Glossary

G.1
401(k) Plan
Deferred compensation plan available through a wide
range of employers. Contributions to a 401(k) plan are
tax deferred to the employee (income tax is not
charged on the amount of the contribution at the time
it is made). Distributions from the plan are taxed as
ordinary income to the recipient when received.
403(b) Plan
Deferred compensation plan available to employees of
many public educational institutions and non-profit
organizations.
457 Plan
Deferred compensation plan available to employees of
many government entities.
Accelerated Cost Recovery System (ACRS)
The system of depreciation in effect from 1981
through 1986. The Tax Reform Act of 1986 contained
several changes to the rules for property placed in
service after 1986. See also Modified Accelerated Cost
Recovery System (MACRS).
Accelerated Depreciation
Various methods of depreciation that yield larger
deductions in the earlier years of the life of an asset
than does the straight-line method. The double (or
200%) declining balance method is an example of an
accelerated depreciation method.
Accountable Plan
A plan for reimbursing employees for ex penses such
as meals, entertainment, travel, and transportation
incurred for business purposes on behalf of the
employer. A plan is an accountable plan if the employ-
er requires the em ployee to account for all business
expenses and to return any ex cess reimbursements.
For employees under an accountable plan, reimburse-
ments are not entered on the tax return as in come,
and the expenses are not deductible.
Accounting Method
The method under which income and expenses are
determined for tax purposes. Major accounting meth -
ods are the cash method and the accrual method, both
of which are defined elsewhere in this glossary.
Accounting Period
The 12-month period which a taxpayer uses to deter-
mine federal income tax liability. Unless a taxpayer
makes a specific choice to the contrary, his accounting
period is the calendar year.
Accrual Method of Accounting
One of the two most common methods of accounting,
the other being the cash method defined elsewhere in
this glossary. Under the accrual method of ac counting,
income is reported in the tax year earned, whether or
not received, and deductions are claimed in the tax
year in curred, whether or not paid.
Accrued Interest
Interest that has been earned but not yet paid or cred-
ited; for example, interest earned on a bond since the
last interest payment was made.
Acquisition Debt
Debt incurred to acquire, construct, or im prove the
taxpayers principal or secondary residence.
Active Income and Losses
For purposes of the passive loss rules, income and
losses must be divided into three categories: active,
passive, and portfolio. Active income and losses are
those for which the taxpayer performs services.
Examples are wages, salaries, tips, bonuses, and
income and losses from business and partnership
activities in which the taxpayer materially partici-
pates. See also Passive Income and Losses and
Portfolio Income and Losses.
Active Participant
A taxpayer who is covered by a qualified employer-
maintained retirement plan, or a qualified self-
employed retirement plan, if even for only one day
during the year.
Actual Expenses (Regular Method)
The method of deducting automobile expenses based
on actual costs incurred.
Additional Child Tax Credit
A refundable credit available to taxpayers with
earned income exceeding $3,000 or with three or more
qualifying children and whose regular child tax cred-
it exceeds tax liabilities minus other nonrefundable
credits. The additional child tax credit is computed on
Form 8812. See also Child Tax Credit.
Adjusted Basis
The cost or other original basis of property reduced by
adjustments such as depreciation allowed or allow-
able and increased by capital improvements and other
adjustments.
G.2 H&R Block Income Tax Course (2013)
Adjusted Gross Income (AGI)
Adjusted gross income equals gross income less reduc-
tions that are allowable, regardless of whether per-
sonal deductions are itemized.
Adjustment to Income
An expense which may be deducted even if the tax-
payer does not itemize deductions. Adjustments to
income are subtracted from gross income to arrive at
adjusted gross income.
Adoption Credit
A nonrefundable credit for qualified adoption expens-
es incurred for each eligible child. The credit cannot
exceed $12,650 per child (for 2012). The limit is a per-
child limit, not an annual limit, and can be carried for-
ward for up to five years or until used.
Advance Earned Income Credit
Payment by an employer based on an employees
claim to entitlement to the earned in come credit.
Advance earned income credit payments are treated
as additional taxes on the tax return.
Alimony Payments
Payments made by one spouse to the other spouse or
former spouse under a written separation or divorce
instrument. Qualified alimony and separate mainte-
nance payments are includable in the gross income of
the recipient and are deductible by the payer. Child
support payments and property settlements are not
treated as alimony.
Alternate (Straight-Line) Method
Under this meth od, the MACRS (or ACRS) deduction
is computed using a straight-line percent and, in some
cases, an optional longer recovery period.
Alternative Minimum Tax (AMT)
The alternative minimum tax was de signed to pre-
vent higher-income taxpayers from escaping taxation
through excessive use of certain tax breaks. A taxpay-
er may be subject to this tax if he has certain mini-
mum tax adjustments or tax preference items and his
alternative minimum taxable income ex ceeds the
exemption allowed for his filing status and income
level. The alternative minimum tax is computed on
Form 6251.
Alternative Straight-Line Depreciation System
A MACRS system of depreciation using the straight-
line method over an alternative (usually longer) recov-
ery period.
Amended Return
A tax return filed on Form 1040X after the original
return has been filed. An amended return is used to
correct an error or to claim a more advantageous way
of filing the original return. An amended return can
also be used to carry back an unused credit or net
operating loss.
American Opportunity Credit (AOC)
Credit for qualifying education expenses available for
tax years 2009 through 2017. The AOC may be par-
tially refundable.
Amortization
The deduction of certain capital expenses over a fixed
period of time. Amortization is claimed on Form 4562.
Amortizable expenses include business start-up
expenses, qualified forestation or reforestation costs,
goodwill, going-concern value, covenants not to com-
pete, franchises, trademarks, trade names, and 197
costs.
Amount Realized
The amount received by a taxpayer on the sale or
exchange of property. The amount received is the sum
of the cash and the fair market value of any property
or services plus any of the sellers liabilities assumed
by the purchaser. Determining the amount realized is
the starting point for arriving at realized gain or loss.
Annuitant
A person who receives a pension or an annuity.
Annuity
A fixed sum payable to a person at specified intervals
for a specific period of time or for life. Payments rep-
resent a partial return of capital and a return on the
capital investment.
Annuity Starting Date
The first day of the first period for which an amount
is due as an annuity payment under an annuity con-
tract.
Anti-Churning Rules
Regulations designed to prevent taxpayers from using
a more advantageous depreciation system when
depreciating property converted from personal use to
business use.
Appointee
Another person authorized by the taxpayer to
exchange information with the IRS for the benefit of
the taxpayer.
Archer Medical Savings Account (MSA)
A trust or custodial account created before 2004 exclu-
sively for the purpose of paying the qualified medical
expenses of a high deductible health plan of the
account holder. For 2004 and later years, Archer
MSAs are replaced by Health savings accounts
(HSAs). See also Health Savings Account (HSA).
Asset
An item of useful or valuable property.
At-Risk Rules
Special rules limiting the taxpayers deductible busi-
ness, partnership, S corporation, or real estate loss to
Glossary G.3
cash invested plus debt he is legally obligated to pay
and the adjusted basis of any property contributed.
Audit
An IRS examination and verification of a taxpayers
return or other transactions with tax consequences. An
office audit is an audit by the IRS which is conducted
in the agents office. A field audit is conducted by the
IRS on the business premises of the taxpayer or in the
office of the tax practitioner representing the taxpayer.
Away From Home Overnight
For purposes of deducting travel expenses, a trip away
from ones tax home for a period longer than an ordi-
nary workday, during which time one is released from
duty to obtain rest.
Bad Debts
Business accounts receivable that have been included
in income in a prior year that are uncollectible, legal-
ly binding debts owed to the taxpayer that are totally
worthless and uncollectible, and debts the taxpayer
must pay that he guaranteed in connection with his
business or for a profit may be de ductible as bad
debts.
Basis
The amount assigned to an asset from which gain or
loss is determined for income tax purposes. For assets
acquired by purchase, basis is cost. Special rules gov-
ern the basis of property received by virtue of anoth-
ers death or by gift, the basis of stock received on a
transfer of property to a controlled corporation, the
basis of the property transferred to the corporation,
and the basis of property re ceived upon the liquida-
tion of a corporation.
Basis of Stock
If purchased, the amount paid for the stock. If the
stock is received as a gift, basis is generally the basis
of the previous owner or the fair market value when
received. The basis of inherited stock is usually its fair
market value on the date of the decedents death.
Beneficiary
The owner or recipient of funds in an account, such as
an IRA, or from an insurance policy or will.
Bequest
A gift by will of personal property. A bequest is not
includable in the income of the recipient. Basis is usu-
ally the value of the property at the date of death of
the decedent. If a bequest of money is to be paid at
intervals, then to the extent that it is paid out of
income from property, it is taxable income to the re -
cipient.
Bond
A note obliging a corporation or governmental unit to
re pay, on a specified date, money loaned to it by the
bondholder. The holder receives interest for the life of
the bond. If a bond is backed by collateral, it is called
a mortgage bond. If it is backed only by the good faith
and credit rating of the issuing company, it is called a
debenture.
Boot
Cash or property of a type not included in the defini-
tion of a nontaxable exchange. The receipt of boot will
cause an otherwise tax-free transfer to become tax-
able to the extent of the lesser of the fair market value
of the boot received or the realized gain on the trans-
fer. Examples of nontaxable exchanges that could be
partially or completely taxable due to the receipt of
boot include transfers to controlled corporations and
like-kind ex changes.
Business Assets
Assets used in a trade or business or used to produce
rental or royalty income.
Business Gifts
The cost of qualified business gifts is de duc tible to a
maximum of $25, per year per client or customer. The
$25 limit does not apply to promotional items costing
$4 or less on which the taxpayers name is clearly
imprinted.
Business-Use Property
Property used for the production of income. Examples
include rental houses, machinery, factories, office
buildings, and similar items.
Cafeteria Plan
A plan wherein an employer offers a choice of nontax-
able fringe benefits from which participating employ-
ees may select. The plan may be funded with employ-
er contributions, employee contributions (usually
through salary reduction agreements) or a combina-
tion of both. It is also often called a 125 plan or a flex-
ible spending account (FSA).
Calendar Year
A year that begins on January 1 and ends on
December 31.
Call
An option to purchase stock at a fixed price within a
specified period of time.
Callable
A bond issue, all or part of which may be redeemed
before maturity by the issuing corporation under spe-
cific conditions. The term also applies to preferred
shares of stock, which may be re deemed by the issu-
ing corporation.
Capital Asset
Broadly speaking, all assets are capital assets except
those specifically excluded by the Tax Code. Major cat-
egories of noncapital as sets include property held for
resale in the normal course of business (inventory),
G.4 H&R Block Income Tax Course (2013)
trade accounts and notes receivable, de preciable prop-
erty, and real estate used in a trade or business.
Capital Expenditure
An expenditure made for assets with useful lives of
more than one year. Usually capital expenditures may
not be deducted in the year they are paid, even if they
are paid in connection with a trade or business. In
other words, they are capitalized and generally may
be depreciated or amortized.
Capital Gain
The gain from the sale or exchange of a capital asset.
Capital Gain Distributions
Amounts paid by mutual funds, re gulated investment
companies, and real estate investment trusts. These
amounts represent the shareholders portion of gain
from the sale of capital assets owned by these invest-
ment companies. Capital gain distributions are taxed
in the year constructively received and are always
considered to be held long term.
Capital Gain or Loss Holding Period
The length of time a capital asset is owned by the tax-
payer. Assets owned 12 months or less are held short
term; those owned more than 12 months are held long
term.
Capital Improvement
An improvement made to extend the useful life of a
property or add to its value. Major repairs, such as the
replacement of a roof, are considered to be capital
improvements. The costs of capital improvements to
business property must be capitalized and may be
depreciated.
Capitalize
To treat the cost of additions and improvements to
property as a capital improvement.
Capital Loss
The loss from the sale or exchange of a capital asset.
Up to $3,000 ($1,500 MFS) of net capital loss is
deductible annually with the excess carried forward to
future years. Losses on personal-use assets are not
deductible.
Capital Stock
Shares of stock which represent ownership of a por-
tion of the corporation.
Carryback/Carryover
Provisions in the Tax Code that allow certain losses or
credits to be used in a tax year other than the tax year
incurred. A carryover is to a future year. A carryback
is to a prior year.
Cash Method of Accounting
One of the two most common methods of accounting,
the other being the accrual method defined elsewhere
in this glossary. Under the cash method of ac counting,
income is reported in the tax year actually or con -
struc tively received and ex penses are deducted in the
tax year paid.
Casualty Loss
A casualty is the complete or partial destruction of
property resulting from an identifiable event of a sud-
den, unexpected, or unusual nature. Examples are
floods, storms, fires, earthquakes, auto accidents, and
terrorist attacks. Individuals may deduct a casualty
loss only if the loss is incurred in a trade or business,
in a transaction entered into for profit, or is a person-
al loss arising from a disaster such as those men-
tioned above. Individuals deduct personal casualty
losses as itemized deductions on Schedule A, subject
to a $100 nondeductible amount and a re duction of
the loss by 10% of the taxpayers AGI. Use of Form
4684 is required.
Certificate
The actual piece of paper that is evidence of owner-
ship of stock in a corporation.
Charitable Contributions
Money or property donated to a qualified charitable
organization. Such donations are deductible on
Schedule A as an itemized deduction.
Child and Dependent Care Credit
A nonrefundable tax credit of 2035% of employment-
related child and dependent care expenses for
amounts of up to $6,000, available to individuals who
are em ployed and have a qualifying child or dis abled
spouse or dependent. The credit is computed on Form
2441 for Form 1040 and 1040A filers.
Child Support Payments
Payments pursuant to a court order, divorce decree, or
other legal obligation. Payments for child support do
not constitute alimony and are not includable in gross
income by the recipient or de duc tible as alimony by
the payer.
Child Tax Credit
A nonrefundable credit of up to $1,000 per dependent
child under age 17 at the end of the tax year.
Circular 230
Regulations governing the practice of attorneys, certi-
fied public accountants, enrolled agents, enrolled actu-
aries, and appraisers before the IRS.
CLADR
See Class Life Asset Depreciation Range.
Claim of Right
A term used in the Tax Code in connection with
money or other property received as income which the
recipient holds, but which he is required to restore to
the payer in whole or in part in a later year because it
Glossary G.5
develops that he did not have an unrestricted right to
the income.
Class Life Asset Depreciation Range (CLADR)
This system of depreciation was used for assets placed
in service prior to January 1, 1981, and must continue
to be used for assets whose depreciation was set up
under that system. The CLADR system provided
guidelines for depreciation lives for the assets listed in
each guideline class.
Closed Year
A tax year for which the statute of limitations has
expired. The taxpayer cannot claim a refund and the
IRS cannot collect additional taxes (with certain
uncommon exceptions).
Collectibles
A group of capital assets which include works of art,
rugs, antiques, precious metals, gems, stamps, coins,
and alcoholic beverages, the net gains from which are
taxed at a maximum rate of 28%.
Commission
(1) The brokers fee for purchasing or selling se curities
or property for a client. (2) An allowance paid to a
salesperson or agent for services rendered.
Commodity Futures
Contracts to buy or sell some fixed amount of a com-
modity (wheat or soybeans, for example) for a fixed
price at a future date.
Common-Law Marriage
A marriage established in a state that legally recog-
nizes nonceremonial marriages. The parties must
have the legal capacity and the intent to marry, and
they must live together and present themselves pub-
licly as husband and wife.
Common Stock
Shares in the ownership of a corporation that are enti-
tled to residual dividends, after bonds and preferred
stock have first received interest and dividends. A
common stockholder usually has a vote in deciding
company affairs, including the election of a corpora-
tions board of directors.
Community Income
Income of a married couple, living in a community
property state, that is considered to belong equally to
each spouse, regardless of which spouse receives the
income.
Community Property
Property considered to belong in equal shares to a
husband and wife. This concept of ownership for prop-
erty ac quired after marriage is followed in Arizona,
Cali for nia, Idaho, Lou isiana, New Mexico, Nevada,
Texas, Washing ton, and Wis consin.
Commuting
Traveling from ones residence to ones regular place
of business and back to the residence.
Compensation
Wages, commissions, tips, professional fees, and net
self-employment income from services rendered; that
is, earned income. For IRA purposes, compensation
also includes alimony and separate maintenance pay-
ments.
Condemnation
The taking of property by a public authority. The prop-
erty is condemned as the result of legal action, and the
owner is compensated by the public authority. The
power to condemn property is known as the right of
eminent domain.
Conduit IRA
An IRA used to hold temporarily a distribution from a
qualified employer-maintained retirement plan, until
such time as it can be rolled into another qualified
employer-maintained retirement plan.
Controlled Group
This refers to a controlled group of corporations that
is one or more chains of corporations connected
through stock ownership with a common parent cor-
poration.
Constructive Receipt
A cash-basis taxpayer is taxed on in come only as it is
received. But if the income was unreservedly subject
to his demand and he could have received it but chose
not to do so, it is regarded as having been construc-
tively re ceived by him and is taxable. For example,
interest credited to a savings account is constructive-
ly received even if the taxpayer has not withdrawn it.
Contract Price
An amount payable to the seller and equal to the gross
selling price when no mortgages are involved. If a
mortgage is assumed, the contract price is the gross
selling price minus the amount of the mortgage plus
the excess (if any) of the mortgage over the sellers
basis and expenses of sale.
Contribution
(1) Gift to a qualified charitable organizations, gener-
ally deductible on Schedule A. (2) Money placed in a
retirement fund such as an individual retirement
arrangement or an employer-maintained retirement
plan.
Conversion (IRA)
Reclassification of a traditional IRA to a Roth IRA.
This process may or may not involve relocation of the
funds. Any converted amounts are taxed to the extent
they were not taxed previously, but are not subject to
an early distribution penalty.
G.6 H&R Block Income Tax Course (2013)
Convertible
A bond or preferred stock that may, under specified
conditions, be exchanged for common stock or another
security, usually of the same corporation.
Copyright
The exclusive legal right to sell, reproduce, or publish
a literary, musical, or artistic work.
Cost
(1) Cash and/or the value of property given to acquire
the property received. (2) The purchase price paid for
property, or the value at which property is taken into
income (as in services paid for with property). Cost is
the amount that is most often applied against the
amount realized from sale of property in de termining
the gain or loss. It is also the figure most often used in
determining the depreciation or cost recovery deduc-
tion.
Cost Depletion
A method for recovering the taxpayers investment in
natural resources or timber. The cost is recovered rat-
ably as the resource is extracted or the timber har-
vested. Total cost depletion cannot be claimed in
excess of basis. Percentage de pletion, the other
method for computing depletion of natural re sources,
is defined elsewhere in this glossary.
Cost Method of Inventory Valuation
Valuing inventory purchased during the year at cost;
that is, the invoice price less any discounts plus trans-
portation or other costs incurred in acquiring the mer-
chandise.
Cost of Goods Sold
Beginning inventory plus direct purchases, direct
labor costs, and overhead costs less withdrawals for
personal use and ending inventory. Sole proprietors
compute their cost of goods sold in Part III of Schedule
C (Form 1040).
Cost of Maintaining a Home
Expenses necessary to maintain a taxpayers resi-
dence. These costs include mortgage interest and real
estate taxes (or rent), fire and casualty insurance on
the dwelling, upkeep and repairs, utilities, paid
domestic help, and food consumed in the home.
Cost Recovery
The writing off of the capital cost of qualified assets
over a specified time period. See also Accelerated Cost
Re covery System (ACRS) and Modified Accelerated
Cost Re covery System (MACRS).
Coupon Bond
A bond with interest coupons attached. The cou pons
are clipped as they come due and are presented by the
bond holder for payment of accrued interest.
Coverdell Education Savings Account (ESA)
A tax-favored savings plan under which any number
of taxpayers may contribute up to a total of $2,000 per
eligible beneficiary. Contributions are non-deductible.
Earnings and withdrawals are tax free and penalty
free if used to pay for qualified higher education
expenses.
Credits
Reductions of tax liability allowed for various purpos-
es to taxpayers who meet the qualifications. Some
credits are refundable; that is, the IRS will send the
taxpayer a refund for any amount in excess of the tax
liability. Some credits are nonrefundable; that is, they
can only reduce tax liability to zero. Some credits may
be carried to other tax years.
Custodial Parent
The parent with whom a child lived for the greater
number of nights during the year.
Dealer
A person or firm that regularly buys and sells proper-
ty. A person is classified as a dealer if at the time of
the sale, he held the property primarily for sale to cus-
tomers in the ordinary course of business. Gains from
the sale of such property are ordinary gains, not capi-
tal gains.
Declaration Control Number (DCN)
A unique 14-digit number assigned by the Electronic
Return Originator (ERO) (or Transmitter, in the case
of Online Filing), to each electronically filed tax
return.
Declining Balance Method of Depreciation
An accelerated me thod of depreciation. The percent is
determined by the type of property. The depreciable
basis for the next year is reduced by the depreciation
deduction taken in the current year.
Deductions
Amounts that may be subtracted from income that is
otherwise taxable.
Deferred Compensation
Compensation that will be taxed when received or
upon the removal of certain restrictions on receipt and
not when earned. For example, contributions to a
qualified retirement plan on behalf of an employee are
considered deferred compensation. Such contributions
will not be taxed to the em ployee until the funds are
made available or distributed to the employee, usual-
ly upon retirement.
Deferred Gain
Nonrecognition of realized gain at the time of a tax-
deferred exchange. Deferred gain on the sale of a prin-
cipal residence generally applies only to those sales
made before May 7, 1997.
Glossary G.7
Defined Benefit Plan
An employee benefit plan that provides determinable
benefits not based on employer profits. The most com-
mon type of deferred benefit plan is a pension plan.
Defined Contribution Plan
An employee benefit plan that provides a separate
account for each person covered and pays benefits
based on account earnings. Examples include 401(k)
plans and profit-sharing plans.
Dependency Exemption
An exemption for an individual who qualifies as the
taxpayers dependent ($3,800 for 2012).
Dependent
An individual whose personal exemption may be
claimed on another persons income tax return. To be
claimed as a dependent, a person must meet certain
tests, all of which are discussed in Chapter 4.
Dependent Care Credit
A nonrefundable credit based on ex penses paid for a
dependents care. Such care must enable the taxpayer
to be gainfully employed or to look for gainful employ-
ment. The credit is computed on Form 2441 for Form
1040 filers and 1040A filers.
Depletion
The process by which the cost or other basis of a nat-
ural resource (for example, an oil and gas interest) is
recovered upon extraction and sale of the resource.
The two ways to determine the depletion allowance
are the cost and percentage methods, both of which
are defined elsewhere in this glossary.
Depreciable Asset
Tangible personal property or real property used in
business or held for the production of income with a
determinable useful life of more than one year.
Depreciation
The deduction of a reasonable allowance for the wear
and tear of assets used in a trade or business or held
for the production of income.
Disabled
See Permanent and Total Disability.
Disability Pension
A taxable pension from an employer-funded disability
plan or a disability provision of a retirement plan.
Until the recipient reaches normal retirement age, a
disability pension generally is reported on line 7 of
Forms 1040 or 1040A (or line 1 of Form 1040EZ) and
treated as wages for purposes of the child care, child
tax, and earned income credits.
Disaster Loss
If a casualty is sustained in an area designated as a
disaster area by the President of the United States,
the casualty is designated a disaster loss. A disaster
loss may be treated as having occurred in the taxable
year immediately preceding the year in which the dis-
aster actually occurred. Thus, im mediate tax benefits
are provided to victims of the disaster.
Disclosure
The release of tax information by an IRS employee.
Disposition
The act of taking an asset out of service in a trade or
business. A disposition occurs when an asset is sold,
abandoned, exchanged, retired, destroyed, or convert-
ed to personal use.
Distribution
Money or property a taxpayer receives from a retire-
ment plan such as an individual retirement arrange-
ment (IRA) or an em ploy er-maintained retirement
plan.
Dividend
A stockholders share of the profits of a corporation.
An insurance dividend is not a true dividend but a
return of premium. Divi dends from a savings and loan
association or credit union are interest, not dividends.
Divorce Decree (Final)
A decree issued after a divorce is declared final by the
court. This action dissolves the marriage and returns
the spouses to unmarried status. Alimony payments
made as a result of this decree are de duc tible by the
payer and income to the recipient, if requirements are
met.
Divorce Decree (Interlocutory)
A divorce decree that is not yet final. Alimony paid
under an interlocutory decree is de duc tible by the
payer and income to the recipient, if requirements are
met.
Domestic Production Activities Deduction
This deduction provides a tax savings against income
attributable to domestic production activities.
Qualified production activities include manufactur-
ing, producing, growing, and extracting tangible per-
sonal property, computer software, sound recordings,
and the construction and substantial renovation of
real property including infrastructure. The production
of certain films is also a qualifying activity as are cer-
tain engineering or architectural services.
Due Diligence
Requirements that Tax Professionals must follow
when preparing income tax returns.
Early Distribution
A distribution from a qualified retirement plan or
individual (IRA) retirement arrangement before the
plan participant has reached age 59. Such distribu-
tions generally are subject to a 10% penalty tax.
G.8 H&R Block Income Tax Course (2013)
Earned Income
Income from personal services as distinguished from
income generated by property or other sources.
Earned income includes all amounts received as
wages, tips, bonuses, other employee compensation,
and self-employment income, whether in the form of
money, services, or property.
Earned Income Credit (EIC or EITC)
A refundable tax credit for qualified taxpayers based
on earned income, adjusted gross income, and the
number of qualifying children.
Easement
A right held by an individual to use property owned by
someone else for a limited purpose, usually to gain
access. For example, an easement may give Person A
the right to use a path through Person Bs property to
get to his own.
Education Expense Deduction
Employees may deduct education expenses as an
itemized deduction if the expenses are incurred either
to maintain or improve existing job-related skills or to
meet the express requirements of the employer or
legal requirements to retain current employment sta-
tus. Such expenses are not deductible as an itemized
deduction if the education is re quired to meet the min-
imum educational requirements for the taxpayers job
or if the education qualifies the taxpayer for a new
trade or business. Education expenses may also qual-
ify the taxpayer for a tuition and fees deduction, a
American Opportunity Credit, or a lifetime learning
credit. All of these are defined elsewhere in this glos-
sary.
Educator Expenses Deduction
An above-the-line deduction of up to $250 for class-
room supplies, books, and equipment, and available to
eligible educators of students in kindergarten through
12th grade.
Electronic Funds Withdrawal
A payment method which allows the taxpayer to
authorize the U.S. Treasury to electronically withdraw
funds from their checking or savings account.
Electronic Return Originator (ERO)
An Authorized IRS e-file Provider that originates the
electronic submission of returns to the IRS.
Eligible Educator
Any educator who works at least 900 hours during a
school year as a teacher, instructor, counselor, princi-
pal or aide in a public or private elementary or second-
ary school.
Eligible Foster Child
A child, other than the taxpayers biological child,
stepchild, or adopted child, who was placed with the
taxpayer by an authorized placement agency or by a
court order, decree, or judgement.
Eminent Domain
The right of a government authority to take private
property for public use upon paying fair compensation
to the owner.
Employee
For income tax purposes, an employee is to be distin-
guished from an independent contractor. This is
important, because the withholding of income taxes
on wages applies only to employees. Also, employee
status will affect the manner and ex tent of some
deductions and credits. The regulations state that an
employee is one who is subject to the will and control
of the employer not only as to what shall be done but
also as to how it shall be done. See also Statutory
Employee.
Employee Stock Option
An option granted to an employee to purchase the
employers stock. Employee stock options to which
special income tax treatment is accorded are known
as statutory options.
Employer-Maintained Retirement Plan
A qualified retirement plan funded in full or in part by
employer contributions on behalf of employees.
Employment Expenses
Ordinary and necessary expenses re quired to perform
the duties for which the taxpayer was hired.
Enrolled Actuary
An enrolled actuary is any individual who has satis-
fied the qualifications set forth in the regulations of
the Joint Board for the Enrollment of Actuaries and
who has been approved by the Joint Board to perform
actuarial services under the Employee Retirement
Income Security Act (ERISA) of 1974.
Enrolled Agent (EA)
An enrolled agent is a person who has earned the
privilege of practicing, that is, representing taxpayers,
before the Internal Revenue Service. Enrolled agents,
like attorneys and certified public accountants
(CPAs), are unrestricted as to which taxpayers they
can represent, what types of tax matters they can
handle, and which IRS offices they can practice before.
Entertainment Expenses
Such expenses are deductible by employees and self-
employed taxpayers only if the expenses are directly
related to or associated with a trade, business, or pro-
fession. To prevent abuses, various restrictions and
documentation re quirements have been imposed on
the deductibility of entertainment expenses. The
deduction for qualified business entertainment is lim-
ited to 50% of cost.
Glossary G.9
Estate
A taxable entity that is established upon the death of
a taxpayer. It consists of all the decedents property
and personal effects. The estate exists until the final
distribution of its assets to the heirs and other benefi-
ciaries. During the period of administration, the
executor must usually file a return.
Estimated Tax
The amount of tax a taxpayer expects to owe for the
year after subtracting expected amounts withheld
and certain refundable credits.
Estimated Tax Voucher
A statement by an individual of (1) the amount of
income tax he estimates he will incur during the cur-
rent taxable year on income that is not subject to
withholding, (2) the excess amount over that withheld
on income which is subject to withholding, and (3) his
estimated self-employment tax. Advance payment of
tax may be required (on as many as four payment
dates) unless estimated tax due after withholding and
credits is less than $1,000.
Estimated (Useful) Life
The period of time over which a depreciable asset will
be used by a particular taxpayer. The estimated use-
ful life is used to determine the annual tax deduction
for pre-1981 depreciation.
Excess Social Security Tax Withheld
If a taxpayer worked for more than one employer dur-
ing 2012, and more than $4,624.20 was withheld for
social security tax, the excess over the maximum is
included in the Payments section of the return. The
excess amount has the same character as withholding
tax.
Exchange
A transfer of property for other property or services.
Exchanges of like-kind property are often permitted
with no immediate tax consequence.
Excludable Amount of Pension
The portion of pension distributions that are not tax-
able.
Excluded Gain
Generally applies to gains realized on the sale of a
principal residence. A taxpayer may exclude up to
$250,000 ($500,000 MFJ) of gain on the sale if he
owned and occupied the residence for at least two of
the five years prior to the sale.
Exclusion
An amount of income that is not included in gross
income because the Tax Code excludes it.
Exclusion Percentage
Used to compute the excludable amount of a pension
under the general rule. This percentage is determined
by di viding the taxpayers total contribution by the
expected re turn.
Ex-Dividend Date
The date before which a stockholder must purchase
stock to qualify to receive the next dividend payment.
Exemption
An amount ($3,800 for 2012) allowed by law as a re -
duction of income that would otherwise be taxed. See
also Personal and Dependency Exemptions.
Exemption From Withholding
Status claimed on Form W-4 directing the employer
not to withhold federal income taxes from the employ-
ee. An employee who had no tax liability and received
a full refund of any federal income tax withheld in the
preceding tax year, and who expects the same condi-
tions to apply in the current tax year, may claim
exemption from withholding.
Expected Return
The total amount an annuitant expects to receive
under a pension or annuity contract. This is generally
determined by multiplying the annual payment by
the annuitants expected life multiple from govern-
ment actuarial tables.
Expenses
For federal income tax purposes, expenses are divided
into four categories: (1) trade or business expenses, (2)
ex penses in connection with production of income, in
connection with management, conservation, or main-
tenance of property held for production of income, (3)
expenses in connection with the determination, collec-
tion, or refund of any tax, and (4) personal, family, or
living expenses. Expenses in the first three categories
are generally deductible in determining taxable
income. Expenses in the fourth category are not
deduc tible, except in a few cases (me dical expenses,
charitable contributions, etc.) in which they are specif-
ically allowed by law. Expenses are to be distinguished
from capital expenditures, defined elsewhere in this
glossary.
Expenses of Sale
When paid by the seller, these expenses re duce the
sale price of property. Examples are commissions to a
broker or real estate agent, legal fees, and transfer
taxes.
Expensing
A term used to refer to the 179 ex pense deduction,
defined elsewhere in this glossary.
Fair Market Value (FMV)
The amount at which property would change hands
between a willing buyer and a willing seller, neither
being under compulsion to buy or sell and both having
reasonable knowledge of the relevant facts.
G.10 H&R Block Income Tax Course (2013)
Fair Rental Value
The amount the owner of property could reasonably
expect to receive from a stranger for the same type of
lodging; generally, the amount at which a home with
its furnishings could be rented to a similar size fami-
ly in a similar location.
Federal Income Tax Withheld
The amount taken out of income by the payer and
submitted to the IRS as an advance payment of the
taxpayers federal income tax.
FICA (Federal Insurance Contributions Act)
The law that provides for social security and medicare
benefits. This program is financed by payroll taxes
imposed equally on the employer and employee. For
2012, the employer is required to withhold 1.45% from
each employees gross wages for medicare tax and
4.2% of each employees wages up to $106,800 for
social security tax.
Fiduciary
One who acts for an estate or trust to manage the
property of the estate or trust.
Finance Charges
Amounts paid for the privilege of making purchases
on a deferred-payment basis.
First In, First Out (FIFO)
An accounting method for determining the cost of
inventories. Under this method, the first items pur-
chased are treated as being the first items sold.
Ending inventory is valued using the cost of later pur-
chases, or the lower of cost or market.
Fiscal Year
An accounting year ending on the last day of any
month except December.
Flexible Spending Account (FSA)
See Cafeteria Plan.
Foreign Tax Credit or Deduction
A credit or deduction avail able to a U. S. citizen or res-
ident alien, and in limited circumstances to a U. S.
nonresident alien, who incurs or pays in come taxes to
a country other than the United States.
Foster Child
A child, other than the taxpayers biological child,
stepchild, or adopted child, who lived with the taxpay-
er. See also Eligible Foster Child.
Fringe Benefits
Compensation or other benefits received by an
employee that are not in the form of cash. Some fringe
benefits (for example, accident and health plans, and
group-term life insurance) may be excluded from the
employees gross income and, therefore, are not sub-
ject to federal income tax.
Full Retirement Age
The age at which a worker qualifies to receive full
social security benefits; increasing incrementally from
age 65 for those born before 1938 to age 67 for those
born after 1959.
Full-Time Student
An individual who is enrolled in a school for the num-
ber of hours or courses considered by the school to be
full time. School includes elementary and secondary
schools, post-secondary colleges, and technical and
trade schools. It does not include on-the-job training,
correspondence schools, or night school. However, a
student will not be disqualified by night classes that
are part of a full-time course of study.
Fully Taxable Pensions
Pensions for which taxpayers contributed none of the
cost or have recovered their cost in previous years.
Gain
The excess of the amount realized from a sale or
exchange over the adjusted basis of the property sold
or exchanged.
General Depreciation System
The most commonly used MACRS system. Personal
property is depreciated using the declining-balance
method (double or 150%, depending on the recovery
class) switching to straight line when that method
results in the larger deduction. Residential rental
property is de preciated using the straight-line method
over 27.5 years, and nonresidential real property is
depreciated using the straight-line method over 39
years (31.5 years for property placed in service before
May 13, 1993).
General Rule
Used to determine the taxable portion of a pension or
annuity, generally replaced by the simplified method
for periodic payments starting after November 18,
1996.
General Sales Tax
A general sales tax is a sales tax imposed on retail
sales of a broad range of items at a single rate.
General Straight-Line Depreciation System
A MACRS system of depreciation using the straight-
line method over the normal MACRS recovery period
for the asset.
Gift
A transfer of property from one person or entity to
another without consideration or compensation. For
income tax purposes, the words gift and contribu-
tion usually have separate meanings, the latter word
being used in connection with contributions to chari-
table, religious, etc., organizations, whereas the word
gift refers to transfers of money or property to pri-
vate individuals, needy persons, friends, relatives, etc.
Glossary G.11
The recipient of a gift is not required to include it in
his gross income, and the maker of the gift is not enti-
tled to deduct it (except for business gifts to customers
of $25 or less per donee per year).
Gift Tax
A graduated federal tax paid by donors on gifts ex -
ceeding $13,000 (for 2012) per donee.
Golden Parachute
An agreement entered into by a corporation with its
top executives to make substantial payments to the
executives in the event of a change in corporate con-
trol. Such payments are treated as compensation.
Goodwill
The ability of a business to generate income in excess
of a normal rate on assets due to superior managerial
skills, market position, new product technology, etc. In
the purchase of a business, goodwill represents the
difference between the purchase price and the value of
the net assets. Goodwill must be amortized over a 15-
year period and is subject to recapture when the busi-
ness is sold. Amor tization is computed on Form 4562.
Government Bonds Issued at a Discount
Certain U.S. Govern ment bonds are issued at a dis-
count and do not pay interest during the life of the
bond. Instead, the bonds are re deem able at increasing
fixed amounts. Thus, the difference between the pur-
chase price and the amount received upon redemption
represents interest income to the holder. A cash-basis
taxpayer may defer recognition of taxable income
until such bonds are re deemed or until the year of
final maturity, whichever is earlier. Alternatively, the
taxpayer may elect to in clude the annual increase in
the value of the bond in gross in come on an annual
basis.
Gross Income
Total worldwide income received in the form of money,
property, or services that is subject to tax.
Gross Profit
Gross receipts less the cost of goods sold.
Gross Rents
Total income from rents before expenses or the depre-
ciation or cost recovery deduction.
Group Term Life Insurance
Life insurance coverage purchased by an employer for
a group of employees. Such insurance is renewable on
a year-to-year basis and does not accumulate in value;
that is, no cash surrender value is built up. The pre -
miums paid by the employer on such insurance are
usually not taxed to an employee unless coverage
exceeds $50,000.
Guaranteed Return
A specific amount to be paid by an annuity. This may
be a certain payment for a given number of years or a
given amount to be paid regardless of death.
Hardship Withdrawal
A withdrawal from a 401(k), 403(b), or 457 plan that
is permitted when the plan participant has an imme-
diate and heavy financial need and the withdrawal is
necessary to meet that need.
Head of Household
The filing status used by an unmarried taxpayer who
pays more than half of the cost of maintaining a
household for a qualifying child who is a dependent
for more than six months or for his or her mother or
father for the entire year and may claim either on his
or her tax return.
Health Savings Account (HSA)
A trust or custodial account created after 2003 exclu-
sively for the purpose of paying the qualified medical
expenses of a high deductible health plan of the
account holder.
Hobby Loss
A nondeductible loss arising from a personal hob by as
contrasted with a loss arising from an activity en-
gaged in for profit.
Holding Period
The period of time property has been owned for
income tax purposes. The holding period determines if
gain or loss from the sale or exchange of a capital
asset is long or short term.
Home-Office Expenses
Expenses of operating a portion of a residence used for
business or employment-related purposes. Several
restrictions limit the deduction for home-office
expenses.
Hope Credit
A nonrefundable credit of up to $1,800 per qualified
student for tuition and fees paid for the first two years
of post-secondary education. If a Midwestern disaster
area student, see Form 8863. Note: For years 2009
through 2017, the Hope credit is replaced by the
American Opportunity Credit (the Hope credit may
apply to Midwestern disaster students for 2009).
Household Employee
An individual who performs nonbusiness services for
the taxpayer in or around the taxpayers home. Such
services include child and dependent care, house clean-
ing, cooking, and yard work.
Household Expenses
A portion of total support; the value of lodging plus
food consumed in the home, utilities paid, and repairs
made. The total is divided equally among all family
G.12 H&R Block Income Tax Course (2013)
members. Each members share of household expens-
es is part of his total support.
Husband and Wife
A status that, among other things, entitles a couple to
file a joint federal income tax return. For the purpose
of joint returns, common-law marriages are recog-
nized only if the state in which the two persons reside
recognizes such marriages or if the state in which the
marriage began recognizes common-law marriages.
The status as husband and wife on the last day of the
tax year governs the right to file a joint return. See
also Marriage.
Hybrid Method of Accounting
A combination of accounting methods, usually of the
cash and accrual methods.
Identifying Numbers
All taxpayers and dependents must have identifying
numbers. Indi viduals generally use their social se -
curity numbers (SSN). Certain resident and nonresi-
dent aliens use individual taxpayer iden tification
numbers (ITIN). Certain children in the process of
being adopted may receive adoption taxpayer identi-
fication numbers (ATIN). Businesses, estates, trusts,
partnerships, and payers of dividends and interest,
use employer identification numbers (EIN).
Imputed Interest
In the case of certain long-term sales of property, the
IRS has the authority to convert some of the gain from
the sale into interest income if the contract does not
provide for a minimum rate of interest to be paid by
the purchaser. Such converted interest is called
imputed interest.
Income
The word income, in its broad sense, is the gain de -
rived from capital, labor, or a combination of the two.
It is distinguishable from the capital itself. Ordinarily,
for income tax purposes, the word income is not used
alone. Rather it is used within such descriptive terms
as gross income, taxable income, and adjusted gross
income, all of which are defined elsewhere in this glos-
sary.
Independent Contractor
A taxpayer who contracts to do work according to his
own methods and who is not subject to control except
as to the results of such work. An employee, by con-
trast, is subject to the control of the employer as to the
me thods to be used to obtain the desired results.
Individual Retirement Arrangement (IRA)
A personal savings plan that allows a taxpayer to
accumulate money tax deferred until withdrawal,
usually upon retirement. There are two types of IRAs:
traditional IRAs and Roth IRAs, both of which are
defined elsewhere in this glossary.
Inheritance
As distinguished from a bequest, property acquired
through laws of descent and distribution from a per-
son who dies intestate (without leaving a will). Prop -
erty so acquired usually takes as its basis the fair
market value at the date of the decedents death. An
inheritance of property is not a taxable event, but the
income produced by an inheritance is taxable.
Installment Method
A method of accounting enabling a taxpayer to spread
the recognition of gain on the sale of property over the
payment period. Under this procedure, the seller com-
putes the gross profit percent from the sale (that is,
the gain divided by the contract price) and applies it
to each payment received to arrive at the amount of
the gain to be recognized.
Insurance Dividends
Amounts paid to policy holders are not dividends on
capital stock, but are a rebate of a portion of the pre-
miums paid for the insurance. Such dividends reduce
the cost of the insurance and are not taxable unless in
excess of the total premiums paid. Interest paid when
the dividends are left with the insurance company is
reported to the taxpayer as in terest and is taxable.
Intangible Personal Property
Property, other than real property, with no intrinsic
value; its value lies in the rights conveyed. Exam ples
include cash, insurance, stock, goodwill, and patents.
Interest Received
An amount received for the use of money that is to be
repaid in full at a specified time or on demand.
Interlocutory Decree
See Divorce Decree (Interlocutory).
Internal Revenue Service (IRS)
The division of the U.S. Treasury Department responsi-
ble for collecting taxes.
Inventory
A list of articles of property. For income tax purposes,
inventory refers only to a list of articles comprising
stock in tradearticles held for sale to customers in
the regular course of a trade or business. The cost of
goods sold during the year is determined by adding to
the inventory at the beginning of the year the pur-
chases during the year, and subtracting from this sum
the inventory at the close of the year.
Investment Income
This term generally includes interest, dividends, capi-
tal gains, and other types of distributions. The subject
can be fully explored in IRS Publication 550,
Investment Income and Expenses (Including Capital
Gains and Losses).
Glossary G.13
Investment Interest
Interest paid on loans acquired to purchase or hold
investment property. Investment interest is de -
ductible as an itemized deduction to the extent of net
investment income.
Investment Property
Property owned primarily for its potential increased
value. Examples include land, stock, works of art, and
collectibles.
Involuntary Conversion
The receipt of money or other property as reimburse-
ment for the loss or destruction of property through
theft, casualty, or condemnation. Any gain realized on
an involuntary conversion can, at the taxpayers elec-
tion, be con sidered nonrecognizable for federal income
tax purposes if the owner reinvests the proceeds with-
in a prescribed period of time in similar property.
Itemized Deductions
Certain personal expenditures allowed by the Tax
Code as deductions from adjusted gross income. Ex -
amples are certain medical expenses, qualified inter-
est on home mortgages, and charitable contributions.
Itemized deductions are reported on Form 1040,
Schedule A. A taxpayer who itemizes deductions may
not claim the standard deduction.
Jointly Owned Property
Property held in the name of more than one person.
Joint Return
A return combining the income, exemptions, cred its,
and deductions of a husband and wife.
Joint Tenancy (with Right of Survivorship)
A form of joint ownership. Each tenant has an undi-
vided interest in the entire property. On death of one
of the owners, the survivor becomes the owner of the
whole. A joint tenancy may involve more than two per-
sons.
Joint Venture
An enterprise participated in by associates acting
together, with a community of interests, each associ-
ate having the right to participate in its management.
For income tax purposes, a joint venture is treated as
a partnership, not taxable in its own capacity, but
regarded as a taxpayer for the purpose of computing
its taxable income, which is distributable among the
associates in the proportions agreed upon. Such dis-
tributive shares are reported by the associates on
their individual income tax returns.
Land Value
The value of the land in a sale where the total sale
price includes land as well as any improvements to
the land.
Last In, First Out (LIFO)
An accounting method for valuing in ventories for tax
purposes. Under this method, the last items pur-
chased are treated as being the first items sold.
Ending inventory is valued using the cost of the items
with the earlier purchase dates.
Legally Blind
Able to see no better than 20/200 in the better eye
with corrective lenses, or having a field of vision not
more than 20 degrees.
Legally Separated
Separated under a decree of separate maintenance
that requires the spouses to live apart.
Lessee
One who rents property from another. In the case of
real estate, the lessee is also known as the tenant.
Lessor
One who rents property to another. In the case of real
estate, the lessor is also known as the landlord.
Lifetime Learning Credit
A nonrefundable credit equal to 20% of the first
$10,000 of qualified higher education tuition and fees
paid during the year on behalf of the taxpayer, his
spouse, or his dependents.
Like-Kind Exchange
An exchange of property held for productive use in a
trade or business or for investment (except in ventory
and stocks and bonds) for property of the same type.
Unless different property is received (called boot), the
exchange is nontaxable in the current year. Any gain
or loss is not recognized until the property received in
the exchange is sold or disposed of. Like-kind
exchanges are reported on Form 8824.
Lineal Ancestor
A direct, in-line family predecessor of the taxpayer;
e.g., parent, grandparent, great-grandparent, etc.
Lineal Descendant
A direct, in-line offspring of the taxpayer; e.g., child,
grandchild, great-grandchild, etc.
Liquidation
(1) The process of converting securities or other prop-
erty into cash. (2) The dissolution of a corporation
with cash (remaining after sale of its assets and pay-
ment of all in debtedness) being distributed to the
shareholders.
Liquidation Distributions
A return of capital received be cause of a partial or
complete liquidation (going out of business) of a corpo-
ration. The basis of the stock on which liquidation dis-
tributions are paid is reduced by the amount of the
distributions. Any amount received in excess of basis
in the stock is taxable. In a liquidation that results in
G.14 H&R Block Income Tax Course (2013)
cancellation of the stock, a loss can be claimed the
year the final distribution is received if total distribu-
tions are less than the taxpayers basis. Report liqui-
dation distributions on Schedule D, Form 1040.
Listed Property
Listed property includes passenger autos and other
property used for transportation, property generally
used for purposes of entertainment, recreation, or
amusement, computers not used exclusively at a reg-
ular business establishment, and other property to be
specified by the IRS. Restrictions apply to the depreci-
ation of listed property.
Lodging
A portion of total support. Lodging includes the fair
rental value of a room, apartment, or house in which
the dependent lives, a reasonable allowance for the
use of furniture and appliances, and all utilities.
Long-Term Capital Gains and Losses
Gains and losses on the sale or exchange of capital
assets that have been held for more than 12 months. A
net long-term capital gain is the excess of long-term
gains over long-term losses, or vice versa for a net long-
term capital loss.
Lower of Cost or Market Method of Inventory
Valuation
Inventory valuation considering the actual cost or the
replacement cost of merchandise on the inventory
date. The lower value is used, creating a reduced gross
profit for the period in which the decline occurred and
an approximately normal gross profit is realized dur-
ing the period in which the item is sold.
Lump-Sum Distribution
Payment of the entire amount due at one time rather
than in installments. Such distributions must come
from qualified employer plans. The recipient of a
lump-sum distribution may be eligible for special tax
treatment of the distribution.
Main Home
See Principal Place of Abode.
Margin
A percentage of the full price of a security that must
be paid as a down payment by an investor buying on
credit. The required margin fluctuates, subject to fed-
eral regulations.
Marriage
A legal union between one man and one woman as
husband and wife.
Married Filing Jointly (MFJ)
The filing status used by a man and a woman who are
married at the end of the tax year and not legally sep-
arated under a final decree of divorce or separate
maintenance and who record total income, exemp-
tions, and deductions of both spouses on one tax
return.
Married Filing Separately (MFS)
The filing status used by a married couple who choos-
es to record their respective incomes, ex emptions, and
deductions on separate individual tax returns.
Material Participation Income
Active income, as distinguished from passive income,
from employment as well as business and other for-
profit activities in which the taxpayer takes a signifi-
cant and active role.
Medical Expenses
Qualified medical expenses of an individual, spouse,
and dependents are allowed as an itemized deduction
to the extent that such amounts (less reimburse-
ments) ex ceed 7.5% of adjusted gross income.
Medicare Part A
The medicare tax taken out of an employees wages, or
the same tax paid by a self-employed person on net
self-employment income. The medicare A tax rate is
1.45% of gross wages (2.9% for self-employed individ-
uals).
Medicare Part B
The medicare insurance premium withheld from the
benefits of social security recipients. The basic premi-
um for 2012 is $99.90 per month ($1,198.90 for the
entire year). The premium will be higher if the annu-
al income is more than $85,000 ($170,000 if MFJ).
Medicare Part D
The medicare insurance premium withheld from the
benefits of social security recipients who choose to pay
for prescriptions through medicare.
Medicare Tax Withheld
See Medicare Part A.
Mileage Rate (Optional Method)
The method of deducting automobile expenses based
on business miles driven. The standard mileage rate
for 2012 is 55.5 per mile.
Modified Accelerated Cost Recovery System
(MACRS)
The method of depreciation used for most depreciable
assets placed in service after 1986. Under MACRS,
costs of qualified property are written off over prede-
termined periods.
Modified AGI (MAGI)
Modified adjusted gross income. For purposes of com-
puting a specific deduction or credit, MAGI begins
with the taxpayers regular adjusted gross income
which is then modified to account for certain types of
losses, exclusions, and deductions. For example, for
many tax purposes, MAGI is regular AGI plus any
Glossary G.15
excluded foreign, U.S. possession, and Puerto Rican
income.
Mortgage Credit Certificate
Qualified taxpayers who receive a mortgage credit
certificate from a state or local government to buy,
rehabilitate, or improve their main homes may claim
a credit for a percentage of their home mortgage inter-
est. The itemized deduction for home mortgage inter-
est must be reduced by the amount of the credit. The
credit is not refundable, but any portion that is
unused be cause it exceeds tax liability may be carried
over to the following three years where it can be
added to any credit for the current year. The credit is
computed on Form 8396. Mortgage credit certificates
may be subject to a recapture rule if the home is sold
within nine years.
Moving Expenses
An adjustment to income permitted to em ployees and
self-employed individuals who move for work-related
reasons, providing certain requirements are met.
Form 3903 is used to compute deductible moving ex-
penses.
Multiple Support Agreement
If two or more persons who would otherwise be enti-
tled to an exemption for a qualifying relative, togeth-
er furnish more than half the dependents support
(but no one individual provides more than half), any
one of them who furnishes more than 10% of the sup-
port is entitled to the exemption if all the others who
furnished more than 10% of the support file written
declarations that they will not claim an exemption for
the individual for that taxable year. Form 2120 is used
for this purpose.
Mutual Fund
(1) An open-ended investment company that in vests
money of its shareholders in a usually diversified
group of securities of other corporations. (2) A compa-
ny that is in the business of buying and selling stocks
and sharing its income with those investing in it
(sometimes called a regulated investment company).
Necessary (Expenses)
An expense that is appropriate and helpful in further-
ing the taxpayers business or income-producing activ-
ity. See also Or dinary Expenses.
Net Operating Loss (NOL)
A net loss for the year attributable to business or
casualty losses. In order to mitigate the effect of the
annual ac counting period concept, the law allows tax-
payers to use an excess loss of one year as a deduction
for certain past or future years.
Nonbusiness Bad Debts
A bad debt loss not incurred in connection with a cred-
itors trade or business. A nonbusiness bad debt is
deduc tible as a short-term capital loss and is allowed
only in the year the debt becomes entirely worthless.
Noncompliance
Failure or refusal to comply with the Tax Code.
Noncustodial Parent
The parent who is not the custodial parent of the
child.
Nonparticipating Spouse
The spouse of an active participant in an employer-
maintained retirement plan who is not also an active
participant in such a plan.
Nonrecourse Debt
An obligation for which the endorser is not personally
liable.
Nonrecovery Property
Property which does not qualify for a cost recovery
deduction under ACRS or MACRS or property the
taxpayer elects to exclude from ACRS or MACRS by
choosing a depreciation method not based on a num-
ber of years.
Nonrefundable Credit
A credit which cannot exceed the taxpayers tax liabil-
ity.
Nonresident Alien
A person who is not a U.S. citizen and does not live in
the United States, or lives in the United States under
a nonresident visa, or does not meet the substantial
presence test. See IRS Publication 519.
Nontaxable Distributions
A general term applied to stock dividend distributions
that are not taxable. These distributions generally
take the form of return of capital, stock dividends,
stock splits, and/or tax-free distributions.
Nontaxable Exchange
An exchange on which no gain or loss is recognized in
the current year.
Nontaxable Income
Income that is by law exempt from tax.
Open Year
A taxable year for which the statute of limitations has
not yet expired.
Option
An agreement to buy or sell property on or before a
specified date at an established price. The sale or
exchange of an option to buy or sell property results in
capital gain or loss if the property is a capital asset.
Ordinary Dividends
Ordinary dividends are the most common type of dis-
tribution from a corporation. They are paid out of the
earnings and profits of the corporation. Ordinary div-
G.16 H&R Block Income Tax Course (2013)
idends are taxable as ordinary income unless they are
qualified dividends.
Ordinary (Expenses)
Common and accepted in the general industry or type
of activity in which the taxpayer is engaged. It is one
of the tests for the deductibility of expenses incurred
or paid in connection with a trade or business; for the
production of income; for the management, conserva-
tion, or maintenance of property held for the produc-
tion of in come; or in connection with the de -
termination, collection, or refund of any tax.
Ordinary Income (Loss)
Income (loss) that is fully includable in (deductible
from) gross income and that does not have the charac-
teristics of capital gain or loss.
Over the Counter
The market for securities issued by companies usual-
ly not listed on any stock exchange. Over the counter
(OTC) trading is the principal market for U.S. govern-
ment and municipal bonds.
Partly Taxable Pensions
Pensions funded through employer plans to which
both pre-tax money and after-tax money has been con-
tributed.
Partnership
A form of business in which two or more persons join
their money and skills in conducting the business as
co-owners. Partnerships are treated as a conduit and
are not subject to taxation. Various items of partner-
ship income, expenses, gains, and losses flow through
to the individual partners and are reported on their
personal income tax returns.
Passive Income and Losses
For purposes of the passive loss rules, income and
losses must be divided into three categories: active,
passive, and portfolio. Passive income and losses are
those from business activities in which the taxpayer
does not materially participate, and all rental activi-
ties (except those of qualified real estate profession-
als). See also Active Income and Losses and Portfolio
Income and Losses.
Patent
The exclusive right of an inventor to make, use, or sell
his invention for a period of years. A patent is an
intangible asset that may be depreciated over its
remaining life. The sale of a patent usually results in
long-term capital gain treatment.
Pension
Payments made periodically of (generally) a definite
amount for a specified period (usually life) from an
em ployer-maintained plan to workers who have met
the stated requirements. Its primary purpose is to
provide retirement income.
Pension/Annuity Starting Date
The first day of the first period for which an amount
is due as a pension/annuity payment under the con-
tract.
Percentage Depletion
There are two methods of computing depletion of nat-
ural resources. One is cost depletion, defined else-
where in this glossary. The other method is percentage
de pletion, which is a specified percentage of the gross
income from the property. In each year, the method
which results in the greater deduction is used.
Percentage depletion is allowed for nearly all natural
re sources, except timber.
Permanent and Total Disability
A disability that prevents an individual from engag-
ing in any substantial gainful activity because of a
medically determined physical or mental impairment
that is expected to result in death, or that has lasted
or is expected to last for a continuous period of not less
than 12 months.
Personal and Dependency Exemptions
The Tax Code provides a $3,800 exemption (for 2012)
for each individual taxpayer and an additional $3,800
exemption for his spouse if a joint return is filed. An
individual may also claim a $3,800 exemption for each
dependent providing certain tests are met. Tax payers
who may be claimed as a dependent on another tax-
payers return may not claim their own personal
exemptions.
Personal Expenses
Expenses of an individual for personal reasons are not
deductible unless stated to be deductible under Tax
Code.
Personal Property
Generally, all property other than real es tate.
Personal Property Tax
An annual tax imposed on certain personal property,
such as cars or boats, and based on the value of the
property.
Personal Residence
The property in which the taxpayer lives and to which
he returns after temporary absences. A taxpayer may
have one or more residences such as a main home and
a vacation house. A residence is not limited to a house.
Con do miniums, cooperative apartments, townhouses,
mobile homes, and houseboats can all qualify as resi-
dences.
Personal-Use Property
Property owned for personal well-being and enjoy-
ment. It includes a taxpayers home, vehicles, furni-
ture, clothing, and other property.
Glossary G.17
Physical Custody
The taxpayer with whom a child lives is considered to
have physical custody, regardless of who has nominal
legal custody.
Points
A loan-origination fee (one-time charge paid for the
use of money) that a buyer generally may deduct as
interest; fully in the year paid if for the purchase or
improvement of a principal residence or, if not, then
over the term of the loan.
Portfolio Income and Losses
For purposes of the passive loss rules, in come and
losses must be divided into three categories: active,
passive, and portfolio. Portfolio income and losses are
those from such sources as dividends, interest, capital
gains and losses, and royalties. See also Active Income
and Losses and Passive Income and Losses.
Prepaid Expenses
Cash-basis as well as accrual-basis taxpayers usually
are required to capitalize prepayments for rent, insur-
ance, etc. that cover more than one year. Deductions
are taken for the period during which the benefits are
received.
Prepaid Interest
Interest paid in advance is deductible as an interest
expense only as it accrues. The one exception to this
rule involves the interest element when a cash-basis
taxpayer pays points to ob tain financing for the pur-
chase or improvement of a principal residence if the
payment of points is an es tablished business practice
in the area in which the indebtedness is incurred and
the amount involved is not excessive. Points paid to
refinance a principal residence, however, must be
deducted over the life of the loan.
Principal Payment
That portion of a loan payment applied to the pur-
chase price (contract price), as opposed to an interest
payment.
Principal Place of Abode (Principal Residence)
The place that an individual considers to be his per-
manent home. A persons abode does not change when
he is temporarily absent due to illness, school, mili-
tary service, etc., as long as his living area is main-
tained and he can reasonably be expected to return
home after the temporary absence.
Principal Place of Business
The main place where work is performed or business
is transacted, or the only fixed location at which a tax-
payer performs administrative and managerial tasks
necessary for business.
Principal Residence
See Principal Place of Abode.
Privilege
Protection from being required to disclose confidential
communications between two parties, such as attor-
ney and client.
Prizes and Awards
The fair market value of a prize or award generally is
includable in gross income. An exception applies when
a qualified recipient of an award for charitable and
the like achievements designates that the prize is to
be transferred by the payer to a governmental unit or
to certain charitable, educational, or religious organi-
zations. Another exception is made for certain employ-
ee achieve ment awards such as the traditional gold
watch presented upon retirement.
Proprietor
The sole owner of a trade or business.
Proprietorship
A business controlled and operated by one person.
Puts and Calls
These are option contracts. A put gives its holder the
option to sell a particular stock at a fixed price within
a specified period of time. A call gives its holder the
right to buy stock under the same conditions. Put and
call contracts can last up to several months and usu-
ally specify a price close to the market value of the
stock at the time they are drawn. Puts are purchased
by investors who think the price of the stock will fall;
calls are purchased by investors who think the price
will rise.
Qualified Charitable Organization
An entity, usually an as sociation or nonprofit corpora-
tion, designed to provide some form of public charity
or service and specifically approved by the U.S.
Treasury as a recipient of deductible charitable con-
tributions.
Qualified Dividends
Dividends received on shares of common stock held by
the taxpayer for more than 60 days of the 121-day
period beginning 60 days before the ex-dividend date
(more than 90 days of the 181-day period beginning 90
days before the ex-dividend date for preferred stock).
These dividends qualify for long-term capital gain
treatment.
Qualified Pension or Profit-Sharing Plan
An employer-sponsored plan that meets the require-
ments of IRS Code 401. If these requirements are
met, none of the employers contributions to the plan
are taxed to the employee until distributed to him.
The employer is allowed a deduction in the year the
contributions are made.
Qualified Tuition Plan
A personal savings plan, defined under 529 of the
Internal Revenue Code, which allows a taxpayer to
G.18 H&R Block Income Tax Course (2013)
accumulate money tax deferred. Contributions are
generally deductible (within limits) for state income
tax purposes. Qualified distributions are tax free for
federal and state income tax purposes when with-
drawn.
Qualifying Child (QC)
A child who meets the relationship, age, residency,
support, joint return, and the special test tests with
regard to a taxpayer to determine the taxpayers eligi-
bility to claim the dependency exemption, child tax
credit, earned income credit, or child and dependent
care credit with regard to the child, or to use the head
of household filing status. The tests are discussed in
detail in Chapter 4.
Qualifying Relative (QR)
A person (1) who bears a certain relationship to the
taxpayer, (2), for whom the taxpayer provides more
than one-half support for the year (3), whose gross
income for the year is less than the exemption
amount, and (4), who is not claimed as a qualifying
child of any taxpayer.
Qualifying Widow(er) (QW)
The filing status available to a qualified taxpayer for
two tax years following the year of the spouses death.
To qualify, the surviving spouse must have been enti-
tled to file a joint return for the year of death, remain
unmarried at the end of the current tax year, and pay
over half the cost of maintaining his or her home
which was the principal residence the entire tax year
of his or her dependent child.
Railroad Retirement Tax Act
See RRTA.
Realized Gain or Loss
The difference between the amount received upon the
sale or other disposition of property and the adjusted
basis of the property.
Real Property
Also known as real estate, includes land, buildings,
and their structural components.
Recapture
The inclusion of a previously deducted or excluded
amount in gross income or tax liability. Recapture
may be applicable to ac celerated depreciation, cost
recovery, amortization, and various credits.
Recapture of Depreciation or Cost Recovery
Each year that a de preciable business asset is owned,
depreciation is claimed that theoretically corresponds
with the using up of the property through normal
wear, obsolescence, etc. Thus, if proper depreciation
has been claimed, the property should be worth its
adjusted basis. If the property is sold for more than its
adjusted basis, 1245 of the Tax Code requires that
the gain on personal property and certain nonresiden-
tial real property (to the extent of depreciation
claimed) be recaptured; that is, included as ordinary
income on the tax return. The purpose of this recap-
ture is to prevent capital gain treatment of gain
resulting from claiming depreciation. The recapture of
depreciation or cost recovery rules do not apply when
the property is disposed of at a loss.
Recharacterization
Returning a converted Roth IRA back to its original
classification as a traditional IRA within the specified
time period allowed.
Recognized Gain or Loss
The portion of realized gain or loss that is subject to
income taxation.
Recovery
The amount of a deduction or credit taken in a previ-
ous year which is later returned to the taxpayer. The
recovered amount must usually be included in income
in the year it is re ceived, to the extent of the previous
tax benefit.
Recovery of Cost
The amount that was paid for income receivedusu-
ally a factor only in income from sales of items pur-
chased for resale, income from sales of property, and
income from pensions or annuities. The portion of
income that represents recovery of cost is not taxable.
Recovery Period
A period of years during which the cost of business
assets is written off under ACRS or MACRS.
Recovery Property
Tangible depreciable property placed in service after
1980 that is not excluded from ACRS or MACRS.
Generally, this is new or used property acquired for
use in a trade or business or property held for the pro-
duction of income.
Refundable Credit
A credit for which the IRS will send the taxpayer a
refund for any amount in excess of the taxpayers tax
liability.
Regular MACRS Method
The MACRS deduction computed using the double
declining-balance method with a switch to straight
line for most personal property, and the straight-line
method for most real property.
Regular Method
A deduction for business use of the taxpayers vehicle
based on actual cost of gas, oil, repairs, tires, washing,
etc., plus a deduction for depreciation.
Regulated Investment Company (Mutual Fund)
A company or trust that uses its capital to invest in
other companies. The two principal types are closed-
end and open-end mutual funds. Shares in closed-end
Glossary G.19
mutual funds, some of which are listed on stock ex -
changes, are readily transferable on the open market
and are bought and sold like other shares. Open-end
funds sell their own new shares to investors, stand
ready to buy back their old shares, and are not listed.
Regulations
The IRS Commissioner publishes his interpretation of
the Tax Code in the form of regulations. They do not
have the force and effect of law except in those cases
in which the law on a particular subject calls for rules
on that subject to be ex pounded through regulations.
Reinvested Dividends
Earnings of investment companies (mutual funds)
that the shareholder has accepted as additional
shares of the companys stock rather than as cash.
They are taxable in the year constructively received.
Rental Income
Income received by the taxpayer for allowing another
persons use of the taxpayers property. Rental income
includes advance rental payments, late payments, and
current payments. Pay ments received for lease cancel-
lation and forfeited security deposits are rental in-
come the year received or forfeited. Rental income is
considered passive income for purposes of the passive
loss rules, except for qualified real estate profession-
als.
Repairs
Current expenditures to restore business-use proper-
ty to an original condition or maintain the property
through minor alterations rather than to extend its
useful life. The cost of re pairs normally is deductible
annually. Substantial repairs that increase the value
or extend the life of the property are treated as capi-
tal improvements and must have their cost re covered
over a number of years.
Replacement Period
The time during which a taxpayer must purchase
appropriate replacement property in order to post-
pone tax on the gain from the property disposed of.
Repossession
Taking possession of property that was earlier sold on
an installment contract because the buyer defaults on
payment of the debt.
Resident Alien
A citizen of another country who lives in the United
States and/or has resident status by law or visa, or
passes the substantial presence test. See IRS Publica-
tion 519.
Returns of Capital (Nontaxable Distributions)
A return of a shareholders investment generally
made because an excess amount of capital has been
accumulated. Returns of capital may be received in
cash or reinvested to acquire additional shares at the
shareholders request. Amounts received that are not
in excess of the basis of the stock on which paid are
not taxable. The basis of the stock on which returns of
capital are paid must be reduced. Amounts received in
excess of the basis of the stock on which returns of
capital are paid are reported on Sched ule D, in Part I
if stock has been owned short term, or in Part II if
stock has been owned long term.
Right
The opportunity a corporation gives a shareholder to
buy additional shares at a special price for a limited
time. Share holders who do not use their rights can sell
them to other in vestors.
Rollover
A qualified transfer of funds from one tax-favored
account to another, usually of the same type. A
rollover must take place within 60 days of receiving
the funds.
Roth IRA
A type of individual retirement arrangement in which
contributions are not tax deductible, earnings grow
tax deferred, and qualified withdrawals are tax free.
Royalty
(1) A payment received for the right to exploit a tax-
payers ownership of natural resources or a taxpayers
literary, musical, or artistic creation. (2) An interest in
the oil and gas in place that entitles the holder to a
specified fraction, in kind or in value, of the total pro-
duction from the property, free of any expense of
development and operation.
Royalty Interest
An interest in the oil and gas in place that entitles the
holder to a specified fraction, in kind or in value, of the
total production from the property, free of any expense
of development and operation.
RRTA (Railroad Retirement Tax Act)
The law that provides for railroad retirement benefits.
Safe Harbor
Tax regulations that allow a (usually) simpler method
of determining a tax consequence than is available fol-
lowing the precise language of the Code.
Salvage Value
The estimated value that will be realized upon the
sale or other disposition of an asset at the end of its
useful life. Salvage value must be taken into account
when determining the depreciable amount under pre-
1981 depreciation, but not under ACRS or MACRS.
Savers Credit
A nonrefundable credit based on up to $2,000 in con-
tributions to qualified retirement plans and tradition-
al and Roth IRAs. The credit is allowed in addition to
G.20 H&R Block Income Tax Course (2013)
any deduction available for the contributions. The
credit is completed on Form 8880.
Schedules
Official IRS forms used to report various types of
income, deductions, and/or credits.
Scholarships and Fellowships
Financial aid grants awarded to students for the pur-
pose of attending a college or performing research.
S Corporation
A qualified small business corporation that has elect-
ed special tax treatment under subchapter S of the
Internal Revenue Code. Unlike most corporations,
which are taxable entities themselves, S corporations
pass income, losses, and deductions through to share-
holders to report on their individual returns.
Section (followed by a number)
The section of the Tax Code in which particular laws
are given.
Section 125 Plan
See Cafeteria Plan.
Section 179 Expense Deduction
An election to treat the cost of certain qualified prop-
erty as a currently deductible expense rather than as
a capital expenditure. Generally a maximum total
deduction of $500,000 may be claimed for qualified
assets placed in service in 2012. This is also referred
to as expensing.
Section 529 Plan
See Qualified Tuition Plan.
Section 1231 Gains and Losses
If the combined gains and losses from the taxable dis-
positions of 1231 assets is a gain, such gains are
treated as long-term capital gains. In arriving at
1231 gains, however, the depreciation recapture pro-
visions (for example, 1245 and 1250) are first ap plied
to produce ordinary income. If the net result of the
combination is a loss, such gains and losses for 1231
assets are treated as ordinary.
Section 1245
Section 1245 assets are depreciable business use per-
sonal property and certain nonresidential real proper-
ty. If the sale of these assets results in a gain, 1245 of
the Code requires the gain to be treated as ordinary
income to the extent of depreciation allowed or allow-
able. That is, the depreciation must be recaptured.
Any gain in excess of the amount re quired to be recap-
tured is 1231 gain, potentially taxable as long-term
capital gain.
Section 1250
The section that requires that gain on disposition of
real property be treated as ordinary income to the
extent of the depreciation claimed in excess of straight
line. Depreciation equivalent to the straight-line por-
tion is called unrecaptured 1250 gain. Any remaining
gain is 1231 gain, which is treated as capital gain.
Self-Employed Individuals
Taxpayers who work for themselves. They decide
when, how, and where to work, obtain their own jobs
or sales, pay their own expenses, and receive social
security and medi care coverage through payment of
self-em ployment tax.
Self-Employment Income
Self-employed individuals are taxed on their net
income from self-employment and are entitled to
social security and medicare benefits through the pay-
ment of self-employment tax.
Self-Employment Tax
For 2012, self-employed persons are subject to social
security tax of 10.4% on net earnings of up to
$106,800 and medicare tax of 2.9% on all net earn-
ings. If a self-employed individual receives wages from
an em ployer that are subject to social security tax, the
amount of self-employment income subject to social
security tax may be re duced. Self-employment tax is
computed on Schedule SE.
Separate Maintenance Payments
Amounts paid to one spouse by the other spouse
under a court order or agreement while they live
apart.
Service Business
A business in which income is produced chiefly by per-
sonal services rendered.
Shareholder
An individual or entity that owns shares of capital
stock.
Short Sale
A sale in which the seller borrows the stock certifi-
cates or other property delivered to the buyer. At a
later date, the seller either purchases similar stock or
property necessary to cover the sale, and delivers it
to the lender or delivers to the lender stock or proper-
ty that he already held but did not wish to transfer at
an earlier date. For income tax purposes, there is no
gain or loss on the transaction until the short sale is
covered by purchase and transfer. Special rules apply
in determining whether the gain or loss on a short
sale is a long-term or short-term capital gain or loss.
Short-Term Gain
Gain on the sale or exchange of a capital asset held 12
months or less.
SIMPLE Retirement Plan
Small employers may establish a savings incentive
match plan for employees retirement plan. A SIMPLE
plan can be either an IRA for each employee or a
Glossary G.21
deferred compensation arrangement, such as a
401(k) plan.
Simplified Employee Pension (SEP)
An arrangement under which an employer makes
contributions to an employees in dividual retirement
account (IRA), or a self-employed person contributes
to his own plan.
Simplified Method
The method of computing the taxable and nontaxable
portions of a qualified employer plan by which the cost
is recovered over a specified number of periodic pay-
ments. The number of payments is determined by
finding a factor on a simple table. This method
replaced the general rule, which was considerably
more complex, for most pensions.
Single
The filing status used by an unmarried taxpayer who
does not qualify for any other filing status.
Social Security Tax Withheld
The employees share of social security tax that was
taken out of the employees pay and submitted along
with the employers share to the IRS by the employer.
The employee pays 4.2% and the employer pays 6.2%
of the first $110,100 of the employees gross wages (for
2012).
Social Security Tips
The amount of tips reported to an em ployer by an
employee that is subject to this tax. Tips are also sub-
ject to medicare tax.
Social Security Wages
Total wages paid to an employee that are subject to
this tax. This amount does not include tips. Wages are
also subject to medicare tax.
Special Averaging
A special method available to determine the tax on a
qualified lump-sum distribution for any taxpayer who
was born before 1936 and meets the other require-
ments. The tax computation is done on Form 4972.
Special-Needs Child
For the adoption credit, a child determined by the
state to be difficult to adopt due to factors such as
racial or ethnic background, age, a condition that
requires special care, or whether the child has sib-
lings. A special-needs child must be a U.S. citizen.
Spousal IRA
An IRA set up by a taxpayer whose spouse has little
or no compensation, for the benefit of that spouse. The
designation spousal is significant for tax purposes
only. There is no connection between a spousal IRA
and the other spouses IRA, and no IRA may be joint-
ly owned.
Standard Deduction
A base amount of income not subject to tax. The regu-
lar standard deduction for 2012 is $5950 for single
taxpayers and married persons filing separately,
$8,700 for heads of household, and $11,900 for mar-
ried couples filing a joint return and qualifying
widow(er)s. Taxpayers who are blind and/or 65 or
older have higher standard deductions. Tax payers
who may be claimed as dependents on other taxpay-
ers returns may have reduced standard deductions.
Standard Mileage Rate
An annual deduction based on a set number of cents
per mile for qualified business use of the taxpayers
vehicle. The standard mileage rate for 2012 is 55.5
per mile.
Statements
Explanations of various types of income, deductions,
and/or credits reported on a schedule or directly on
Form 1040. Statements may or may not be official IRS
forms.
State or Local Income Tax Withheld
The amounts taken out of income by the payer and
submitted to the state or local taxing authority as an
advance payment of the taxpayers state or local
income tax.
Statutory Employee
A worker who is treated as an employee for social
security and medicare tax purposes and as self-em -
ployed for income tax purposes. The Statutory
employee box on such a workers Form W-2 should be
marked.
Stock Dividend
Additional shares of stock distributed to shareholders
at no cost. The number of shares received are a per-
centage of the shares owned. The basis of the original
shares is generally apportioned equally to the total
shares owned after the distribution.
Stock in Trade
Property held primarily for sale to customers in the
ordinary course of business; inventory.
Stock Split
Additional shares of stock distributed to shareholders
at no cost. The number of shares received are a ratio
of the shares owned. The basis of the original shares
is generally apportioned equally to the total shares
owned after the split.
Straddle
A combination of a call and a put (both of which are
defined elsewhere in this glossary) written at the
same time on the same number of shares of a securi-
ty at the same price during the same period of time.
The call and put parts of a straddle are generally
bought by different holders.
G.22 H&R Block Income Tax Course (2013)
Straight-Line Depreciation Method
The most commonly used method of depreciation prior
to 1981. Basis less salvage value or land value divid-
ed by useful life equals depreciation deduction.
Student Loan Interest Deduction
An adjustment to income (limited to $2,500) for inter-
est paid during the year on qualified higher-education
loans.
SUB Pay
Supplemental unemployment benefits. These benefits
are generally received from a company-financed fund
and are fully taxable as wages.
Support
The total amount provided on behalf of an individual.
Support includes food, lodging, and other necessities
as well as recreation and other nonessential expendi-
tures. Support is not limited to necessities and can be
as lavish as the taxpayer can afford.
Tangible Personal Property
Property, other than real property, that has a physical
existence and an intrinsic value. Ex amples are live-
stock, machinery, equipment, and vehicles.
Tax Bracket
The rate at which income at a particular level is
taxed.
Tax Credit for the Elderly or the Disabled
Eligible taxpayers 65 years old and older, and those
under 65 retired on a permanent and total disability,
may claim the credit. The amount of the credit, if any,
is computed on Schedule R, for Forms 1040 and
1040A.
Tax-Exempt Income
Income that by law is not subject to in come tax.
Tax-Free Exchanges
Transfers of property specifically ex empt from federal
income tax consequences in the current year.
Examples are a transfer of property to a controlled
corporation and a like-kind ex change.
Tax Home
The business location, post, or station of the taxpayer.
If an employee is temporarily reassigned to a new post
for a period of one year or less, the taxpayers tax
home is his personal residence and the travel expens-
es are deductible.
Tax Liability
The amount of total tax due the IRS after any credits
and before taking into account any advance payments
(withholding, estimated payments, etc.) made by the
taxpayer.
Tax Preference Items
Tax items that may result in the imposition of the
alternative minimum tax.
Tax Rate Schedules
Tax Rate Schedules, which appear in the ap pendix,
are used by certain taxpayers. Separate rate sched-
ules are provided for married individuals filing jointly
or qualifying wi dow(er)s, unmarried heads of house-
hold, single taxpayers, and married individuals filing
separate returns.
Tax Table
The Tax Table, appearing in the appendix, is provided
for taxpayers with taxable incomes of less than
$100,000. Separate columns are provided for single
taxpayers, married taxpayers filing jointly or qualify-
ing widow(er)s, heads of household, and married tax-
payers filing separately.
Taxable Income
Adjusted gross income less itemized deductions or the
standard deduction, less allowable personal and de -
pendent exemption amounts. This term is also used to
refer to income that is not exempt or excluded from
taxation. For example, Wages are taxable income, but
gifts are not.
Taxable Year
The calendar year or fiscal year for which the taxable
income is computed.
Temporary Assignment
A work assignment away from the taxpayers tax
home, generally for a period of one year or less. De -
duction of temporary assignment expenses is allowed
to provide relief to those who have extra expenses
because of their work. To have any deductible expens-
es, the taxpayer must own or be renting or buying
lodging in the general area of the regular place of
employment and intend to return to that lodging at
the end of the temporary assignment.
Tenancy by the Entirety
A tenancy in which parties jointly own property. After
the death of one, the survivor takes the whole estate.
Tenancy by the entirety can be terminated during
their lifetime only by joint action of the parties.
Tenancy in Common
Two or more individuals jointly owning property. Each
owns an undivided share of the whole. The shares
remain separate even if one party dies.
Tip Income
Gratuities received by the taxpayer for services ren-
dered. Tips of $20 or more from any one job during a
calendar month must be reported to the taxpayers
employer.
Glossary G.23
Trade Date
Date on which a capital asset is actually bought or
sold.
Trade or Business Expenses
Deductions from gross income that are attributable to
a taxpayers business or profession.
Traditional IRA
An individual retirement arrangement, contributions
to which may or may not be deductible depending on
the taxpayers AGI and whether or not he is covered
under an employer-sponsored retirement plan.
Earnings within a traditional IRA grow tax-deferred.
Distributions from a traditional IRA are taxable
except to the extent they represent nondeductible con-
tributions.
Transfer Tax
A tax imposed when real estate is sold or transferred
from one person to another.
Transportation Expenses
Transportation expenses for an employee or self-
employed taxpayer include only the cost of transporta-
tion (taxi fares, auto expenses, etc.) incurred in the
course of business or employment when the taxpayer
is not away from home in a travel status.
Travel Expenses
Travel expenses include meals and lodging and trans-
portation expenses while away from home in the pur-
suit of a trade or business (including that of an
employee).
Trust
A tax entity created by a trust agreement. This entity
distributes all or part of its income to beneficiaries as
instructed by the trust agreement. This entity is
required to pay taxes on undistributed income.
Trustee
A person or institution that manages the assets of an
account (an IRA, for example) for the benefit of the
account owner or a beneficiary.
Tuition and Fees Deduction
An above-the-line deduction of up to $4,000 per tax
return for qualified tuition and course-related expens-
es. The amount of the deduction is figured on Form
8917.
Unadjusted Basis
The basis of property for purposes of figuring depreci-
ation under ACRS or MACRS. The unadjusted basis is
the original cost or other basis.
Underpayment Penalty
If a taxpayer did not pay enough tax on a timely basis
during the year, he may be required to pay an under-
payment penalty. The penalty, if any, is computed on
Form 2210.
Unearned Income
Taxable income other than that received for services
performed (earned income). Unearned income in -
cludes money received for the investment of money or
other property, such as interest, dividends, and royal-
ties. It also in cludes pensions, alimony, un employment
compensation, and other income that is not earned.
Unrecaptured Section 1250 Gains
Gains from the sale of 1250 property that are attrib-
utable to depreciation equivalent to the amount which
would have been claimed under a straight-line
method. This gain is subject to a maximum tax rate of
25%.
Unstated Interest
Interest which must be calculated and the sale price
reduced by this amount when interest is not stated in
an in stallment agreement or the interest rate used is
less than the ap plicable rate.
Vacation Home
The Tax Code places restrictions on taxpayers who
rent their residences or vacation homes to others for
part of the tax year. The restrictions may result in
scaling down of expense deductions for such taxpay-
ers.
Vested Benefits
Pension benefits owned by the taxpayer.
Wash Sale
The purchase of substantially similar stock or other
securities within 30 days before or after the sale of the
similar stock or security at a loss. A taxpayer cannot
claim a wash sale loss; instead, the loss is added to the
basis of the most recently purchased substantially
similar securities.
Welfare to Work Credit
A tax credit for employers who hire workers from wel-
fare rolls. The credit is claimed on Form 8861.
Widow (Widower)
A woman (man) who has not remarried following the
death of her husband (his wife).
Withholding Allowances
An increase by which income tax withholding on cer-
tain income is reduced. That is, each individual with-
holding allowance decreases the amount of tax with-
held from the income by the payer.
Work Opportunity Credit
A credit available to employers who hire employees
from specified disadvantaged groups. The credit is
claimed on Form 5884.
Worksheet
A record of compiled information that is generally not
sent to the IRS with a tax return.
G.24 H&R Block Income Tax Course (2013)
Worthless Securities
A loss is allowed for a security that be comes worthless
during the year. The loss is deemed to have oc curred
on the last day of the year. Special rules apply to secu-
rities of affiliated companies and small business
stock.