As Ben Franklin famously said, the only certain things in life are death and taxes. Many people dread mid-April, either for the hit to their bank accounts with a tax payment, or simply for the headache of filing paperwork. To make things even more confusing, sometimes the words related to taxes might seem familiar, but actually have different meanings when it comes to their financial usage. If the words of tax season are as perplexing to you as the numbers on the forms, let's clear things up with a closer look at some of the most common tax-season jargon.
Fiduciary
"Fiduciary income tax" refers to the taxation of income from estate or trust assets, such as a trust fund or rental property. The word "fiduciary" itself means "holding something in trust." It appeared in the 1640s from the Latin fiduciarius, meaning "entrusted, held in trust," from fiducia, "trust, confidence, reliance."
Equity
In relation to the U.S. tax system, "equity" is used as a measure of fairness of the system based on an individual's ability to pay. "Horizontal equity" applies if two families of the same size and income are expected to pay the same taxes — equity would be based on either's ability to take advantage of certain deductions or exemptions. The word "equity" originated in the early 14th century, meaning "quality of being equal or fair; impartiality," from the Latin aequitatem ("the uniform relation of one thing to others"). It began to be used in terms of finance as early as 1904.
Deduction
A tax deduction (sometimes called a "write off") is a reduction of taxable income that results from expenses — for example, a business owner can deduct purchases such as travel expenses or office supplies from the total amount of income taxable by the IRS. "Deduction" originated in the 15th century as the "action of deducting; a taxing away, a number or amount subtracted," from the Latin deductionem, "a leading away, an escorting; a diminution."
Liability
A person's tax liability is the total amount owed to the government, including income tax, capital gains tax, self-employment tax, penalties and interest, and any past-due taxes from previous years. While the usage of "liability" in legal jargon dates to 1790, the more general sense of "thing for which one is liable" dates to 1809. "Liable" comes from the Old French lier, meaning "to bind, tie up, fasten, tether, bind by obligation."
Dependent
"Tax dependent" refers to a person, generally a child or some other relative who is dependent financially, that allows the responsible party to claim certain tax deductions. The usage of "dependent," meaning "subordinate, under the control of or needing aid from an extraneous source," dates to the 1640s, while “dependent” as a mathematical term (it seems similar to taxes, but it isn’t used the same way) dates to the mid-1800s.
Featured image credit: Khanchit Khirisutchalual/ iStock