Glossary of Tax Terms

Early Withdrawal Penalty

The penalty you pay for withdrawing money from a savings plan, such as a certificate of deposit (CD), before its maturity date. For instance, if you have a 2-year CD, but you withdraw the money after only one year, the bank may charge you a penalty. You report your interest income in full, but you are allowed to take an adjustment to your gross income for the penalty.

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Earned Income

Income that you earn by work or effort, as opposed to unearned income from sources such as investments. Earned income includes wages, tips, and your net profit from your business that you materially participate in, but not investment income such as dividends and interest.

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Earned Income Credit (EIC)

A refundable credit for low-income taxpayers with earned income. If you qualify for the earned income credit, you may receive a refund even if you had little or no income tax withheld.

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Education IRA

A new type of savings plan for education. You may be able to make nondeductible contributions to an education IRA for a child under 18. The child will be able to make tax-free withdrawals when he or she incurs qualified education expenses.

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Electronic Filing

A method for filing your tax return with the IRS using your modem. Electronic filing is the fastest, most convenient method of filing your return and the only way you can receive confirmation that the IRS has received your return.

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Employee Stock Ownership Plan (ESOP)

A plan for encouraging employees to own stock in their company. Dividends paid under an employee stock ownership plan are deductible by the company. Ordinary dividends are not. If you exercise a stock option under this type of plan, you defer payment of tax on any gain until you sell the stock.

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Employer Identification Number (EIN)

A nine-digit number assigned by the IRS for businesses, estates, and trusts.

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Employer Parking

If your employer offers you a choice between free parking and cash, you can exclude the value of the free parking from your taxable income. If, however, you choose the cash, you must include it in your income.

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Estate Tax

A tax based on the fair market value of the decedent's property at death, less his or her liabilities. Estate tax law is very complex and should be handled by a professional advisor.

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Estimated Tax Payments

Quarterly tax payments you make to the IRS if your tax withholding amount is inadequate. You may be required to make estimated tax payments if a significant amount of your income is not subject to withholding, such as net income from a business or investment income.

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Excess Accelerated Depreciation

On the sale or disposition of property, the difference between the total depreciation you have taken since you acquired the property and the depreciation you would have taken if you had used the straight-line depreciation method.

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Excise Tax

A tax based on the value of services or property other than real estate. You cannot deduct most excise taxes, including those for airline tickets, gasoline, spirits, or tobacco. However, you can deduct as an itemized deduction any portion of state and local tax on your vehicle or other personal property that is based solely on the value of the property and assessed on an annual basis.

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Exemption

A deduction from taxable income for you, your spouse, and your qualifying dependents. For 2002, each exemption reduces your taxable income by $3,000. Special rules apply if someone else can claim you or your spouse as a dependent.

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