buy certain things or to help those in need, the government enacts various deductions and tax credits.

A deduction allows you to calculate your tax on an amount lower than you actually earned. For example, if you earned $100,000 but paid $10,000 in medical expenses, a deduction would allow you to pay taxes as if you had earned only $90,000 ($100,000 - $10,000).

A tax credit allows you to directly reduce the amount of tax you owe. For example, if you owe $3,000 in taxes, a $1,000 tax credit would mean you actually owe only $2,000 ($3,000 - $1,000).

A credit generally is worth more than a deduction. For example...

o A $1,000 deduction is worth only the amount of tax you would pay on $1,000 of income. So if you pay 10 percent of your income in taxes, the deduction would save you $100 (10 percent of $1,000).

o A $1,000 tax credit would save you $1,000.

A tax credit can be refundable or non-refundable. A non-refundable credit can reduce your taxes only up to the amount that you owe. With a refundable credit, you always get the full amount - meaning that you can receive it as a refund if it is worth more than the tax you owe.

Tax Refund

Each year by April 15 you file an income tax return based on the amount you earned in the previous year.

When you fill out your tax return, what you actually are doing is reconciling the amount of your tax with the amount you paid throughout the year.

o If you paid less than the amount of your tax, you must pay the difference to the Internal Revenue Service (IRS) by April 15.

o If you paid more than the amount of your tax, the IRS returns the amount you overpaid. This is your tax refund.

Note: In some cases your refund may be more than the what you paid, due to credits from programs such as the Earned Income Tax Credit.

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