Tax Terms Defined: Your Complete Expat Tax Dictionary

Each year, a collective groan can be heard due to the impending “tax day.” When tax day comes around, both U.S. residents and expats alike must report their income to the IRS—and consider the many complicated rules on how much taxes they owe and what kinds of expenses can be written off.

Paying taxes is both a civic duty and a requirement by law. Knowing the importance of tax is one thing, but knowing the basics and technicalities of the tax system is another. If you live abroad, you may have more financial responsibilities to settle.

If you need assistance regarding the various tax terms involved in tax laws, then consider this infographic as your beginner dictionary for everything you need to know.

What are Taxes?

Taxes are mandatory fees and financial obligations that a government entity or tax authority imposes on its citizens. As the primary source of revenue for most governments, taxes help finance public works and services, welfare programs, and other public spending aimed at developing the nation.

Regardless of where you reside, the U.S. requires its citizens to continue filing and paying taxes on worldwide income irrespective of country of residency. The rules for filing income and paying expat tax are generally similar to the laws imposed on those living in the U.S. Thus, even though you live abroad, not understanding your U.S. tax obligations can lead to serious consequences.

Common Types of Taxes

Income Tax

Governments impose income tax on income generated by businesses and individuals within their jurisdiction. This is collected from all forms of income, including wages, salaries, commissions, investments, and business earnings. Income tax helps fund government programs and services, such as Social Security, military, schools, and roads.

Payroll Tax

Payroll taxes are one of the reasons your take-home pay is different from your actual salary. These are paid by employees or employers based on employees’ wages, salaries, and tips. Your employer deducts state and federal payroll taxes from your earnings to pay for Social Security and Medicare.

Corporate Income Tax

A corporate tax is imposed on a corporation’s profits, including revenue minus cost of goods sold (COGS), general and administrative (G&A) expenses, selling and marketing, research and development, depreciation, and other operating costs.

Consumption Tax

Consumption tax depends on your consumption financed by income. It is levied on the money you spend. Sales taxes are a type of consumption tax imposed by state or local governments, collected by merchants who sell goods.

An excise tax or “sin tax” is another consumption tax levied on specific goods such as cigarettes, alcohol, or gasoline. Consumption taxes can also cover non-discretionary items such as food, clothing, and housing.

Property Tax

Also known as ad valorem tax, property taxes are paid on the value of real estate or other personal property, including homes, land, or commercial real estate.

When buying a home, consider the property tax that would come with it. Property taxes are usually charged regularly. The property’s assessed value is determined by an assessor appointed by the local government.

Tariff

A tariff, also called customs duty, is a tax imposed by a country for imported goods and services. There are two types of tariffs. A fixed or “unit” tariff is imposed on one unit of good (e.g., $300 per ton of imported steel), and an ad valorem tariff is levied on a proportion of the value of imported goods (e.g., 20% tariff on imported cars).

Estate/Inheritance Tax

Both estate and inheritance taxes are levied on the value of an individual’s property after their death. Estate taxes are imposed for the transfer of wealth from the deceased to the inheritors, paid from the deceased’s net worth. Estate taxes exist on a federal level; some states levy their estate taxes, as well.

Inheritance taxes only exist in a handful of states such as Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The beneficiary pays the inheritance tax.

Capital Gains Tax

Capital gains taxes apply to investment income from the sale of an asset, such as homes, stocks, and bonds. Your capital gains tax rate depends on the amount of your taxable income—the higher your income, the higher your rate.

Short-term capital gains are taxed at the owner’s ordinary income tax rate on assets sold within the first year after they were acquired, and long-term gains on assets held for more than a year are taxed at a lower capital gains rate.

Tax Terminology Explained

Tax Return

Tax returns involve filling out a series of forms that declare your income, expenses, sales, interest, dividends, and other pertinent tax information. Through this, the IRS and your state can determine if you’ve paid enough taxes or owe the government more money.

Taxes are filed through IRS Form 1040. Tax returns are only required if you earned more than the standard deduction for your filing status or owed some other type of tax, such as the alternative minimum tax.

Tax Avoidance

Tax avoidance is the method to reduce your tax liabilities legally. Tax deductions, tax credits, charitable donations, and individual retirement accounts are common methods to reduce taxes.

Other forms of tax avoidance include setting up residence in a country with low-income tax rates, putting assets in your partner’s name, setting up a company, paying dividends instead of income, and handing down assets to your children before dying.

Tax Evasion

While tax avoidance is the legal way, tax evasion is the illegal means of avoiding taxes. This includes concealing your assets, income, or other information, overclaiming expenses, understating your owed tax amount, failing to report income from rental properties outside of the country, failing to disclose foreign assets, or not paying cryptocurrency taxes.

Tax Resolution

Tax resolution is the process of working with the IRS or tax professionals to solve your tax problems. Also called tax relief, tax problem recovery, and IRS representation, tax resolution services can help solve tax problems such as audits, levies, or liens.

Besides properly assessing your current tax situation, tax resolution specialists can also speak on behalf of you or your business and determine the best tax resolution approach for you.

Tax Refund

A tax refund is a reimbursement to taxpayers who have overpaid their taxes. It often results from cases when employers withhold too much from paychecks. If you’re self-employed, a tax refund happens when you overpay your estimated taxes. You can avoid overpaying by filling out employee tax forms correctly and calculating deductions with greater accuracy.

Tax Credit

A tax credit allows taxpayers to subtract a set amount from their local, state, or federal tax liability. Most tax credits are non-refundable, which means you can’t reduce your tax liability to below zero.

Low-income filers often can’t receive the full benefit of the credits for which they qualify. However, some tax credits are fully or partially refundable, such as the foreign tax credit, earned income tax credit, and child tax credit.

Standard Deduction

A standard deduction reduces taxable income and ensures that only households with income above certain thresholds will owe income tax. For 2021, the standard deduction is US$12,550 for single filers and those married but filing separately, US$25,100 for joint filers, and US$18,800 for the head of household.

Double Taxation

Double taxation occurs when taxes are paid twice on the same income. Corporate double taxation happens when taxes are levied on the income of a corporation and then imposed again once the income is distributed to shareholders in the form of dividends.

International double taxation is the taxation of foreign income in the country where the income is earned and the country where the taxpayer is a resident.

Read: 5 Ways to Avoid Double Taxation for Foreign Entrepreneurs

Tax Day is Like Any Other Day

You may be thinking that understanding the tax system is a tedious and complex task. However, you can be free from your tax problems for good if you’re willing to invest the time and effort to learn what you can.

If you have questions or doubts with regards to filing in the most efficient way possible, you need a trusted tax service provider to help you minimize your tax liability and avoid future risks. Tax Samaritan provides professional expat tax services that ensure you file accurate tax returns with the lowest tax liability possible.

Get a Free Tax Quote Today →