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Glossary of Tax Terms
# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
The U.S. Individual Income Tax Return Form 1040 is the basic "long" form taxpayers file annually with the Internal Revenue Service. Taxpayers with simple returns can use the "short" Form 1040 A or Form 1040 EZ.
1099-DIV
Form 1099-DIV is a statement from your broker, a mutual fund, or a company whose stock you own that summarizes the dividends you were paid. The purpose of Form 1099-DIV is to report the dividends you received, income tax withheld from dividends, and foreign taxes paid on dividends.
1099-INT
Form 1099-INT is a statement of interest income sent to you by payers of interest, such as banks and savings institutions. The 1099-INT summarizes your interest income for the year. The 1099-INT is also used to report other tax items related to your interest income, such as early withdrawal penalties and federal tax withheld.
401(k) Plan
A 401(k) Plan is a tax deferred savings plan which is authorized by section 401(k) of the Internal Revenue Code. Under Section 401(k) a percentage of your salary is withheld and placed in a savings account or the company's profit-sharing plan. Your employer may match a percentage of the amount you have withheld. You are not taxed on the amount deducted from your pay, your employer's matching amount, or any interest or gains until you receive distributions, usually at retirement. Most plans allow employees to borrow from their accounts.
Accelerated Cost Recovery System (ACRS)
Accelerated Cost Recovery System (ACRS) was a statutory method of depreciation allowing accelerated rates for most types of property used in business and income-producing activities during the years 1981 through 1986. This method allowed assets to be depreciated at a faster rate than had been allowed previously. It has been superseded by Modified Accelerated Cost Recovery System (MACRS) for assets placed in service after 1986.
Accelerated Depreciation
Accelerated depreciation is a method of depreciation that produces larger deductions for depreciation in the early years of an asset's life versus spreading the cost evenly over the life of the asset, as with the straight-line depreciation method. For most business property, except real estate, the law allows you to depreciate the cost at a rate faster than would be allowed under straight-line depreciation.
Accounting Method
An Accounting Method is a method used by a business or individual to keep its records. Most individuals and small businesses use the cash method, although businesses that maintain inventory are required to use the accrual method.
Accrual Method
The Accrual Method is a business method of accounting requiring income to be reported when earned and expenses to be deducted when incurred - rather than reporting income when you receive payment and expenses when you pay them. However, deductions generally may not be claimed until economic performance has occurred. The Accrual Method is usually used by most large corporations. If you own a business that maintains an inventory you are required to use the accrual method for purchases and sales.
Active Income
Active Income is income from wages, tips, salaries, commissions, and a trade or business in which you materially participate.
Active Participation
Active Participation refers to the level of involvement that real estate owners must meet to qualify to deduct up to $25,000 of losses from rental real estate. The rules for active participation are much easier to meet than the material participation rules. An active participant must own more than 10 percent of the property and cannot be a limited partner.
Active Participation also refers to a test for determining deductibility of IRA deductions. Active participants in employer retirement plans are subject to IRA deduction phase-out rules if adjusted gross income exceeds certain thresholds.
Adjusted Basis
Your adjusted basis in property is the starting point for determining taxable gain or loss. It is generally your original cost, increased by capital improvements, and decreased by depreciation, depletion, and other capital write-offs. Special rules apply to assets you inherit or receive as a gift. Subtract your adjusted basis in property from its net sales price to determine your gain or loss.
Adjusted Gross Income (AGI)
Your Adjusted Gross Income (AGI) is your gross income less allowable adjustments, such as IRAs, up to $1,000 of interest on higher education loans, alimony, medical savings accounts, job-related moving expenses, any penalty paid on the early withdrawal of savings, the deduction for 50% of the self-employment tax, and SIMPLE and Keogh deductions. AGI is the key to determining your eligibility for certain tax benefits and the phase-out of your eligibility for others such as personal exemptions, itemized deductions, and the rental loss allowance.
Adjustment
An adjustment is a reduction of your income for expenses, such as IRAs, up to $1,000 of interest on higher education loans, alimony, medical savings accounts, job-related moving expenses, any penalty paid on the early withdrawal of savings, the deduction for 50% of the self-employment tax, and SIMPLE and Keogh deductions.
Alien
An alien is a person who is not a citizen of the country in which that person lives.
Alimony
Payments made to a separated or divorced spouse as required by a divorce decree or agreement. Qualifying payments to an ex-spouse can be deducted as adjustments to income regardless of whether you itemize. They are taxable to the recipient.
Alternative Minimum Tax (AMT)
Alternative Minimum Tax (AMT) is a special tax designed primarily to prevent high-income taxpayers from using so many tax breaks that their regular tax bill is reduced to little or nothing. The tax is triggered if certain tax benefits reduce your regular income tax below the Alternative Minimum Tax computed on Form 6251. AMT applies tax rates of 26% and 28%.
Amended Return
An amended return, which is a revised tax return, may be filed on a 1040x, To correct a mistake made on an original return within three years of the original filing. An amended return can result in a refund or additional tax due.
Amortization
The term amortization has multiple meanings. It's the gradual reduction of a debt by means of equal periodic payments sufficient to meet current interest and liquidate the debt at maturity. It's also an expense allowed as a means of spreading the cost of an intangible asset over a period of years.
Annuity
An annuity is an annual payment of money by a company or individual to a person called the annuitant. The payment is for a fixed period or the life of the annuitant. The payments you receive include the return of your investment in the contract plus interest or other return on your invested capital.
Asset
Anything owned by an individual or a business, which has cash, commercial, or exchange value. Assets may consist of specific property or claims against others.
Audit
An audit, in reference to U.S. federal income taxes, is an IRS examination of your tax return. It is generally limited to a three-year period after you file by the statute of limitations.
Away from Home
The away from home rules are an IRS requirement for deducting travel expenses on a business trip. Sleeping arrangements are required for at least one night before returning home. If you meet the requirements for being away from home, you can deduct meals and lodging expenses.
Cancellation of Debt
Forgiveness of a debt without payment or consideration. Cancellation of debt is taxable as income to the debtor unless the creditor intended it as a gift or it meets certain exceptions relating to bankruptcy, insolvency, or farming.
Capital Gain
The difference between the amount realized and adjusted basis on the sale or exchange of capital assets. Profit on the sale of capital assets such as stocks, mutual fund shares and real estate. Depending on your tax bracket and on how long you held a capital asset you may pay about one-third to one-half less tax on a capital gain than you would have paid on the same amount of ordinary income.
Casualty and Theft Loss
A loss caused by a sudden, unexpected, or unusual event such as a hurricane, earthquake, fire, flood, or theft. Casualty or theft losses are deductible as an itemized deduction subject to a $100 reduction per event and to the extent your total losses during the tax year exceed 10 percent of your adjusted gross income
Charitable Contribution Deduction
An itemized tax deduction is allowed for donations to qualifying tax exempt organizations. A receipt is required as proof for any single contribution of $250 or more.
Charitable Organization
An organization that is recognized as tax-exempt by the IRS.
Child
For income tax purposes, your child is your son, stepson, daughter, stepdaughter, legally adopted child, or a child placed with you for adoption by an authorized placement agency. A foster child who lived with you the entire year is also considered your child.
Child and Dependent Care Credit
A tax credit of up to 30% based on certain care expenses you paid for the care of your children or other dependents to allow you to work. The credit can save as much as $720 off your tax bill if you pay for the care of one individual or as much as $1,440 if you pay for the care of two or more individuals.
Child Credit
A tax credit you may qualify for if you have children under the age of 17. The credit is $500 per child in 1999. The right to this credit is phased out as adjusted gross income rises over $110,000 on a joint return, $75,000 on an individual return or head of household return and $55,000 if you're married filing separately
Child Support
Payments to support a minor child generally to a custodial parent under a divorce or separation decree or agreement. Child support is not deductible by the payer, nor is it taxable to the recipient.
College Credits
These credits were first available in 1998 to help pay for the cost of college education. The Hope credit is worth up to $1,500 per year per student and is available for the first two years of vocational school or college. A lifetime learning credit is worth up to $1,000 per year for additional schooling. You can claim a Hope credit for each qualifying student (including yourself, your spouse or your dependent child) for whom you pay tuition and other qualifying fees (but not the cost of books or room and board), so three children in college at the same time could earn you $4,500 of credit. Only one lifetime learning credit can be claimed each year, however, for a maximum credit of $1,000. The right to these credits disappears as adjusted gross income rises between $40,000 and $50,000 on an individual return and between $80,000 and $100,000 on a joint return.
Combat Pay
Pay received by members of the U.S. Armed Forces and support personnel in combat zones, including designated peace keeping areas. Military pay received by enlisted personnel serving in combat or designated peace-keeping areas is tax-free. Officer pay is tax-free up to the maximum pay for enlisted personnel, plus imminent danger/hostile fire pay.
Combat Zone
A geographical area designated by the President of the United States as a combat zone. Members of the armed forces can exclude from taxable income military pay that they earn while working in a combat zone.
Corporation
A type of business organization chartered by a state and given legal rights as a separate entity. Corporations are owned by shareholders and can own property, incur debts, and sue or be sued. Corporations are generally treated as separate taxpayers unless a Subchapter S election is made.
Cost of Goods Sold
The cost of obtaining and producing goods sold in business. The amount determined by subtracting the value of the ending merchandise inventory from the sum of the beginning merchandise inventory and the net purchases for the fiscal period.
Credit
A tax credit directly reduces the tax you owe, as opposed to a deduction that reduces income subject to tax. A credit is a direct dollar-for-dollar reduction of your income tax. You can get tax credits for items such as child care expenses and the earned income credit for low-income taxpayers.
Decedent
A person who has died
Deductions
Items that directly reduce taxable income. Deductions such as alimony, capital losses, moving expenses, business losses, and deductible IRA and Keogh contributions can offset gross income even if you don't have enough deductions to itemize. Personal expenses such as medical costs, mortgage interest, state and local taxes, employee business expenses, and charitable contributions are deductible only if you itemize your deductions. All taxpayers may claim a standard deduction. If your qualifying expenses exceed your standard deduction, you may claim the higher amount by itemizing your deductions. Although no records are needed to back up your right to the standard deduction, you must maintain records of qualifying expenditures if you itemize.
Deferred Compensation
A portion of earnings withheld by an employer or put into a retirement plan for distribution to the employee at a later date. If certain legal requirements are met, you do not pay tax on qualified deferred compensation until you receive the distributions.
Deferred Gain on the Sale of Your Home
Prior to May 7, 1997, if you sold your personal residence for a profit you could defer paying income tax on the gain if the next house you bought was more expensive than the one you sold. The law changed in 1997. With the new exclusion rules your home sale probably will not result in a taxable gain.
Dependency Exemption
An exemption you claim for a dependent. Extra exemptions are allowed for each qualifying dependent. The exemptions are phased out for certain high income individuals.
Dependent
A person who relies on someone else for financial support. You can claim a dependency exemption on your tax return for each dependent who qualifies. To qualify the dependent must meet all five of the following tests:
Relationship or member of household test
Citizenship test
Joint return test
Gross income test
Support test
Each dependent under age 17 also qualifies his or her parent for a $500 tax credit.
Dependent Care Credit
A tax credit based on expenses you paid for the care of your child or other dependents while you were gainfully employed.
Depletion
A deduction claimed for the use of timber or mineral resources, including oil and gas, because the resources are being depleted over time.
Depreciable Property
Property with a useful life of more than one year that is used in your trade or business. Deductions are spread over the estimated useful life of the property.
Depreciation
A deduction to reflect the gradual loss of value of business property - such as office equipment, vehicles, buildings, and furniture - as it wears out or becomes obsolete. The tax law assigns a life to various types of property and your basis in such property is deducted over that period of time. The tax law specifies the depreciation term for specific types of assets.
If the expense is assumed to be incurred in equal amounts in each business period over the life of the asset the depreciation method used is straight line (SL). If the expense is assumed to be incurred in decreasing amounts in each business period over the life of the asset the method used is said to be accelerated. Two commonly used variations of the accelerated method of depreciating an asset are the sum-of-years digits (SYD) and the double-declining balance (DDB) methods. Frequently, accelerated depreciation is chosen for a business' tax expense but straight line is chosen for its financial reporting purposes.
Disabled
A person is permanently and totally disabled if both of the following apply:
He or she cannot engage in any substantial gainful activity because of a physical or mental condition; and
A physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death.
Dual-Status Taxpayer
An alien who is a resident part of the tax year and a non-resident the other part of the tax year.
Earned Income
All the money you earn including any wages, salaries, commissions, tips, net earnings from self-employment, and any other income received for personal services as opposed to unearned income from sources such as investments. You must have earned income to have a deductible IRA or to claim the earned income credit.
Earned Income Credit (EIC)
A refundable credit for low-income taxpayers with earned income. Low-income workers can file a tax return to get an earned income credit, even if no income tax was withheld from the worker's pay.
Education IRA
A new type of savings plan for higher education. An Education IRA has nothing to do with retirement. You may be able to make nondeductible contributions up to $500 per child per year to an education IRA for children under 18. There's no deduction for contributions but if the money is used to pay college bills withdrawals are tax free.
Electronic Filing
A method for filing your tax return with the IRS using your modem. Taxpayers can now file their tax return with personal computers and tax preparation software or online at a web site such as this one. Electronic filing is the fastest and most secure method of filing your tax return. The information goes directly to the IRS and the IRS can directly deposit your refund into your bank account. Electronic filing allows you to get your refund quickly.
Estate
The entire group of assets owned by an individual at the time of his or her death. The estate includes all funds, personal effects, interests in business enterprises, titles to property, real estate, chattels, and evidences of ownership such as stocks, bonds and mortgages owned, notes receivable, etc.
Estate Tax
The Federal taxes levied on the transfer of property from the deceased to his or her heirs, legatees or devisees. It is based on the fair market value of the decedent's property at death, less his or her liabilities. The tax begins at a 37% rate - when a decedent's taxable estate exceeds $650,000. That amount will rise gradually until it reaches $1 million in 2006. For qualifying small business and family farms up to $1.3 million can be free of the estate tax starting in 1998.
Estimated Tax Payments
Advance payment of current tax liability by making installment payments of your estimated tax liability. You may be required to make estimated tax payments if a significant amount of your income is not subject to withholding, such as net income from a business or investment income. To avoid penalties, you generally must pay to the IRS either 90% of your final tax liability, or either 100% or 110% of the prior year's tax liability, depending on your adjusted gross income.
Excess Distributions
Retirement payments exceeding specified limits. They are subject to a 15% penalty unless rolled over to an IRA or other exceptions are met.
Exempt from Tax Liability
An organization that does not have to pay tax. Certain charitable organizations are tax exempt organizations.
Exemption
A deduction from taxable income for you, your spouse, and your qualifying dependents. Special rules apply if someone else can claim you or your spouse as a dependent.
Federal income tax
The federal government levies a tax on personal income. The federal income tax provides for national programs such as defense, foreign affairs, law enforcement, and interest on the national debt.
Federal Insurance Contributions Act (FICA) Tax
Provides benefits for retired workers and their dependents as well as for disabled workers and their dependents. Also known as the Social Security tax.
File a return
To mail or otherwise transmit to IRS service center the taxpayer's information, in specified format, about income and tax liability. This information-the return-can be filed on paper, electronically (e-file).
Determines the rate at which income is taxed. The five filing statuses are: single, married filing a joint return, married filing a separate return, head of household, and qualifying widow(er) with dependent child.
Spending and income records and items to keep for tax purposes, including paycheck stubs, statements of interest or dividends earned, and records of gifts, tips, and bonuses. Spending records include canceled checks, cash register receipts, credit card statements, and rent receipts.
This is another term for a proportional tax.
Form W-4, Employee's Withholding Allowance Certificate
Completed by the employee and used by the employer to determine the amount of income tax to withhold.
A foster child is any child placed with a taxpayer by an authorized placement agency or by court order. Eligible foster children may be claimed by taxpayers for tax benefits.
Gross income
Money, goods, services, and property a person receives that must be reported on a tax return. Includes unemployment compensation and certain scholarships. It does not include welfare benefits and nontaxable Social Security benefits.
Head of Household filing status
You must meet 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. 3. A qualifying person lived with you in the home for more than half the year (except temporary absences, such as school). However, a dependent parent does not have to live with the taxpayer.
Income taxes
Taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Income taxes can be levied on both individuals (personal income taxes) and businesses (business and corporate income taxes).
Performs services for others. The recipients of the services do not control the means or methods the independent contractor uses to accomplish the work. The recipients do control the results of the work; they decide whether the work is acceptable. Independent contractors are self-employed.
A tax that can be shifted to others, such as business property taxes.
The charge for the use of borrowed money.
The income a person receives from certain bank accounts or from lending money to someone else.
Internal Revenue Service (IRS)
The federal agency that collects income taxes in the United States.
Includes taxable and tax-exempt interest, dividends, capital gains net income, certain rent and royalty income, and net passive activity income.
Refers to the preparation and transmission of tax return information to the IRS using telephone lines or a computer with a modem or Internet access.
Long-distance telephone tax refund
Taxpayers are eligible to file for refunds of all excise tax they have paid on long-distance service billed to them after Feb. 28, 2003.
A tax paid on expensive goods and services considered by the government to be nonessential.
Married Filing Joint filing status
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.)
Married Filing Separate filing status
You must be married. 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
Used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65.
Personal exemption
Can be claimed for the taxpayer and spouse. Each personal exemption reduces the income subject to tax by the exemption amount.
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.
A tax that takes a larger percentage of income from high-income groups than from low-income groups.
Taxes on property, especially real estate, but also can be on boats, automobiles (often paid along with license fees), recreational vehicles, and business inventories.
Qualifying child
To be a qualifying child, the dependent must meet five tests: (1) Relationship, (2) Age, (3) Residency, (4) Support, and (5) Special test for qualifying children of more than one person.
Qualifying relative
There are four tests that must be met to be a qualifying relative, they are: (1) Not a qualifying child, (2) Member of household or relationship, (3) Gross income, and (4) Support.
Qualifying Widow(er) filing status
If your spouse died in 2006, you can use married filing jointly as your filing status for 2006 if you otherwise qualify to use that status. The year of death is the last year for which you can file jointly with your deceased spouse. You may be eligible to use qualifying widow(er) with dependent child as your filing status for two years following the year of death of your spouse. For example, if your spouse died in 2006, and you have not remarried, you may be able to use this filing status for 2007 and 2008. 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.
Refund
Money owed to taxpayers when their total tax payments are greater than the total tax. Refunds are received from the government.
Revenue
The income the nation collects from taxes.
Salary
Compensation received by an employee for services performed. A salary is a fixed sum paid for a specific period of time worked, such as weekly or monthly.
Sales tax
A tax on retail products based on a set percentage of retail cost.
Self-employment income minus self-employment expenses, when self-employment income is less than self-employment expenses.
Self-employment income minus self-employment expenses, when self-employment income is greater than self-employment expenses.
Similar to Social Security and Medicare taxes. The self-employment tax rate is 15.3 percent of self-employment profit. The self-employment tax is calculated on Schedule SE—Self-Employment Tax. The self-employment tax is reported on Form 1040, U.S. Individual Income Tax Return.
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.
A tax on goods such as tobacco and alcohol.
Provides benefits for retired workers and their dependents as well as for the disabled and their dependents. Also known as the Federal Insurance Contributions Act (FICA) tax.
Reduces the income subject to tax and varies depending on filing status, age, blindness, and dependency.
For dependency test purposes, support includes food, clothing, shelter, education, medical and dental care, recreation, and transportation. It also includes welfare, food stamps, and housing provided by the state. Support includes all income, taxable and nontaxable.
Taxable interest income
Interest income that is subject to income tax. All interest income is taxable unless specifically excluded.
Tax avoidance
An action taken to lessen tax liability and maximize after-tax income.
Tax code
The official body of tax laws and regulations.
Tax credit
A dollar-for-dollar reduction in the tax. Can be deducted directly from taxes owed.
A reduction in the amount of taxes taken by the government.
An amount (often a personal or business expense) that reduces income subject to tax.
Required payments of money to governments that are used to provide public goods and services for the benefit of the community as a whole.
A failure to pay or a deliberate underpayment of taxes.
Interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by states, cities, or counties and the District of Columbia.
Tax exemption
A part of a person's income on which no tax is imposed.
Tax liability (or total tax bill)
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.
Telephone tax refund
Taxpayers are eligible to file for refunds of all excise tax they have paid on long-distance service billed to them after Feb. 28, 2003.
Money and goods received for services performed by food servers, baggage handlers, hairdressers, and others. Tips go beyond the stated amount of the bill and are given voluntarily.
Wages
Compensation received by employees for services performed. Usually, wages are computed by multiplying an hourly pay rate by the number of hours worked.
Withholding ("pay-as-you-earn" taxation)
Money, for example, that employers withhold from employees paychecks. This money is deposited for the government. (It will be credited against the employees' tax liability when they file their returns.) Employers withhold money for federal income taxes, Social Security taxes and state and local income taxes in some states and localities.
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