Glossary of Tax Terms

Decedent

A person who has died.

Back to top

Deductions

Expenses allowed by the IRS that reduce your taxable income. Deductions such as alimony, capital losses, moving expenses, business losses, and deductible IRA and Keogh contributions can offset gross income even if you don't have enough deductions to itemize.

Personal expenses such as medical costs, mortgage interest, state and local taxes, employee business expenses, and charitable contributions are deductible only if you itemize your deductions.

Back to top

Deferred Compensation

An amount your employer deducts from your earnings and pays to a qualified retirement plan, to be distributed to you at a later date, usually when you retire. You do not pay tax on qualified deferred compensation until you receive the distributions.

Back to top

Deferred Gain on Sale of Home

Before May 7, 1997, if you sold your personal residence for a profit, you could defer paying income tax on your gain if the next house you bought was more expensive than the one you sold. This tax deferral is called a rollover. The rules changed with the Tax Act of 1997. Now, you can no longer defer the gain on the sale of your home, because with the new exclusion rules you probably will not pay any tax on the gain.

Back to top

Deficiency

The difference between the amount you reported on your tax return and the amount assessed by the IRS. The IRS has the power to assess deficiencies during an audit of your return, and it may use a deficiency as a basis for tax underpayment penalties.

Back to top

Defined-Benefit Pension Plan

A retirement plan that pays you fixed periodic benefits or a specified amount (all at once) when you retire. Unlike a defined-contribution plan, a defined-benefit pension plan does not have a separate account for each employee.

Back to top

Dependency Exemption

An exemption you claim for a dependent.

Back to top

Dependent

Someone you support who you can claim as an exemption. To qualify, the dependent must meet all five of the following tests:

• Relationship or member of household test
• Citizenship test
• Joint return test
• Gross income test
• Support test

Back to top

Dependent Care Credit

A tax credit based on expenses you paid for the care of your children or other dependents while you were gainfully employed.

Back to top

Dependent Child Credit

A new tax credit you may qualify for if you have children under the age of 17. The credit is $600 per child for 2001 through 2004.

Back to top

Depletion

If you invest in a property with timber or mineral resources, including oil and gas, you can take an expense allowance or a deduction because the resources are being depleted over time.

Back to top

Depreciable Property

Property with a useful life of more than one year that is used for your trade or business. You spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year that you placed the asset in service.

Back to top

Depreciation

A deduction you are allowed for the wearing away and expensing over time of assets, such as office equipment, vehicles, buildings, and furniture. For assets that have an expected useful life of more than one year, you spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year you place the asset in service. For tax purposes, tax law specifies the depreciation term for specific types of assets.

Back to top

Direct Deposit

For tax refunds, you can arrange for the IRS to deposit your tax refund directly into your bank account rather than mailing you a check.

Back to top

Direct Tax

A tax that you pay directly, as opposed to indirect taxes, such as tariffs and business taxes. Direct taxes include income and property taxes.

Back to top

Disaster Loss

An unreimbursed loss caused by property loss or damage in an area the President has declared eligible for federal disaster assistance. You can choose to deduct the loss in the year of the loss, or you can file an amended return if necessary to deduct the loss in the prior year. This gives you the option of receiving your tax benefit sooner.

Back to top

Disposition

The sale or other disposal of property that causes a gain or a loss including like-kind exchanges and involuntary conversions.

Back to top

Dividends

Distributions from a company to its stockholders. The distributions may be ordinary dividends, capital gain distributions, or nontaxable distributions. You usually receive dividends in cash, but you may receive them in the form of more stock, stock rights, property, or services. Companies or brokerage firms report dividend income to you on Form 1099-DIV.

Back to top

Dual-Status Taxpayer

An alien who is a resident part of the tax year and a nonresident the rest of the tax year.

Back to top