Académique Documents
Professionnel Documents
Culture Documents
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Federal Insurance Contributions Act (FICA). Social of credit has been enacted and repealed repeatedly
security taxes (for both old-age, survivors and disability throughout history.
insurance-OASDI-and Medicare).
Involuntary conversion. The conversion of property into
Federal Unemployment Tax Act (FUTA). Unemployment money under circumstances beyond the control of the owner.
taxes. 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.
Filing status. One of four tax ranks determined by your
Owners may avoid tax on any gain that may result (if the
marital status, your dependents and the way you file your tax
insurance settlement or condemnation award exceeds the
return: (1) single, (2) married filing jointly, (3) married filing
adjusted basis of the property) by reinvesting in similar
separately and (4) head of household. Filing status determines
property within certain time limits.
your tax rates and your eligibility for various tax benefits (for
example: alimony deduction, IRA deduction, standard
deduction, etc.). Joint return. An optional filing status available to married
taxpayers that offers generally (but not always) lower taxes
than "married filing separately."
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 Keogh plan. A retirement plan available to self-employed
were the first ones sold. This is important if the items in the individuals.
group were acquired or manufactured at different times or for
different costs. The rule may be overridden by identifying the
Last-in, first-out (LIFO). A rule that applies to the sale of
specific item sold, if possible. (See "Last-in, first-out (LIFO).")
part of a group of similar items in an inventory that assumes
the last ones acquired were the first ones sold. This is
Generation-skipping transfer tax. An extra tax on gifts or important if the items in the group were acquired or
on-death transfers of money or property that would otherwise manufactured at different times or for different costs. (See
escape the once-per-generation transfer taxes that apply to "First-in, first-out (FIFO).")
gifts and estates. For example: a gift from a grandfather to a
granddaughter skips a generation and might be subject to this
Like-kind exchanges. Tax-free swaps of investment
tax.
property. Commonly used for real estate.
Rollover. The tax-free termination of one investment and Accelerated Cost Recovery System (ACRS) – Instead of
reinvestment of the proceeds. For example: An individual may depreciating an asset uniformly over its useful life (as is the
roll over a lump-sum distribution from an employer's case with the straight-line depreciation method), ACRS uses
retirement plan into an IRA. 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
S corporation. A corporation with no more than 35 the earlier years, and generally applies to tangible property
shareholders that is not taxed, but treated similarly to a placed into service after 1980 and before 1987.
partnership, if other requirements are met.
Savings Incentive Match Plan for Employees (SIMPLE Accelerated Depreciation – Any method of depreciation
plans). A simplified retirement arrangement for small that results in greater depreciation deductions for an asset in
businesses that comes in two varieties: one similar to a 401(k) the earlier years of its life than the straight-line depreciation
plan and one that funds IRAs for employees. method.
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cannot be longer than 12 months. 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
Accrual Method – The accounting method where, generally, payer and must be included in the spouse’s or former
you report income when earned, rather than when received. spouse’s income.
Generally, you deduct expenses when incurred, rather than
when paid.
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tax home substantially longer than an ordinary day’s work, accepted in your field of business. A necessary expense is one
and (2) you need sleep or rest to meet the demands of work that is helpful and appropriate for your business. An expense
while away from home. 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.
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 Business-Use Property – Property (such as an office, rental
genuine if it arises from a debtor-creditor relationship based house, or automobile used for business) that is used in your
on a valid and enforceable obligation to repay a fixed or trade or business or for the production of income.
determinable sum of money. There are two kinds of bad debts
– business bad debts and nonbusiness bad debts.
Calendar Year – A calendar year covers a 12-month period
that begins January 1 and ends December 31.
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 Capital Asset – Any asset that is not specifically identified as
depreciation, amortization, depletion, and casualty losses. If a noncapital asset. Almost everything you own and use for
your property is used for both business and personal personal purposes or investment is a capital asset. For
purposes, the basis must be allocated based on the use. The example, stocks and bonds, a home owned and occupied by
original basis in your property is adjusted by improvements to you and your family, timber grown on your home property or
your property (increases your basis) and by deductions taken investment property even if you make casual sales of the
for depreciation or casualty losses (decreases your basis). timber, household furnishings, your car used for pleasure or
commuting, coin or stamp collections, gems and jewelry, gold,
silver, and other metals.
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 Capital Gain – Generally, a sale or trade of a capital asset
partly blind. If you are partly blind, you must obtain a certified results in a capital gain or capital loss. If the sales price is
statement from an eye doctor or registered optometrist greater than the basis, there is a gain. If you sell an item that
stating that you: 1) cannot see better than 20/200 in the you owned for personal use (such as a car, refrigerator,
better eye with glasses or contact lenses, or 2) have a field of furniture, stereo, jewelry, or silverware), any gain is taxable as
vision that is not more than 20 degrees. 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
Bond – An obligation by a corporation or government to pay deductible as a capital loss.
back money borrowed from the bondholder on a determined
date, together with any accrued interest. This obligation takes
the form of a bond.
Capital Gain Distributions – Capital gain distributions (also
called capital gain dividends) are paid to you or credited to
your account by regulated investment companies (commonly
Burden of Proof – If you take an IRS case to court, the IRS called mutual funds) and real estate investment trusts (REITs).
will have the burden of proving certain facts if you kept Report capital gain distributions as long-term capital gains
adequate records showing your tax liability, cooperated with regardless of how long you owned the shares in the mutual
the IRS, and meet certain other conditions. Otherwise, you fund or REIT.
have the burden of proving your tax return is accurate.
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the lesser of: (1) your allowable capital loss deduction for the must be below a certain amount based on your filing status. If
year, or (2) your taxable income increased by the allowable you are unable to claim the full amount of the child tax credit,
capital loss deduction for the year and the deduction for you may be able to take the additional child tax credit.
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 Combat Pay – Pay received by members of the U.S. Armed
the next year. If part of the loss is still unused in the following Forces and support personnel in combat zones, including
year, you can carry it over to later years until it is completely peacekeeping efforts. Combat pay received by enlisted
used up. 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
Carryback – Applying a loss, deduction, or credit to a prior danger/hostile fire pay).
year.
Carryforward/Carryover – Applying a loss, deduction, or credit
to a future year.
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
Cash Method – The accounting method where all items of area usually becomes a combat zone and ceases to be a
income are reported in the year that you actually or combat zone on the dates the President designates by
constructively receive them. You deduct all expenses in the Executive Order.
year you actually pay them. This is the method most
individual taxpayers use.
Commission – A fee a broker or agent charges you for
facilitating a transaction, such as the buying or selling of
Casualty – The damage, destruction, or loss of property securities or real estate.
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 Common Law Marriage – A marriage in which a man and
one that is not a day-to-day occurrence and that is not typical woman who have lived together for a certain period of time
of the activity in which you were engaged. A casualty can and who hold themselves to be husband and wife are
occurs when property is damaged as a result of a disaster considered to be married even without a license or a formal
such as a storm, fire, car accident, or similar event. 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
Casualty Loss – The act of losing property or experiencing a common law marriage that is recognized in the state where
decrease in the value of property as a result of a casualty. you now live or in the state where the common law marriage
Deductible casualty losses can result from certain car began.
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 Community Income – Generally, income from: (1)
attacks, vandalism, and volcanic eruptions. 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
Charitable Contribution – A donation or gift to, or for the taxpayers who are domiciled in one of the following
use of, a qualified organization. It is voluntary and is made community property states: Arizona, California, Idaho,
without getting, or expecting to get, anything of equal value. Louisiana, Nevada, New Mexico, Texas, Washington, or
Wisconsin.
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Compensation – Pay received for your services. Employee (Form 1040) of the decedent for the year of death and any
compensation can include wages, salaries, tips, and fringe returns not filed for preceding years. A surviving spouse,
benefits. under certain circumstances, may have to file the returns for
the decedent.
Constructive Receipt – You constructively receive income Declining Balance Method – An accelerated depreciation
when it is credited to your account or set apart in any way method. For property placed in service before 1987, the
that makes it available to you. You do not need to have declining balance method allowed you to recover a larger
physical possession of it. For example, interest credited to amount of the cost of the property in the early years of your
your bank account on December 31 is taxable income to you use of the property by allowing a declining balance rate of up
in the year it was credited if you could have withdrawn it in to twice the straight-line rate. When using a declining balance
that year (even if the amount is not entered in your passbook method under MACRS, you apply the same depreciation rate
or withdrawn until the next year). 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
Cost Basis – The basis of property you buy is usually its cost. greater deduction. You calculate your declining balance rate
The cost is the amount you pay in cash, debt obligations, by dividing the specified declining balance percentage (150%
other property, or services. Your cost also includes amounts or 200% changed to a decimal) by the number of years in the
you pay for sales tax, freight, installation and testing, excise property’s recovery period.
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 Deferred Compensation – The part of your income that you
estate and business assets may include other items. 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
Cost of Goods Sold – If your business manufactures until you receive it.
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 Defined Benefit Plan – Any plan that is not a defined
follows: inventory at the beginning of the year PLUS purchases contribution plan. Types of defined benefit plans include
(reduced by cost of items withdrawn for personal use) PLUS pension plans and annuity plans. If you are eligible to
cost of labor (not including amounts paid to yourself) PLUS participate in your employer’s defined benefit plan for the
materials and supplies PLUS other costs MINUS inventory at plan year that ends within your tax year, you are covered by
the end of the year. 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
Cost of Keeping Up a Home – Expenses incurred to required to accrue a benefit for the year.
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, Defined Contribution Plan – A plan that provides for a
mortgage interest, real estate taxes, insurance on the home, separate account for each person covered by the plan. Types
repairs, utilities, and food eaten in the home. Do not include of defined contribution plans include profit-sharing plans,
expenses such as clothing, education, medical treatment, stock bonus plans, and money purchase pension plans.
vacations, life insurance, or transportation. Also, do not Generally, you are covered by a defined contribution plan for
include the rental value of a home you own or the value of a tax year if amounts are contributed or allocated to your
your services or those of a member of your household. account for the plan year that ends with or within that tax
year.
Custodial Parent – The parent who has custody of the child Depreciation – A loss in the value of property over the time
for the greater part of the year. The custodial parent is the property is being used. Events that can cause property to
generally treated as the parent who provides more than half depreciate include wear and tear, age, deterioration, and
of the child’s support. It does not matter whether the custodial obsolescence. You can get back your cost of certain property,
parent actually provided more than half of the support. such as equipment you use in your business or property used
for the production of income, by taking deductions for
depreciation.
Decedent – A deceased person. The personal representative
of the decedent’s estate (the person who is in charge of the
decedent’s property) must file the final income tax return
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Direct Deposit – Instead of getting a paper check, you may Employee Stock Option – An option granted to you by your
be able to have your refund deposited directly into your employer to purchase the employer's stock. If you receive a
account at a bank or other financial institution. If the Direct nonstatutory option to buy or sell stock or other property as
Deposit cannot be done, the IRS will send a check instead. 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
Disabled – For tax purposes, you are permanently and totally have any income until you sell or exchange your stock. Your
disabled if you cannot engage in any substantial gainful employer can tell you which kind of option you hold.
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. 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
Dividend – A taxable payment given to a corporation’s at nightclubs, theaters, sporting events, or on fishing trips.
shareholders out of the company's current or retained You can deduct entertainment expenses only if they are both
earnings. Certain distributions commonly called dividends are ordinary and necessary and meet one of the following two
actually interest. You must report as interest so-called tests: (1) directly related test or (2) associated test. To meet
“dividends” on deposits or on share accounts in cooperative the directly related test the entertainment must have taken
banks, credit unions, domestic building and loan associations, place in a clear business setting, or the main purpose of
domestic savings and loan associations, federal savings and entertainment was the active conduct of business. For the
loan associations, and mutual savings banks. associated test, the entertainment must be associated with
your trade or business, and the entertainment directly
precedes or follows a substantial business discussion. You
Dual-Status Alien – Someone who is both a nonresident generally can deduct only 50% of your unreimbursed
alien and a resident alien during the same tax year. This entertainment expenses.
usually occurs in the year of arrival in or departure from the
United States.
Estate tax – The federal tax on the taxable estate of a
decedent, reduced by any credits allowed. Income that a
Earned Income – Generally means wages, salaries, tips, decedent had a right to receive is included in the decedent’s
other taxable employee compensation, net earnings from self- gross estate and is subject to estate tax. This income in
employment, and gross income received as a statutory respect of a decedent is also taxed when received by the
employee. recipient (estate or beneficiary). However, an income tax
deduction is allowed to the recipient for the estate tax paid on
the income.
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FICA (Federal Insurance Contributions Act) – The federal Form W-4 – The Employee’s Withholding Allowance
law that requires your employer to withhold social security Certificate is used to determine the correct amount of federal
and Medicare taxes from your wages. 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)
Filing Status – You must determine your filing status before whether to withhold at the single rate or at the lower married
you can determine your filing requirements, standard rate, (2) how many withholding allowances you claimed (each
deduction, and correct tax. You also use your filing status in allowance reduces the amount withheld), and (3) whether you
determining whether you are eligible to claim certain want an additional amount withheld.
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 Fringe Benefits – Noncash compensation or other benefits
that will give you the lowest tax. you receive from your employer.
Fiscal Year – A regular fiscal year is a 12-month period that Gift Tax – A tax on the transfer of property by one individual
ends on the last day of any month except December. A 52-53 to another while receiving nothing or less than full value in
week fiscal year varies from 52 to 53 weeks and always ends return. The tax applies whether the donor intends the transfer
on the same day of the week. to be a gift or not.
Foreign Tax Credit or Deduction – If you paid or accrued Gross Income – This includes all income you receive in the
foreign taxes to a foreign country on foreign source income form of money, goods, property, and services that is not
and are subject to U.S. tax on the same income, you may be exempt from tax. It also includes income from sources outside
able to take either a credit or an itemized deduction for those the United States (even if you may exclude all or part of it).
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. 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
Form 1040 – The U.S. Individual Income Tax Return that must home for the year; and (3) a qualifying person lived with you
be filed when you do not qualify to use Form 1040EZ or Form in the home for more than half the year (except for temporary
1040A. Form 1040 can be used to report all types of income, absences, such as school). However, your dependent parent
deductions, and credits. does not have to live with you. A foster child must live with
you all year.
Form 1040A – The U.S. Individual Income Tax Return that you
may be able to use if you do not qualify to use Form 1040EZ. Hobby Loss – A loss from a not-for-profit activity. Losses from
To use this form, if among other requirements, your taxable a hobby are not deductible from other income.
income is less than $50,000, and you do not itemize
deductions. You are allowed only certain adjustments and
credits.
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
Form 1040EZ – The Income Tax Return for Single and Joint holding period determines whether any capital gain or loss
Filers With No Dependents is the simplest individual income was a short-term or long-term capital gain or loss. To
tax return to use. You can use this form if, among other determine how long you held the investment property, begin
requirements, you do not claim any dependents, adjustments counting on the date after the day you acquired the property.
or itemized deductions, your taxable income is less than The day you disposed of the property is part of your holding
$50,000, you did not receive any advance earned income period.
credit payments, and you do not claim any credits other than
the earned income credit.
Home Office Expenses – If you use a part of your home
regularly and exclusively for business purposes, you may be
Form 1040X – The Amended U.S. Individual Income Tax able to deduct a part of the operating expenses and
Return is used to correct a return that has already been filed. depreciation of your home. You can claim this deduction for
An amended tax return cannot be filed electronically using IRS the business use of a part of your home only if you use that
e-file. 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
Form W-2 – The Wage and Tax Statement is a statement from case of a separate structure not attached to your home, in
your employer of wages and other compensation paid to you connection with your trade or business.
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 Hope Credit – A nonrefundable education credit of up to
dependent care benefits, is also shown on the Form W-2. $1,500 per eligible student that is available ONLY until the first
two years of postsecondary education are completed and
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ONLY for 2 years per eligible student. Student must be Investment Interest – Interest paid on loans used for
pursuing an undergraduate degree or other recognized investment purposes, such as to buy stock on margin. You can
educational credential and must be enrolled at least half time deduct this interest up to the amount of investment income
for at least one academic period beginning during the year. (not including capital gains) you report.
Indefinite Assignment – An assignment is considered Involuntary Conversion – The receipt of money due to the
indefinite if it is realistically expected to last for more than one forced disposition of property due to theft, casualty or
year, whether or not it actually lasts for more than one year, condemnation. If you receive property as a result of an
or if it is realistically expected to last for one year or less but involuntary conversion, you can calculate the basis of the
actually lasts longer. If your assignment or job away from your replacement property using the basis of the converted
main place of work is indefinite, your tax home changes and property.
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 Itemized Deductions – Personal expenses allowed to be
able to deduct the cost of relocating to your new tax home as claimed on your tax return as deductions from your adjusted
a moving expense. gross income. Examples are medical expenses, mortgage
interest, real estate taxes, and charitable contributions.
Taxpayers who itemize deductions may not claim the standard
deduction.
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 Keogh Plan – A retirement savings plan that is available to
generally not employees. However, whether such people are self-employed taxpayers. Contributions are deductible within
employees or independent contractors depends on the facts specific limits.
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 Lifetime Learning Credit – A nonrefundable education
and methods of accomplishing the result. 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
Injured Spouse – When a joint return is filed and only one student does not need to be pursuing a degree or other
spouse owes a past-due amount, the other spouse can be recognized educational credential.
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. Like-Kind Exchange – The nontaxable exchange of property
for the same kind of property.
Inventory – An inventory is necessary to clearly show income Married Filing Jointly – The filing status you can choose if
when the production, purchase, or sale of merchandise is an you are married and both you and your spouse agree to file a
income-producing factor. If you must account for an inventory joint return. On a joint return, you report your combined
in your business, you must use an accrual method of income and deduct your combined allowable expenses. You
accounting for your purchases and sales. can file a joint return even if one of you had no income or
deductions.
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Married Filing Separately – The filing status you can To be deductible, nonbusiness bad debts must be totally
choose if you are married and do not want to file jointly with worthless and you must have a basis in it – that is, you must
your spouse. This method may benefit you if you want to be have already included the amount in your income or loaned
responsible only for your own tax or if this method results in out your cash. You cannot deduct a partly worthless
less tax than a joint return. If you and your spouse do not nonbusiness debt.
agree to file a joint return, you may have to use this filing
status.
Noncapital Asset – Any asset that is not specifically
identified as a capital asset. Usually noncapital assets are
Medicare Tax – Tax paid for Medicare. This amount is 1.45% those used in a trade or business, or for the production of
of wages for employees and 2.9% of net profit for self- rental or royalty income. Examples of noncapital assets are:
employed taxpayers. 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
Medicare – A federal program that pays for certain health rendered or from the sale of property, and supplies of a type
care expenses for people age 65 or older. you regularly use or consume in the ordinary course of your
trade or business.
Negligence – A failure to make a reasonable attempt to Passive Activity – Generally, passive activities include trade
comply with the tax law or to exercise ordinary and or business activities in which you did not materially
reasonable care in preparing a return. Negligence also participate for the tax year, and rental activities, regardless of
includes failure to keep adequate books and records. You will your participation. Losses from passive activities may be
not have to pay a negligence penalty if you have a reasonable limited.
basis for a position you took.
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Points – The term "points" is used to describe certain charges you retire.
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 Simplified Employee Pension (SEP) – A retirement
points to get a loan (including a mortgage, second mortgage, program for self-employed people allowing them to defer
line of credit, or a home equity loan), do not add the points to taxes on investments intended for retirement
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 Single – Your filing status is single if, on the last day of the
under a certain age. year, you are unmarried or legally separated from your spouse
under a divorce or separate maintenance decree, and you do
not qualify for another filing status.
Prepaid Income – Prepaid income is generally included in
gross income in the year that you receive it. Your method of
accounting does not matter as long as the income is available Social Security Tax – Tax sent to the Social Security
to you. Prepaid income includes rents or interest you receive Administration on your behalf. This amount is 6.2% of wages
in advance and pay for services you will perform later. for employees and 12.4% of net profit for self-employed
taxpayers
Tax Credits – A credit is an amount the IRS allows you to Tax – Tax is the amount you legally owe the government. Most
deduct directly from the tax calculated on your taxable taxpayers use either the Tax Table or the Tax Rate Schedules
income. It is a dollar for dollar reduction of your taxes. Some to calculate their income tax. However, there are special
of the credits include the earned income credit, child and methods if your income includes any capital gains, lump-sum
dependent care credit, child tax credit, education credits, and distributions, farm income, or investment income over $1,500
credit for the elderly or disabled. Credits can be for children under age 14.
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 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.
Tax Deductions – A tax deduction is an amount allowed There are different schedules depending on your filing status.
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 Tax Table – If your taxable income is below $100,000, you
cost on your tax return each year. Other examples are your can choose to use either the tax rate schedules or the tax
standard or itemized deductions and your exemption tables when determining your tax liability. The tax tables are
deductions. simple to use, as no calculations are necessary. Simply find
the range your taxable income falls in, and look up the
corresponding tax under the appropriate column for your filing
status.
Tax 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 Temporary Assignment – You may regularly work at your
calculating your tax liability. Tax-exempt income includes tax home and another location. It may not be practical to
certain social security benefits, welfare benefits, nontaxable return home from this other location at the end of each
life insurance proceeds, Armed Forces family allotments, workday. If your assignment or job away from your main place
nontaxable pensions, and tax-exempt interest. 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.
Tax Liability – The amount of tax that must be paid. Generally, a temporary assignment in a single location is one
Taxpayers meet (or pay) their federal income tax liability that is realistically expected to last (and does in fact last) for
through withholding, estimated tax payments, and payments one year or less.
made with the tax forms they file with the government.
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Tip Income – All tips you receive are income and are subject Underpayment Penalty – If you did not pay enough tax
to federal income tax. Tips go beyond the stated amount of during the year either through withholding or by making
the bill and are given voluntarily. You must include in gross estimated tax payments, you may have to pay a penalty. In
income all tips you receive directly from customers, tips from certain situations, you will not have to pay the penalty, such
charge customers that are paid to you by your employer, and as if you had no tax liability in the prior year or if your current
your share of any tips you receive under a tip-splitting or tip- year tax less withholding is less than $1,000.
pooling arrangement. The value of noncash tips, such as
tickets, passes, or other items of value are also income and
subject to tax.
Unearned Income – Unearned income includes investment-
type income such as interest, dividends, and capital gains. It
also includes unemployment compensation, alimony, taxable
Trade Date – The date you contract to buy, sell, or exchange social security benefits, pensions, annuities, royalties, and
an asset is called the trade date. Do not confuse the trade distributions of unearned income from a trust.
date with the settlement date, which is the date by which the
asset must be delivered and payment must be made.
Unlike Properties – Unlike properties are properties of a
different nature or character. For example, personal property
Trade-In Allowance – When you purchase a property and and real property are unlike.
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 Useful Life – To be depreciable, your property must have a
your old car when purchasing a new one to reduce the determinable useful life. This means it must be something
amount of cash you must give to the dealer. Note that a that wears out, decays, gets used up, becomes obsolete, or
dealer’s offer for your car as a trade-in on a new car does not loses its value from natural causes. The estimated length this
necessarily reflect a measure of its true value. takes is called its useful life.
Transfer Tax – Transfer taxes (or stamp taxes) and similar Vacation Home – The IRS classifies your vacation home as a
taxes and charges on the sale of a personal home are not personal residence, personal residence/rental property, or a
deductible. If they are paid by the seller, they are expenses of rental property. If you do not rent out your vacation home, or
the sale and reduce the amount realized on the sale. If paid by only rent it out for 14 days or less, you can deduct only your
the buyer, they are included in the cost basis of the property. 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
Transportation Expenses – Transportation expense is the home for personal use and how actively you are involved with
cost of transportation when you are not traveling away from renting it out affects how much of the expenses you can
home. Transportation can be by air, rail, bus, taxi, etc., or the claim.
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, Wash Sale – A wash sale occurs when you sell or trade stock
visiting clients or customers, going to a business meeting or securities at a loss and within 30 days before or after the
away from your regular workplace, or getting from your home sale you: 1) Buy substantially identical stock or securities, 2)
to a temporary workplace when you have one or more regular Acquire substantially identical stock or securities in a fully
places of work. 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.
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. 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
Trust – A trust is a legal entity created under state or the information you provided on Form W-4. Tax may also be
common law, whereby a trustee holds property for the benefit withheld from certain other income – including pensions,
of some other person called a beneficiary. A trust may be bonuses, commissions, and gambling winnings. In each case,
created during an individual's life or upon his or her death the amount withheld is paid to the Internal Revenue Service
under a will. A trust (except for a grantor type trust) is a (IRS) in your name.
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.
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