Tax Glossary 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
Accelerated depreciation. A depreciation method that
of the property (See "Adjusted basis.") and, for business
allows larger deductions in the early years of an asset's "life"
property, may be converted into deductions through
and smaller deductions at the end of the period. (See
depreciation or amortization.
"Straight-line depreciation.")

Capital gain or loss. Gain or loss from the sale or exchange

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 figure-
see "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.
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

Amortization. The write-off of an amount spent for certain
employee to receive part of a year's pay in a later year and
capital assets, similar to depreciation. This tax meaning is
not be taxed in the year the money was earned.
different from the common meaning of the term that
describes, for example, payment schedules of loans.
Depletion. A system similar to depreciation that allows the
owner of natural resources (for example: a coal mine or an oil
Applicable Federal Rates (AFRs). Minimum interest rates
well) to deduct a portion of the cost of the asset during each
that must be charged on various transactions that involve
year of its presumed productive life.
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.") 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
At-risk rules. Rules that limit an investor's deductible losses
period").
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 Earned income. Income earned by working for it. Interest,
financing). Without these rules, investors could raise their dividends and other kinds of profits are examples of unearned
deduction limit considerably without being at-risk for the income.
actual loss.
Earned income credit. A tax credit available to individuals
Basis. The starting point for computing gain or loss on a sale with low earned income. An individual is entitled to the full
or exchange of property or for depreciation. (See "Adjusted amount of this credit even if it exceeds the amount of tax
basis.") For property that is purchased, basis is its cost. The otherwise due.
basis of inherited property is its value at the date of death (or
alternative valuation date). The basis of property received as
Employee stock ownership plan (ESOP). A type of profit-
a gift or a nontaxable transaction is based on the adjusted
sharing plan in which benefits come in the form of stock in the
basis of the transferor (with some adjustments). Special rules
employer.
govern property transferred between corporations and their
shareholders, partners and their partnership, etc.
Estimated tax. Quarterly down payments on a year's taxes
that are required (on April 15, June 15, September 15, and
Cafeteria plan. A plan maintained by an employer that
January 15) if the total year's taxes will exceed $1,000 and the
allows employees to select from a menu of taxable and
amount is not covered by withholding.
nontaxable benefits.

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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.
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.

Golden parachutes. Bonuses payable to key executives in

Limited liability company (LLC). A legal structure that
the event control of their corporation changes, as in the case
allows a business to be taxed like a partnership but function
of a takeover. "Excess" golden parachute payments are
generally like a corporation. An LLC offers members (among
subject to tax penalties.
other things) protection against liability for claims against the
business that is not available in a partnership.
Gross income. All income that might be subject to tax. Most
"realized" increases in wealth are considered income. The
Listed property. Property listed in the tax code or by the IRS
main exceptions for individuals are gifts, inheritances,
that must comply with special rules before depreciation may
increases in value of property prior to sale, loan repayments
be claimed. Cars and personal computers are examples of
and some personal injury awards. For businesses, investments
listed property. The special rules are designed to prevent
in their capital are not considered income.
deductions where the property is used for personal rather
than business purposes.
Head of household. A filing status available to qualifying
single parents (or others supporting certain dependents) that
Medical Spending Accounts (MSAs). An investment fund
allows lower taxes than the normal rates for singles.
similar to an IRA that can be used to pay more routine medical
expenses, when used in conjunction with "high-deductible"
Imputed interest. A portion of a future payment that is health insurance, which pays the big bills. Only 750,000 of
treated as interest if parties to the transaction do not provide these MSAs are available nationwide under a pilot program
a stated amount of interest at a rate acceptable to the IRS. that runs through the year 2000. To qualify, you have to be
(See "Applicable Federal Rates (AFRs).") This prevents self-employed or employed by a small employer that offers
improper use of certain tax advantages (capital gains rates or the program.
tax deferral). For example: if a business sells an asset on the
installment basis, part of all future payments is treated as
Modified Accelerated Cost Recovery System (MACRS).
interest whether the transaction states it or not.
The system for computing depreciation for most business
assets.
Incentive stock option. A stock option that may be granted
to an employee under tax-favored terms.
Net operating loss. The excess of business expenses over
income. A business may apply a net operating loss to get a
Itemized deductions. Personal deductions that may be refund of past taxes (or a reduction of future taxes) by
taken if they total more than the standard deduction. (See carrying it back to profitable years as an additional deduction
"Standard deduction.") The following deductions are then (or by carrying it forward as a deduction to future years).
itemized or listed on Schedule A of Form 1040: medical
expenses, charitable contributions, state and local taxes,
Original issue discount (OID). The purchase discount
home mortgage interest, real estate taxes, casualty losses,
offered on some bonds (and similar obligations) in lieu of
unreimbursed employee expenses, investment expenses and
interest. For example: zero-coupon bonds. OID is generally
others.
treated as interest income to the holder rather than as a
capital gain.
Investment credit. A credit against tax available for
investment in a limited range of business property. The
Passive activity loss (PAL). Loss on an investment that is
general investment credit was repealed in 1986, but this type
deductible only up to the limit of gains from similar
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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 low-
income 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
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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.
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).
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).
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.
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.
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.
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 self-
employment tax, self-employed health insurance, and alimony
paid.
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.
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.
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.
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.
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.
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.
Asset – An item of value or usefulness. For tax purposes, an
asset can be capital or noncapital.
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.
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
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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.
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).
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
Capital-Loss Carryover – The amount of the capital loss
carryover is the amount of the total net loss that is more than
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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.
Carryback – Applying a loss, deduction, or credit to a prior
year.
Carryforward/Carryover – Applying a loss, deduction, or credit
to a future year.
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.
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.
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, government-
ordered 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.
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.
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.
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
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.
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).
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.
Commission – A fee a broker or agent charges you for
facilitating a transaction, such as the buying or selling of
securities or real estate.
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.
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.
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.
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Compensation – Pay received for your services. Employee
compensation can include wages, salaries, tips, and fringe
benefits.
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.
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.
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.
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.
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
(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 straight-
line 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.
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.
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.
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.
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.
7
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.
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.
Earned Income – Generally means wages, salaries, tips,
other taxable employee compensation, net earnings from self-
employment, and gross income received as a statutory
employee.
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.
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.
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.
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.
Entertainment Expenses – If you are an employee or self-
employed, 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.
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.
Estimated Tax – The method used to pay tax on income that
is not subject to withholding. This includes income from self-
employment, 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.
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).
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.
8
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
Hobby Loss – A loss from a not-for-profit activity. Losses from
a hobby are not deductible from other income.
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.
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
9
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.
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.
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.
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.
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.
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.
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.)
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.
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.
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.
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.
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.
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.
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.
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.
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.
10
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.
Medicare Tax – Tax paid for Medicare. This amount is 1.45%
of wages for employees and 2.9% of net profit for self-
employed taxpayers.
Medicare – A federal program that pays for certain health
care expenses for people age 65 or older.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Personal Identification Number (PIN) – Allow taxpayers to
"sign" their tax returns electronically. The PIN, a five-digit self-
selected number, ensures that electronically submitted tax
returns are authentic. Most taxpayers can qualify to use a PIN.
11
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.
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.
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.
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.
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.
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 1-
December 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.
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
you retire.
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.
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
Standard Deduction – A deduction you use if you do not
itemize your deductions.
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.
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.
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.
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
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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 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 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 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 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.
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).
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.
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 – 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 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 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.
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.
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.
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.
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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 tip-
pooling arrangement. The value of noncash tips, such as
tickets, passes, or other items of value are also income and
subject to tax.
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.
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.
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.
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.
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.
Unadjusted Basis – Your unadjusted basis is your
depreciable basis without reduction for depreciation
previously claimed.
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.
Unearned Income – Unearned income includes investment-
type 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.
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.
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.
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.
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.
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