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A depreciation method that allows larger deductions in the early years of an asset's "life" and smaller deductions at the end of the period. (See "Straight-line depreciation.") Accrual method (or accrual basis). One of two main accounting methods for determining when a transaction has tax significance. The accrual method says that a transaction is taxed when an obligation to pay or a right to receive payment is created (for example, at the time products are delivered, services rendered, billings sent, etc.). This method is used by all but the smallest businesses. (See "Cash method (or cash basis).") Adjusted basis. The cost of property (or a substitute figuresee "Basis") with adjustments made to account for depreciation (in the case of business property), improvements (in the case of real estate), withdrawals or reinvestment (in the case of securities, funds, accounts, insurance or annuities), etc. Adjusted basis is part of the computation for determining gain or loss on a sale or exchange and for depreciation. Adjusted gross income. The amount of income considered actually "available" to be taxed. Adjusted gross income is gross income reduced principally by business expenses incurred to earn the income and other specified reductions (such as alimony). Alternative minimum tax. An alternative tax system that says: your tax shall not go below this level. The alternative minimum tax works by negating (or minimizing) the effects of tax preferences or loopholes. Amortization. The write-off of an amount spent for certain capital assets, similar to depreciation. This tax meaning is different from the common meaning of the term that describes, for example, payment schedules of loans. Applicable Federal Rates (AFRs). Minimum interest rates that must be charged on various transactions that involve payments over a number of years. If the parties to a transaction do not adhere to these rates, the IRS will impute the interest. (See "Imputed interest.") At-risk rules. Rules that limit an investor's deductible losses from an investment to the amount invested. Complications arise when investors finance their investment through loans that they are not personally on the hook for (nonrecourse financing). Without these rules, investors could raise their deduction limit considerably without being at-risk for the actual loss. Basis. The starting point for computing gain or loss on a sale or exchange of property or for depreciation. (See "Adjusted basis.") For property that is purchased, basis is its cost. The basis of inherited property is its value at the date of death (or alternative valuation date). The basis of property received as a gift or a nontaxable transaction is based on the adjusted basis of the transferor (with some adjustments). Special rules govern property transferred between corporations and their shareholders, partners and their partnership, etc. Cafeteria plan. A plan maintained by an employer that allows employees to select from a menu of taxable and nontaxable benefits.
Capital expenditures. Amounts spent to acquire or improve assets with useful lives of more than one year. These expenditures may not be deducted, but are added to the basis of the property (See "Adjusted basis.") and, for business property, may be converted into deductions through depreciation or amortization. Capital gain or loss. Gain or loss from the sale or exchange of investment property, personal property (such as a home) or other "capital asset," which is often entitled to preferential tax treatment. Carrybacks and carryforwards. Deductions that may be transferred to a year other than the current year because they exceeded certain limits. These deductions are typically carried back to earlier years first and, if they exceed the limits for those years, are then carried forward to later years until the deduction is used up. Charitable contributions and net operating losses are examples of deductions that may be carried back or forward. Cash method (or cash basis). One of two main accounting methods for determining when a transaction has tax significance. The cash method says that a transaction is taxed when payment is made. This method is used by most individuals. (See "Accrual method (or accrual basis).") Community property. A system governing spousal ownership of property and income that is the law in certain western and southern states and Wisconsin. The differences between community property and "common law" can change how federal tax law applies to spouses. For example: married taxpayers filing separately in a common law state do not have to report income earned by the other spouse. They do have to report income earned in a community property state. Deferred compensation. An arrangement that allows an employee to receive part of a year's pay in a later year and not be taxed in the year the money was earned. Depletion. A system similar to depreciation that allows the owner of natural resources (for example: a coal mine or an oil well) to deduct a portion of the cost of the asset during each year of its presumed productive life. Depreciation. A system that allows a business or individual to deduct a portion of the cost of an asset ("recover its cost") during each year of its predetermined "life" (or "recovery period"). Earned income. Income earned by working for it. Interest, dividends and other kinds of profits are examples of unearned income. Earned income credit. A tax credit available to individuals with low earned income. An individual is entitled to the full amount of this credit even if it exceeds the amount of tax otherwise due. Employee stock ownership plan (ESOP). A type of profitsharing plan in which benefits come in the form of stock in the employer. Estimated tax. Quarterly down payments on a year's taxes that are required (on April 15, June 15, September 15, and January 15) if the total year's taxes will exceed $1,000 and the amount is not covered by withholding.
Federal Insurance Contributions Act (FICA). Social security taxes (for both old-age, survivors and disability insurance-OASDI-and Medicare). Federal Unemployment Tax Act (FUTA). Unemployment taxes. Filing status. One of four tax ranks determined by your marital status, your dependents and the way you file your tax return: (1) single, (2) married filing jointly, (3) married filing separately and (4) head of household. Filing status determines your tax rates and your eligibility for various tax benefits (for example: alimony deduction, IRA deduction, standard deduction, etc.). First-in, first-out (FIFO). A rule that applies to the sale of part of a group of similar items (such as inventory, shares of the same stock, etc.) that assumes the first ones acquired were the first ones sold. This is important if the items in the group were acquired or manufactured at different times or for different costs. The rule may be overridden by identifying the specific item sold, if possible. (See "Last-in, first-out (LIFO).") Generation-skipping transfer tax. An extra tax on gifts or on-death transfers of money or property that would otherwise escape the once-per-generation transfer taxes that apply to gifts and estates. For example: a gift from a grandfather to a granddaughter skips a generation and might be subject to this tax. Golden parachutes. Bonuses payable to key executives in the event control of their corporation changes, as in the case of a takeover. "Excess" golden parachute payments are subject to tax penalties. Gross income. All income that might be subject to tax. Most "realized" increases in wealth are considered income. The main exceptions for individuals are gifts, inheritances, increases in value of property prior to sale, loan repayments and some personal injury awards. For businesses, investments in their capital are not considered income. Head of household. A filing status available to qualifying single parents (or others supporting certain dependents) that allows lower taxes than the normal rates for singles. Imputed interest. A portion of a future payment that is treated as interest if parties to the transaction do not provide a stated amount of interest at a rate acceptable to the IRS. (See "Applicable Federal Rates (AFRs).") This prevents improper use of certain tax advantages (capital gains rates or tax deferral). For example: if a business sells an asset on the installment basis, part of all future payments is treated as interest whether the transaction states it or not. Incentive stock option. A stock option that may be granted to an employee under tax-favored terms. Itemized deductions. Personal deductions that may be taken if they total more than the standard deduction. (See "Standard deduction.") The following deductions are then itemized or listed on Schedule A of Form 1040: medical expenses, charitable contributions, state and local taxes, home mortgage interest, real estate taxes, casualty losses, unreimbursed employee expenses, investment expenses and others. Investment credit. A credit against tax available for investment in a limited range of business property. The general investment credit was repealed in 1986, but this type
of credit has been enacted and repealed repeatedly throughout history. Involuntary conversion. The conversion of property into money under circumstances beyond the control of the owner. For example: (1) property that is destroyed and "converted" into an insurance settlement or (2) property that is seized by the government and "converted" into a condemnation award. Owners may avoid tax on any gain that may result (if the insurance settlement or condemnation award exceeds the adjusted basis of the property) by reinvesting in similar property within certain time limits. Joint return. An optional filing status available to married taxpayers that offers generally (but not always) lower taxes than "married filing separately." Keogh plan. A retirement plan available to self-employed individuals. Last-in, first-out (LIFO). A rule that applies to the sale of part of a group of similar items in an inventory that assumes the last ones acquired were the first ones sold. This is important if the items in the group were acquired or manufactured at different times or for different costs. (See "First-in, first-out (FIFO).") Like-kind exchanges. Tax-free swaps of investment property. Commonly used for real estate. Limited liability company (LLC). A legal structure that allows a business to be taxed like a partnership but function generally like a corporation. An LLC offers members (among other things) protection against liability for claims against the business that is not available in a partnership. Listed property. Property listed in the tax code or by the IRS that must comply with special rules before depreciation may be claimed. Cars and personal computers are examples of listed property. The special rules are designed to prevent deductions where the property is used for personal rather than business purposes. Medical Spending Accounts (MSAs). An investment fund similar to an IRA that can be used to pay more routine medical expenses, when used in conjunction with "high-deductible" health insurance, which pays the big bills. Only 750,000 of these MSAs are available nationwide under a pilot program that runs through the year 2000. To qualify, you have to be self-employed or employed by a small employer that offers the program. Modified Accelerated Cost Recovery System (MACRS). The system for computing depreciation for most business assets. Net operating loss. The excess of business expenses over income. A business may apply a net operating loss to get a refund of past taxes (or a reduction of future taxes) by carrying it back to profitable years as an additional deduction (or by carrying it forward as a deduction to future years). Original issue discount (OID). The purchase discount offered on some bonds (and similar obligations) in lieu of interest. For example: zero-coupon bonds. OID is generally treated as interest income to the holder rather than as a capital gain. Passive activity loss (PAL). Loss on an investment that is deductible only up to the limit of gains from similar
investments. The limit mainly affects tax shelters and does not apply to stocks, bonds or investments in businesses in which the investor materially participates. Special rules apply to investments in real estate. Qualified plan. A retirement or profit-sharing plan that meets requirements about who must be covered, the amount of benefits that are paid, information that must be given to plan participants, etc. Qualified plans are entitled to tax benefits unavailable to nonqualified plans. Real estate investment trust (REIT). A kind of "mutual fund" that invests in real estate rather than stocks and bonds. Real estate mortgage investment conduit (REMIC). A kind of "mutual fund" that invests in real estate mortgages rather than stocks and bonds. Recapture. The undoing of a tax benefit if certain requirements are not met in future years. For example: (1) The low-income housing credit may be recaptured or added back to tax if the credit property ceases to be used as lowincome housing for a minimum number of years. (2) The alimony deduction may be retroactively lost or recaptured if payments do not continue at the requisite level for a minimum number of years. Regulated investment company (RIC). A mutual fund. Rollover. The tax-free termination of one investment and reinvestment of the proceeds. For example: An individual may roll over a lump-sum distribution from an employer's retirement plan into an IRA. S corporation. A corporation with no more than 35 shareholders that is not taxed, but treated similarly to a partnership, if other requirements are met. Savings Incentive Match Plan for Employees (SIMPLE plans). A simplified retirement arrangement for small businesses that comes in two varieties: one similar to a 401(k) plan and one that funds IRAs for employees. Standard deduction. A deduction allowed individuals instead of listing or itemizing deductible personal expenses. (See "Itemized deductions.") The amount depends on the individual's filing status. Additional amounts are available for taxpayers who are blind or are age 65 or over. Individuals may deduct either their standard deduction or the total of their itemized deductions, whichever is greater. Straight-line depreciation. A depreciation method that allows equal deductions in each year of an asset's "life" or recovery period. (See "Accelerated depreciation.") Swaps, tax-free. (1) Exchanges of like-kind property that result in no capital gains tax (commonly used for real estate). (2) Sales and repurchases of stock (or other securities) designed to realize a tax loss without discontinuing the investment. Transactions must comply with the wash sale rules to be effective. (See "Wash sales.") Taxable income. What is left after all deductions are taken. This is the amount upon which tax is computed. Taxpayer identification number (TIN). In the case of an individual, the Social Security number. In the case of a business (even an individual in business), the employer identification number.
Top-heavy plan. An employee retirement or profit-sharing plan that disproportionately benefits top executives. Uniform capitalization rules (Unicap). A set of uniform rules for computing the cost of goods produced by a business that prevents current deductions for costs that must be capitalized (See "Capital expenditures.") or added to inventory. Wash sales. Simultaneous or near-simultaneous purchases and sales of the same property, usually stocks or bonds, made to generate deductible tax losses without discontinuing the investment. Losses on the transactions are ignored for tax purposes, however, unless a 30-day waiting period is observed between them. Withholding allowances. Adjustments made to assure correct withholding on wages for individuals who may have unusually large deductions or who may be subject to other special circumstances. 401(k) Plan – A qualified retirement investment plan provided by your employer that allows you to put a percentage of earned wages into a tax-deferred investment account selected by the employer. The amount put into the 401(k) plan is not taxed currently, but is taxed when you withdraw funds upon retirement.
Accelerated Cost Recovery System (ACRS) – Instead of depreciating an asset uniformly over its useful life (as is the case with the straight-line depreciation method), ACRS uses fixed percentages and a predetermined number of years, depending on the asset’s class life, to calculate a depreciation deduction. This method allows for a greater depreciation in the earlier years, and generally applies to tangible property placed into service after 1980 and before 1987.
Accelerated Depreciation – Any method of depreciation that results in greater depreciation deductions for an asset in the earlier years of its life than the straight-line depreciation method.
Accountable Plan – An accountable plan is one in which all three of the following rules are satisfied: (1) your expenses (such as for travel, transportation, meals, and entertainment) must have been paid or incurred while performing services as an employee of the employer; (2) you must adequately account to the employer for these expenses; and (3) you must return any excess reimbursement or allowance. When an employer reimburses you, the reimbursement will not be considered income on your tax return, and the expenses will not be allowed as a deduction on your tax return.
Accounting Method – The method used to account for income and expenses for tax purposes. Most taxpayers use either the cash method or an accrual method. The accounting method is chosen when you file your first income tax return. To change accounting methods after that, generally IRS approval is required.
Accounting Period – The 12-month period you use as your tax year when filing a tax return. Most individual tax returns cover a calendar year. If a calendar year is not used, the accounting period is a fiscal year. The accounting period (tax year) is chosen when you file your first income tax return. It
cannot be longer than 12 months.
Accrual Method – The accounting method where, generally, you report income when earned, rather than when received. Generally, you deduct expenses when incurred, rather than when paid.
Alimony – Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument. Alimony is deductible by the payer and must be included in the spouse’s or former spouse’s income.
Acquisition Debt – Mortgages taken out after October 13, 1987, to buy, build, or improve your home. The interest on these mortgages is fully deductible if these mortgages plus any grandfathered debt (mortgages taken out on or before October 13, 1987) totaled $1 million or less for the year ($500,000 or less if married filing separately).
Alternative Minimum Tax (AMT) – An additional tax that you may have to pay if you benefit from tax laws that give special treatment to some kinds of income and allow special deductions and credits for some kinds of expenses. You may have to pay at least a minimum amount of tax through AMT.
Actual Expenses – A method used to calculate the deductible costs of operating your car (including a van, pickup, or panel truck) for business, charitable, medical, or moving purposes based on the actual costs incurred. For business purposes, this includes gas, oil, repairs, tires, depreciation, insurance, lease payments, registration fees, garage rent, and licenses. For charitable, medical, and moving purposes, this includes unreimbursed out-of-pocket expenses, such as the cost of gas and oil (expenses for general repairs and maintenance, depreciation, registration fees, or the costs of tires or insurance cannot be deducted).
Amended Return – A return used to correct a return that has already been filed. A return should be corrected if, after it has been filed, it is determined that (1) some of your income was not reported, (2) deductions or credits were claimed that you should not have claimed, (3) deductions or credits were not claimed that you could have claimed, or (4) you should have claimed a different filing status.
Amortization – Amortization is similar to depreciation. Using amortization, your cost or basis in certain property can be recovered proportionately over a specific number of years or months. Examples of costs that can be amortized are the costs of starting a business, reforestation, and pollution control facilities.
Additional Child Tax Credit – The additional child tax credit is a refundable credit for certain individuals who get less than the full amount of the child tax credit. The additional child tax credit may give you a refund even if you do not owe any tax.
Amount Realized – The amount realized from a sale or trade of property is everything you received for the property. This includes the money you received plus the fair market value of any property or services received.
Adjusted Basis – The basis of property after certain adjustments (increases such as capital improvements and decreases such as prior year depreciation) are made to determine the basis to be used for figuring gain or loss on a sale, exchange, or other disposition of the property or figuring allowable depreciation, depletion, or amortization.
Annuity – A predetermined sum of money payable at a set interval for a specified time period, for life, or forever. Part of the payment represents a return of capital and is not taxable. The rest of the payment is taxable as it represents a return on investment.
Adjusted Gross Income (AGI) – Gross, or total, income minus any allowed deductions (other than the standard deduction/itemized deductions or deduction for exemptions), or adjustments to income.
Asset – An item of value or usefulness. For tax purposes, an asset can be capital or noncapital.
Adjustment to Income – A deduction that is allowed even if you do not itemize deductions. Adjustments to income are subtracted from total income to get adjusted gross income (AGI) and include deductions for IRA contributions, student loan interest, Archer MSAs, moving expenses, one-half of selfemployment tax, self-employed health insurance, and alimony paid.
Audit – During an audit, the IRS verifies the amounts reported on your tax return or reconciles amounts not reported on the return but reported to the IRS. You should have documentation supporting income, expenses, and itemized deductions. This is also known as an Examination. Automobile Expenses – Expenses that may be deductible if you use your car (including a van, pickup, or panel truck) for business, charitable, medical, or moving purposes. Generally, one of the two following methods can be used to calculate deductible expenses: actual expenses or the standard mileage rate. Parking fees and tolls are expenses that can be deducted regardless whether you use actual expenses or the standard mileage rate.
Adjustments for AMT – Your regular income is modified by either positive or negative adjustments to arrive at your alternative minimum taxable income. The adjustment affects the current tax year and may have implications in subsequent tax years. Some of these adjustments include personal exemptions, standard or itemized deductions, installment sale adjustments, gain or loss adjustments on the disposition of business property, incentive stock options, and passive activity loss limitation.
Away From Home – For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for business, profession, or job. You are traveling away from home if: (1) your duties require you to be away from your
tax home substantially longer than an ordinary day’s work, and (2) you need sleep or rest to meet the demands of work while away from home.
Bad Debt – Occurs when someone owes you money that you cannot be collect. The amount owed may be deductible when figuring your tax for the year the debt becomes worthless. A debt must be genuine to be deductible as a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. There are two kinds of bad debts – business bad debts and nonbusiness bad debts.
accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. Examples of business expenses are depreciation, vehicle expenses, interest, insurance, real estate taxes, and advertising.
Business-Use Property – Property (such as an office, rental house, or automobile used for business) that is used in your trade or business or for the production of income.
Basis – Basis is the amount of your investment in a property for tax purposes. The basis of property is used to calculate your gain or loss on the sale, exchange, or other disposition of your property. It is also used to calculate your deductions for depreciation, amortization, depletion, and casualty losses. If your property is used for both business and personal purposes, the basis must be allocated based on the use. The original basis in your property is adjusted by improvements to your property (increases your basis) and by deductions taken for depreciation or casualty losses (decreases your basis).
Calendar Year – A calendar year covers a 12-month period that begins January 1 and ends December 31.
Capital Asset – Any asset that is not specifically identified as a noncapital asset. Almost everything you own and use for personal purposes or investment is a capital asset. For example, stocks and bonds, a home owned and occupied by you and your family, timber grown on your home property or investment property even if you make casual sales of the timber, household furnishings, your car used for pleasure or commuting, coin or stamp collections, gems and jewelry, gold, silver, and other metals.
Below-Market-Rate Loans – A below-market loan is a loan on which you charge no interest or on which you charge interest at a rate below the applicable federal rate. You may have to include in income the interest that the IRS determines you should have charged.
Capital Expenditure or Improvement – Expenses for major improvements or additions to property used in a business or trade that cannot be immediately deducted on the tax return. These expenses must be added to the basis of the property and depreciated or amortized over time.
Blind – If you are blind on the last day of the year and not itemizing deductions, you are entitled to a higher standard deduction. To qualify for this benefit, your must be totally or partly blind. If you are partly blind, you must obtain a certified statement from an eye doctor or registered optometrist stating that you: 1) cannot see better than 20/200 in the better eye with glasses or contact lenses, or 2) have a field of vision that is not more than 20 degrees.
Bond – An obligation by a corporation or government to pay back money borrowed from the bondholder on a determined date, together with any accrued interest. This obligation takes the form of a bond.
Capital Gain – Generally, a sale or trade of a capital asset results in a capital gain or capital loss. If the sales price is greater than the basis, there is a gain. If you sell an item that you owned for personal use (such as a car, refrigerator, furniture, stereo, jewelry, or silverware), any gain is taxable as a capital gain. You cannot deduct a loss for personal-use property. However, if you sell an item that was held for investment (such as stocks, gold or silver bullion, coins, or gems), any gain is taxable as a capital gain and any loss is deductible as a capital loss.
Burden of Proof – If you take an IRS case to court, the IRS will have the burden of proving certain facts if you kept adequate records showing your tax liability, cooperated with the IRS, and meet certain other conditions. Otherwise, you have the burden of proving your tax return is accurate.
Capital Gain Distributions – Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by regulated investment companies (commonly called mutual funds) and real estate investment trusts (REITs). Report capital gain distributions as long-term capital gains regardless of how long you owned the shares in the mutual fund or REIT.
Business Bad Debts – A business bad debt, generally, is one that comes from operating your trade or business and is deductible as a business loss. A business bad debt is a loss from the worthlessness of a debt that was either: (1) created or acquired in your trade or business, or (2) closely related to your trade or business when it became partly or totally worthless.
Capital Loss – Generally, a sale or trade of a capital asset results in a capital gain or capital loss. If the sales price is less than the basis, there is a loss. If you sell an item that you owned for personal use (such as a car, refrigerator, furniture, stereo, jewelry, or silverware), any gain is taxable as a capital gain. You cannot deduct a loss for personal-use property. However, if you sell an item that was held for investment (such as stocks, gold or silver bullion, coins, or gems), any gain is taxable as a capital gain and any loss is deductible as a capital loss.
Business Expenses – Business expenses are costs you do not have to capitalize or include in the cost of goods sold. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and
Capital-Loss Carryover – The amount of the capital loss carryover is the amount of the total net loss that is more than
the lesser of: (1) your allowable capital loss deduction for the year, or (2) your taxable income increased by the allowable capital loss deduction for the year and the deduction for personal exemptions. If the deductions are more than your gross income for the tax year, use the negative taxable income in computing the amount in item (2). If you have a total net capital loss, you can carry the unused part over to the next year. If part of the loss is still unused in the following year, you can carry it over to later years until it is completely used up.
must be below a certain amount based on your filing status. If you are unable to claim the full amount of the child tax credit, you may be able to take the additional child tax credit.
Carryback – Applying a loss, deduction, or credit to a prior year. Carryforward/Carryover – Applying a loss, deduction, or credit to a future year.
Combat Pay – Pay received by members of the U.S. Armed Forces and support personnel in combat zones, including peacekeeping efforts. Combat pay received by enlisted personnel, warrant officers, and commissioned warrant officers is tax-free. Combat pay received by commissioned officers (other than commissioned warrant officers) is tax-free up to the highest rate of enlisted pay (plus imminent danger/hostile fire pay).
Cash Method – The accounting method where all items of income are reported in the year that you actually or constructively receive them. You deduct all expenses in the year you actually pay them. This is the method most individual taxpayers use.
Combat Zone – Any area the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order.
Casualty – The damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. A sudden event is one that is swift, not gradual or progressive. An unexpected event is one that is ordinarily unanticipated and unintended. An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. A casualty can occurs when property is damaged as a result of a disaster such as a storm, fire, car accident, or similar event.
Commission – A fee a broker or agent charges you for facilitating a transaction, such as the buying or selling of securities or real estate.
Casualty Loss – The act of losing property or experiencing a decrease in the value of property as a result of a casualty. Deductible casualty losses can result from certain car accidents, earthquakes, certain fires, floods, governmentordered demolition or relocation of a home that is unsafe to use because of a disaster, mine cave-ins, shipwrecks, sonic booms, storms, including hurricanes and tornadoes, terrorist attacks, vandalism, and volcanic eruptions.
Common Law Marriage – A marriage in which a man and woman who have lived together for a certain period of time and who hold themselves to be husband and wife are considered to be married even without a license or a formal ceremony. Only certain states recognize common law marriages. When determining your filing status, you are considered married for the whole year if on the last day of your tax year you and your spouse are living together in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began.
Charitable Contribution – A donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value.
Community Income – Generally, income from: (1) community property; (2) salaries, wages, or pay for services of you, your spouse, or both during your marriage; and (3) real estate that is treated as community property under the laws of the state where the property is located for married taxpayers who are domiciled in one of the following community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.
Child and Dependent Care Credit – A nonrefundable credit that you may be able to claim for paying for care of your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. To qualify, these expenses must be paid so you can work or look for work.
Child Support – Payments made by one parent to the other who has custody of their child(ren) when the parents are separated. A payment that is specifically designated as child support under a divorce or separation instrument is not alimony. Child support payments are neither deductible by the payer nor taxable to the recipient.
Community Property – Property: (1) that you, your spouse, or both acquire during your marriage while you are domiciled in a community property state; (2) that you and your spouse agreed to convert from separate to community property; and (3) that cannot be identified as separate property. If you are married and your permanent home is in a community property state, half of any income described by state law as community income may be considered yours.
Commuting – Transportation between your home and your main or regular place of work. You cannot deduct commuting expenses no matter how far your home is from your regular place of work. You cannot deduct commuting expenses even if you work during the commuting trip.
Child Tax Credit – A nonrefundable credit that reduces your tax by as much as $600 (for tax year 2002) for each qualifying child. To take the credit, your modified adjusted gross income
Compensation – Pay received for your services. Employee compensation can include wages, salaries, tips, and fringe benefits.
(Form 1040) of the decedent for the year of death and any returns not filed for preceding years. A surviving spouse, under certain circumstances, may have to file the returns for the decedent. Declining Balance Method – An accelerated depreciation method. For property placed in service before 1987, the declining balance method allowed you to recover a larger amount of the cost of the property in the early years of your use of the property by allowing a declining balance rate of up to twice the straight-line rate. When using a declining balance method under MACRS, you apply the same depreciation rate each year to the adjusted basis of your property. You must use the applicable convention and you must switch to the straightline method in the first year for which it will give an equal or greater deduction. You calculate your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property’s recovery period.
Constructive Receipt – You constructively receive income when it is credited to your account or set apart in any way that makes it available to you. You do not need to have physical possession of it. For example, interest credited to your bank account on December 31 is taxable income to you in the year it was credited if you could have withdrawn it in that year (even if the amount is not entered in your passbook or withdrawn until the next year).
Cost Basis – The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for sales tax, freight, installation and testing, excise taxes, legal and accounting fees (when they must be capitalized), revenue stamps, recording fees, and real estate taxes (if assumed for the seller). In addition, the basis of real estate and business assets may include other items.
Cost of Goods Sold – If your business manufactures products or purchases them for resale, some of your expenses are for the products you sell. You use these expenses to compute the cost of the goods you sold during the year, as follows: inventory at the beginning of the year PLUS purchases (reduced by cost of items withdrawn for personal use) PLUS cost of labor (not including amounts paid to yourself) PLUS materials and supplies PLUS other costs MINUS inventory at the end of the year.
Deferred Compensation – The part of your income that you choose to have withheld by your employer and put into a retirement plan for distribution to you at a later date, typically upon retirement. Generally, this compensation is not taxed until you receive it.
Cost of Keeping Up a Home – Expenses incurred to maintain your household. When determining whether you paid more than half of the cost of keeping up a home for head of household filing status, include expenses such as rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home. Do not include expenses such as clothing, education, medical treatment, vacations, life insurance, or transportation. Also, do not include the rental value of a home you own or the value of your services or those of a member of your household.
Defined Benefit Plan – Any plan that is not a defined contribution plan. Types of defined benefit plans include pension plans and annuity plans. If you are eligible to participate in your employer’s defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. This rule applies even if you: (1) declined to participate in the plan, (2) did not make a required contribution, or (3) did not perform the minimum service required to accrue a benefit for the year.
Defined Contribution Plan – A plan that provides for a separate account for each person covered by the plan. Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year.
Coverdell Education Savings Account (ESA) – A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the designated beneficiary of the account (formerly called Education IRA). Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until withdrawn. If, for a year, withdrawals from an account are not more than a designated beneficiary’s qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the withdrawals.
Dependent – A person for whom you can claim a dependent exemption. There are five dependency tests that must be met to claim the exemption for a dependent.
Depletion – The using up of natural resources by mining, quarrying, drilling, or felling. The depletion deduction allows an owner or operator to account for the reduction of a product’s reserves.
Custodial Parent – The parent who has custody of the child for the greater part of the year. The custodial parent is generally treated as the parent who provides more than half of the child’s support. It does not matter whether the custodial parent actually provided more than half of the support.
Depreciation – A loss in the value of property over the time the property is being used. Events that can cause property to depreciate include wear and tear, age, deterioration, and obsolescence. You can get back your cost of certain property, such as equipment you use in your business or property used for the production of income, by taking deductions for depreciation.
Decedent – A deceased person. The personal representative of the decedent’s estate (the person who is in charge of the decedent’s property) must file the final income tax return
Direct Deposit – Instead of getting a paper check, you may be able to have your refund deposited directly into your account at a bank or other financial institution. If the Direct Deposit cannot be done, the IRS will send a check instead.
Disabled – For tax purposes, you are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. A physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death.
Employee Stock Option – An option granted to you by your employer to purchase the employer's stock. If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you will usually have income either when you receive the option or when you exercise the option (use it to buy or sell the stock or other property). However, if your option is a statutory stock option, you usually will not have any income until you sell or exchange your stock. Your employer can tell you which kind of option you hold.
Dividend – A taxable payment given to a corporation’s shareholders out of the company's current or retained earnings. Certain distributions commonly called dividends are actually interest. You must report as interest so-called “dividends” on deposits or on share accounts in cooperative banks, credit unions, domestic building and loan associations, domestic savings and loan associations, federal savings and loan associations, and mutual savings banks.
Dual-Status Alien – Someone who is both a nonresident alien and a resident alien during the same tax year. This usually occurs in the year of arrival in or departure from the United States.
Entertainment Expenses – If you are an employee or selfemployed, you may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Examples include entertaining guests at nightclubs, theaters, sporting events, or on fishing trips. You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following two tests: (1) directly related test or (2) associated test. To meet the directly related test the entertainment must have taken place in a clear business setting, or the main purpose of entertainment was the active conduct of business. For the associated test, the entertainment must be associated with your trade or business, and the entertainment directly precedes or follows a substantial business discussion. You generally can deduct only 50% of your unreimbursed entertainment expenses.
Earned Income – Generally means wages, salaries, tips, other taxable employee compensation, net earnings from selfemployment, and gross income received as a statutory employee.
Estate tax – The federal tax on the taxable estate of a decedent, reduced by any credits allowed. Income that a decedent had a right to receive is included in the decedent’s gross estate and is subject to estate tax. This income in respect of a decedent is also taxed when received by the recipient (estate or beneficiary). However, an income tax deduction is allowed to the recipient for the estate tax paid on the income.
Earned Income Credit (EIC) – A refundable tax credit for certain people who work and have earned income under a certain amount. EIC may reduce the amount of tax you owe and may also give you a refund.
Electronic Filing (IRS e-file® ) - IRS e-file® uses automation to replace most of the manual steps needed to process paper returns. As a result, the processing of e-file returns is faster and more accurate than the processing of paper returns. As with a paper return, you are responsible for making sure your return contains accurate information and is filed on time.
Estimated Tax – The method used to pay tax on income that is not subject to withholding. This includes income from selfemployment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Exchange – Receiving property for property given or services rendered.
Elective Deferral – The amount contributed under a salary reduction arrangement. A salary reduction arrangement is an arrangement under which you can elect to have your employer contribute part of your pay to your SEP-IRA. Only the remaining portion of your pay is currently taxable. The tax on the contribution is deferred.
Exemption – A deduction amount that reduces your tax. You are generally allowed one exemption for yourself and, if you are married, one exemption for your spouse (personal exemptions), and one exemption for each person you claim as a dependent (exemptions for dependents).
Employee Business Expenses – Business-related expenses you incur as an employee. You may be able to deduct unreimbursed ordinary and necessary business-related expenses you have for travel, entertainment, gifts, or transportation. An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
Fair Market Value (FMV) – Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.
Federal Income Taxes – Taxes withheld from your pay by your employer, based upon the Form W-4 you submitted, that the employer sends to the IRS. This amount is shown in box 2 on Form W-2.
FICA (Federal Insurance Contributions Act) – The federal law that requires your employer to withhold social security and Medicare taxes from your wages.
Filing Status – You must determine your filing status before you can determine your filing requirements, standard deduction, and correct tax. You also use your filing status in determining whether you are eligible to claim certain deductions and credits. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. If more than one filing status applies to you, choose the one that will give you the lowest tax.
Form W-4 – The Employee’s Withholding Allowance Certificate is used to determine the correct amount of federal income tax an employer needs to withhold from your pay. A Form W-4 must be completed for every employer for whom you work. Form W-4 includes three types of information that an employer will use to calculate federal withholding: (1) whether to withhold at the single rate or at the lower married rate, (2) how many withholding allowances you claimed (each allowance reduces the amount withheld), and (3) whether you want an additional amount withheld.
Fringe Benefits – Noncash compensation or other benefits you receive from your employer.
Fiscal Year – A regular fiscal year is a 12-month period that ends on the last day of any month except December. A 52-53 week fiscal year varies from 52 to 53 weeks and always ends on the same day of the week.
Gift Tax – A tax on the transfer of property by one individual to another while receiving nothing or less than full value in return. The tax applies whether the donor intends the transfer to be a gift or not.
Foreign Tax Credit or Deduction – If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
Gross Income – This includes all income you receive in the form of money, goods, property, and services that is not exempt from tax. It also includes income from sources outside the United States (even if you may exclude all or part of it).
Form 1040 – The U.S. Individual Income Tax Return that must be filed when you do not qualify to use Form 1040EZ or Form 1040A. Form 1040 can be used to report all types of income, deductions, and credits.
Head of Household – The filing status you may be able to use if you meet all of the following requirements: (1) you are unmarried or considered unmarried on the last day of the year; (2) you paid more than half the cost of keeping up a home for the year; and (3) a qualifying person lived with you in the home for more than half the year (except for temporary absences, such as school). However, your dependent parent does not have to live with you. A foster child must live with you all year.
Form 1040A – The U.S. Individual Income Tax Return that you may be able to use if you do not qualify to use Form 1040EZ. To use this form, if among other requirements, your taxable income is less than $50,000, and you do not itemize deductions. You are allowed only certain adjustments and credits.
Hobby Loss – A loss from a not-for-profit activity. Losses from a hobby are not deductible from other income.
Form 1040EZ – The Income Tax Return for Single and Joint Filers With No Dependents is the simplest individual income tax return to use. You can use this form if, among other requirements, you do not claim any dependents, adjustments or itemized deductions, your taxable income is less than $50,000, you did not receive any advance earned income credit payments, and you do not claim any credits other than the earned income credit.
Holding Period – The length of time investment property has been held. If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.
Form 1040X – The Amended U.S. Individual Income Tax Return is used to correct a return that has already been filed. An amended tax return cannot be filed electronically using IRS e-file.
Form W-2 – The Wage and Tax Statement is a statement from your employer of wages and other compensation paid to you and taxes withheld from your pay. Form W-2 shows total compensation and the income tax (federal, state, and local), social security tax, and Medicare tax that was withheld during the year. Other information, such as allocated tips and dependent care benefits, is also shown on the Form W-2.
Home Office Expenses – If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: (1) as your principal place of business for any trade or business; (2) as a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business; or (3) in the case of a separate structure not attached to your home, in connection with your trade or business.
Hope Credit – A nonrefundable education credit of up to $1,500 per eligible student that is available ONLY until the first two years of postsecondary education are completed and
ONLY for 2 years per eligible student. Student must be pursuing an undergraduate degree or other recognized educational credential and must be enrolled at least half time for at least one academic period beginning during the year.
Investment Interest – Interest paid on loans used for investment purposes, such as to buy stock on margin. You can deduct this interest up to the amount of investment income (not including capital gains) you report.
Indefinite Assignment – An assignment is considered indefinite if it is realistically expected to last for more than one year, whether or not it actually lasts for more than one year, or if it is realistically expected to last for one year or less but actually lasts longer. If your assignment or job away from your main place of work is indefinite, your tax home changes and you cannot deduct your travel expenses. You must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. However, you may be able to deduct the cost of relocating to your new tax home as a moving expense.
Involuntary Conversion – The receipt of money due to the forced disposition of property due to theft, casualty or condemnation. If you receive property as a result of an involuntary conversion, you can calculate the basis of the replacement property using the basis of the converted property.
Independent Contractor – People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the payer, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
Itemized Deductions – Personal expenses allowed to be claimed on your tax return as deductions from your adjusted gross income. Examples are medical expenses, mortgage interest, real estate taxes, and charitable contributions. Taxpayers who itemize deductions may not claim the standard deduction.
Keogh Plan – A retirement savings plan that is available to self-employed taxpayers. Contributions are deductible within specific limits.
Injured Spouse – When a joint return is filed and only one spouse owes a past-due amount, the other spouse can be considered an injured spouse. An injured spouse can get a refund for his or her share of the overpayment that would otherwise be used to pay the past-due amount.
Lifetime Learning Credit – A nonrefundable education credit of up to $1,000 per return available for all years of postsecondary education and for courses to acquire or improve job skills and for an unlimited number of years. The student does not need to be pursuing a degree or other recognized educational credential.
Like-Kind Exchange – The nontaxable exchange of property for the same kind of property.
Innocent Spouse – By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse did something wrong on your tax return. The tax, interest, and penalties that qualify for relief can only be collected from your spouse. However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse.
Listed Property – Listed property includes any property of a type generally used for entertainment, recreation, and amusement (including photographic, phonographic, communication, and video recording equipment). Listed property also includes computers and related equipment unless they are used in a qualifying office in your home.
Installment Sale – Sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. If you finance the buyer’s purchase of your home yourself, instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. You may be able to report the part of the gain you cannot exclude on the installment basis.
Long-Term Capital Gain or Loss – Profit or loss on the sale or exchange of assets or properties that have been held for more than 12 months.
Interest Income – In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. (It does not have to be entered in your passbook.)
Lump-Sum Distribution – The payment within one year of the full amount of your interest in a pension or profit-sharing plan. To qualify as a lump-sum distribution – and for favorable five-year or ten-year averaging – other requirements must be met.
Main Home – Regular, permanent place of abode.
Inventory – An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales.
Married Filing Jointly – The filing status you can choose if you are married and both you and your spouse agree to file a joint return. On a joint return, you report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions.
Married Filing Separately – The filing status you can choose if you are married and do not want to file jointly with your spouse. This method may benefit you if you want to be responsible only for your own tax or if this method results in less tax than a joint return. If you and your spouse do not agree to file a joint return, you may have to use this filing status.
To be deductible, nonbusiness bad debts must be totally worthless and you must have a basis in it – that is, you must have already included the amount in your income or loaned out your cash. You cannot deduct a partly worthless nonbusiness debt.
Medicare Tax – Tax paid for Medicare. This amount is 1.45% of wages for employees and 2.9% of net profit for selfemployed taxpayers.
Medicare – A federal program that pays for certain health care expenses for people age 65 or older.
Noncapital Asset – Any asset that is not specifically identified as a capital asset. Usually noncapital assets are those used in a trade or business, or for the production of rental or royalty income. Examples of noncapital assets are: property held mainly for sale to customers, depreciable property used in your trade or business, real property used in your trade or business, accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property, and supplies of a type you regularly use or consume in the ordinary course of your trade or business.
Modified Accelerated Cost Recovery System (MACRS) – MACRS provides a uniform method for all taxpayers to use to compute the depreciation for each asset. Using the basis, class life, and the MACRS tables, you can compute the deduction for each asset in the year that it is placed in service and each subsequent year of its class life.
Noncustodial Parent – The noncustodial parent is the parent who has custody of the child for the shorter part of the year or who does not have custody at all.
Modified Adjusted Gross Income – Adjusted gross income is sometimes modified for specific purposes (such as for the education credit, adoption credit, child tax credit, and determining taxable social security). For each purpose, the modification may be different, so you need to read the instructions carefully.
Nonrefundable Credit – A credit that cannot be more than your tax liability. For example, a nonrefundable credit is the child tax credit and the child and dependent care credit.
Nonresident Alien – If you are an alien (not a U.S. citizen), you are considered a nonresident alien unless you meet the green card or substantial presence test.
Multiple Support Agreement – When trying to determine who can take an exemption for a dependent, sometimes no one provides more than half of the support of a person. Instead, two or more persons, each of who would be able to take the exemption but for the support test, together provide more than half of the person’s support. When this happens, you can agree that any one of you who individually provide more than 10% of the person’s support, but only one, can claim an exemption for that person. Each of the others must sign a statement agreeing not to claim the exemption for that year. A multiple support declaration identifying each of the others who agreed not to claim the exemption must be attached to the return of the person claiming the exemption.
Nontaxable Exchanges – A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred.
Original Issue Discount (OID) – A form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer.
Negligence – A failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records. You will not have to pay a negligence penalty if you have a reasonable basis for a position you took.
Passive Activity – Generally, passive activities include trade or business activities in which you did not materially participate for the tax year, and rental activities, regardless of your participation. Losses from passive activities may be limited.
Net Operating Loss – If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). You can use an NOL by deducting it from your income in another year or years.
Personal Interest – Personal interest is not deductible. Examples of personal interest include interest on a loan to purchase an automobile for personal use and credit card and installment interest incurred for personal expenses. But you may be able to deduct interest you pay on a qualified student loan.
Nonbusiness Bad Debts – If someone owes you money that you cannot collect, you have a bad debt. A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Bad debts that you did not get in the course of operating your trade or business are nonbusiness bad debts.
Personal Identification Number (PIN) – Allow taxpayers to "sign" their tax returns electronically. The PIN, a five-digit selfselected number, ensures that electronically submitted tax returns are authentic. Most taxpayers can qualify to use a PIN.
Points – The term "points" is used to describe certain charges paid to obtain a home mortgage. Points may be deductible as home mortgage interest, if you itemize deductions. If you can deduct all of the interest on your mortgages, you may be able to deduct all of the points paid on the mortgage. If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Premature Distributions – Withdrawals from a company retirement plan or an IRA subject to a 10% penalty if you're under a certain age.
Simplified Employee Pension (SEP) – A retirement program for self-employed people allowing them to defer taxes on investments intended for retirement
Single – Your filing status is single if, on the last day of the year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree, and you do not qualify for another filing status.
Prepaid Income – Prepaid income is generally included in gross income in the year that you receive it. Your method of accounting does not matter as long as the income is available to you. Prepaid income includes rents or interest you receive in advance and pay for services you will perform later.
Social Security Tax – Tax sent to the Social Security Administration on your behalf. This amount is 6.2% of wages for employees and 12.4% of net profit for self-employed taxpayers
Qualifying Widow(er) with Dependent Child – The filing status you may be eligible to use for 2 years following the year of death of your spouse. For example, if your spouse died in 2001, and you have not remarried, you may be able to use this filing status for 2002 and 2003. This filing status entitles you to use joint return tax rates and the highest standard deduction amount (if you do not itemize deductions). This status does not entitle you to file a joint return.
Standard Deduction – A deduction you use if you do not itemize your deductions.
Recovery Period – A period of years during which the cost of business assets is depreciated. Refundable Credit – A credit for which you can get a refund even if it exceeds your tax liability. An example of a refundable credit is the earned income credit and the additional child tax credit.
Standard Mileage Rate – Also known as the optional method. A method used to calculate the deductible costs of operating a car (including a van, pickup, or panel truck) for business purposes based on a fixed number of cents per mile for business, charitable, medical, or moving miles. The standard mileage rate varies depending on the activity for which the vehicle was used: charitable, medical, or in connection with job-related moving expenses.
Straight-Line Method – A method of depreciation where the deduction is taken in equal amounts each year for the useful life of its asset.
Rental Income – Rental income is any payment you receive for the use or occupation of property. In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. You generally must include in your gross income all amounts you receive as rent.
Tangible Personal Property – Tangible personal property is any tangible property that is not real property. For example, it includes machinery, equipment, and property contained in or attached to a building (other than structural components) such as refrigerators, grocery store counters and office equipment.
Resident Alien – You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1December 31).
Section 179 Expense Deduction – Under section 179 of the Internal Revenue Code, you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.
Taxable Income – The IRS allows you to deduct certain amounts from your income before you calculate the tax due on it. These include the personal exemption (if you are entitled to claim one) and the standard deduction (or itemized deductions if you can itemize). What remains is your taxable income.
Taxable Year – Most individual tax returns cover a calendar year – the 12-month period from January 1 through December 31. You may use a fiscal year as your taxable year if necessary. A regular fiscal year is a 12-month period that ends on the last day of any month except December.
Self-Employment Tax – Self-employment tax (SE tax) is the social security and Medicare tax for people who work for themselves. Your payments to SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. By not reporting all your self-employment income, you could cause your social security benefits to be lower when
Tax Benefit Rule – You must include a recovery in your income in the year you receive it. You only need to include the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. The most common recoveries are state tax refunds and reimbursements. You may also have recoveries of nonitemized deductions (such as payments on previously deducted bad
debts) and recoveries of items for which you previously claimed a tax credit.
Tax Bracket – Your income is not all taxed at one rate. It is partially taxed in each of the tax brackets up to the highest bracket in which your taxable income falls. The applicable income ranges for these tax brackets differ depending on your filing status, but the percentages are the same.
Tax Preference Items – Tax preference items are items that are excluded from regular taxable income but that are added back to your alternative minimum taxable income. Tax preference items include tax-exempt interest from certain private activity bonds, depletion, intangible drilling costs, accelerated depreciation on leased personal or real property placed in service before 1987, amortization of certain pollution control costs or facilities placed in service before 1987, and certain leased property subject to accelerated cost recovery.
Tax Credits – A credit is an amount the IRS allows you to deduct directly from the tax calculated on your taxable income. It is a dollar for dollar reduction of your taxes. Some of the credits include the earned income credit, child and dependent care credit, child tax credit, education credits, and credit for the elderly or disabled. Credits can be nonrefundable (cannot reduce your tax liability below zero), or refundable (can reduce your liability below zero, entitling you to money back from the government).
Tax – Tax is the amount you legally owe the government. Most taxpayers use either the Tax Table or the Tax Rate Schedules to calculate their income tax. However, there are special methods if your income includes any capital gains, lump-sum distributions, farm income, or investment income over $1,500 for children under age 14.
Tax Deductions – A tax deduction is an amount allowed against your gross income in order to arrive at your taxable income. For example, you recover your cost in income producing property through yearly tax deductions by depreciating the property; that is, by deducting some of your cost on your tax return each year. Other examples are your standard or itemized deductions and your exemption deductions.
Tax Rate Schedules – One method of calculating your tax liability is through the use of a tax rate schedule. You must use this schedule if your taxable income is over $100,000. There are different schedules depending on your filing status.
Tax Exempt Income – Tax-exempt income is any income the IRS specifies is not subject to tax and is therefore excluded from your gross income. You might still need to report it on your tax return, but it will not be taken into account when calculating your tax liability. Tax-exempt income includes certain social security benefits, welfare benefits, nontaxable life insurance proceeds, Armed Forces family allotments, nontaxable pensions, and tax-exempt interest.
Tax Table – If your taxable income is below $100,000, you can choose to use either the tax rate schedules or the tax tables when determining your tax liability. The tax tables are simple to use, as no calculations are necessary. Simply find the range your taxable income falls in, and look up the corresponding tax under the appropriate column for your filing status.
Tax Liability – The amount of tax that must be paid. Taxpayers meet (or pay) their federal income tax liability through withholding, estimated tax payments, and payments made with the tax forms they file with the government.
Temporary Assignment – You may regularly work at your tax home and another location. It may not be practical to return home from this other location at the end of each workday. If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered to be away from home for the whole period you are away from your main place of work. You can deduct your travel expenses, if they otherwise qualify for deduction. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less.
Tax-Exempt Interest – If you must file a tax return, you are required to show any tax-exempt interest you received on your return. This is an information-reporting requirement only. It does not change tax-exempt interest to taxable interest. Interest may be exempt for federal income tax purposes, but may be taxable or not for state income tax purposes (for example municipal bond interest).
Tenancy by the Entirety – A form of property ownership where two or more people own the property jointly. The survivor(s) is(are) entitled to the decedent’s share of the property upon their death.
Tax Home – Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. If you have more than one regular place of business, your tax home is your main place of business. If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. If you do not have a regular place of business or post of duty and there is no place where you regularly live, you are considered a transient and your tax home is wherever you work. As a transient, you cannot claim a travel expense deduction because you are never considered to be traveling away from home.
Tenancy in Common – A form of property ownership where two or more people own the property separately. The survivor(s) is(are) not automatically entitled to the decedent’s share of the property upon their death.
Ten-Year Averaging – The 10-year tax option is a special formula used to calculate a separate tax on the ordinary income part of a lump-sum distribution. You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. You can elect this treatment only once for any plan participant, and only if the plan participant was born before 1936.
Tip Income – All tips you receive are income and are subject to federal income tax. Tips go beyond the stated amount of the bill and are given voluntarily. You must include in gross income all tips you receive directly from customers, tips from charge customers that are paid to you by your employer, and your share of any tips you receive under a tip-splitting or tippooling arrangement. The value of noncash tips, such as tickets, passes, or other items of value are also income and subject to tax.
Underpayment Penalty – If you did not pay enough tax during the year either through withholding or by making estimated tax payments, you may have to pay a penalty. In certain situations, you will not have to pay the penalty, such as if you had no tax liability in the prior year or if your current year tax less withholding is less than $1,000.
Trade Date – The date you contract to buy, sell, or exchange an asset is called the trade date. Do not confuse the trade date with the settlement date, which is the date by which the asset must be delivered and payment must be made.
Unearned Income – Unearned income includes investmenttype income such as interest, dividends, and capital gains. It also includes unemployment compensation, alimony, taxable social security benefits, pensions, annuities, royalties, and distributions of unearned income from a trust.
Trade-In Allowance – When you purchase a property and offer another property as part payment, this reduces the amount of cash you need to pay the seller to satisfy the purchase agreement. The amount of cash reduced by this exchange is the trade-in allowance. For example, you trade-in your old car when purchasing a new one to reduce the amount of cash you must give to the dealer. Note that a dealer’s offer for your car as a trade-in on a new car does not necessarily reflect a measure of its true value.
Unlike Properties – Unlike properties are properties of a different nature or character. For example, personal property and real property are unlike.
Useful Life – To be depreciable, your property must have a determinable useful life. This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. The estimated length this takes is called its useful life.
Transfer Tax – Transfer taxes (or stamp taxes) and similar taxes and charges on the sale of a personal home are not deductible. If they are paid by the seller, they are expenses of the sale and reduce the amount realized on the sale. If paid by the buyer, they are included in the cost basis of the property.
Transportation Expenses – Transportation expense is the cost of transportation when you are not traveling away from home. Transportation can be by air, rail, bus, taxi, etc., or the cost of driving and maintaining your car. Transportation expenses include the ordinary and necessary costs of getting from one workplace to another in the course of your business or profession when you are traveling within your tax home, visiting clients or customers, going to a business meeting away from your regular workplace, or getting from your home to a temporary workplace when you have one or more regular places of work.
Vacation Home – The IRS classifies your vacation home as a personal residence, personal residence/rental property, or a rental property. If you do not rent out your vacation home, or only rent it out for 14 days or less, you can deduct only your mortgage interest and real estate taxes if you itemize. If you rent it out over 14 days, you must include the rental income in your tax return, but you can also claim rental expenses subject to certain limitations. The number of days you use the home for personal use and how actively you are involved with renting it out affects how much of the expenses you can claim.
Travel Expenses – To be deductible for tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. These include transportation, meals, and lodging.
Wash Sale – A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: 1) Buy substantially identical stock or securities, 2) Acquire substantially identical stock or securities in a fully taxable trade, or 3) Acquire a contract or option to buy substantially identical stock or securities. You cannot deduct losses from sales or trades of stock or securities in a wash sale.
Trust – A trust is a legal entity created under state or common law, whereby a trustee holds property for the benefit of some other person called a beneficiary. A trust may be created during an individual's life or upon his or her death under a will. A trust (except for a grantor type trust) is a separate legal entity for federal tax purposes. A trust computes its income tax liability the same way that an individual does and is allowed most of the credits and deductions that an individual is allowed. Amounts distributed to the beneficiary are reported on the beneficiary’s individual tax returns.
Withholding – If you are an employee, your employer probably withholds income tax from your pay. Other taxes withheld include social security and Medicare taxes. How much is withheld from your pay depends on your income and the information you provided on Form W-4. Tax may also be withheld from certain other income – including pensions, bonuses, commissions, and gambling winnings. In each case, the amount withheld is paid to the Internal Revenue Service (IRS) in your name.
Unadjusted Basis – Your unadjusted basis is your depreciable basis without reduction for depreciation previously claimed.
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