Glossary of Tax Terms

Fair Market Value

The price an item would sell for, assuming the buyer and a seller both have reasonable knowledge and are not under undue pressure. To determine fair market value, it is common to compare other similar properties sold near the same time as your property.

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Farm

A category of business that includes livestock, dairy, poultry, fish, fruit, truck farms, plantations, ranches, ranges, and orchards. You are in the business of farming if you own a farm or if you manage a farm as a tenant.

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Federal Insurance Contributions Act (FICA)

A federal law that requires you to pay social security tax on your earned income.

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Fiduciary

An individual, company, or association responsible for managing another's assets. Fiduciaries include executors of wills and estates, trustees, receivers in bankruptcy, and those responsible for managing the finances of a minor.

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Filing Extension

An additional amount of time to file your return. A filing extension, however, does not give you more time to pay your taxes.

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Filing Status

The category you file under, based mainly on your family status. Your filing status is an important factor in determining your standard deduction and tax rate and whether you must file a return. The five filing status types are Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er).

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Final Return for Decedent

An individual's tax return filed for the year in which the individual died. The decedent's personal representative is responsible for filing a final return.

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First-in, First-out Inventory Valuation Method (FIFO)

A method of valuing your inventory that assumes any inventory you sold was from the first inventory you purchased. When you cannot specifically identify items of inventory and you purchased quantities of inventory at different times for different prices, you must use a method, such as FIFO or LIFO (last-in, first-out,) to determine your cost of goods sold and the value of your remaining inventory.

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First-year Expensing

A deduction for up to the entire cost of a depreciable business asset other than real estate in the year purchased, which you may be able to use as an alternative to depreciating the asset over its useful life. The annual limit in 2002 is $24,000. From 2003 on, the annual limit will be $25,000. You cannot use the Section 179 deduction to the extent that it would cause you to report a loss from your business.

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Fiscal Year

A 12-month year ending on a date other than December 31. Most individual taxpayers are on a calendar year.

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Fixing-up Expenses

Expenses that you incur to physically prepare your home for sale. Fixing-up expenses include repairs and decorating that make the home more saleable but do not include improvements, such as room additions or major remodeling. You subtract fixing-up expenses from the amount you realize from the sale. With the new exclusion for most gains from home sales, fixing-up expenses are not usually as important as they were under the old rules.

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Flexible Spending Account

A plan in which your employer reduces your earnings to pay for your enhanced medical insurance coverage or child care. Under this plan, you receive medical insurance and child care tax free.

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FMS

Financial Management Service

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Foreign Child

For qualifying expenses for the adoption credit, a foreign child is a child who is not a U.S. citizen or resident. You cannot deduct adoption expenses until the year the adoption is finalized.

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Foreign Earned Income Exclusion

Income of up to $78,000 per year (in 2001) that you can exclude from your income if you live and earn your income in a foreign country.

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Foreign Housing Exclusion and Deduction

An exclusion or deduction you may qualify for if you lived and earned income outside the United States and either your employer paid for your housing or you were self-employed.

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Foreign Tax Credit

A credit you may be able to take if you pay income tax to another country on income that is also subject to U.S. income tax. For instance, if you own foreign stock you may have foreign tax withheld from dividends you receive. In most cases, you can take a dollar-for-dollar credit for the foreign taxes paid.

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Form 1040, U.S. Individual Income Tax Return

The basic form you file annually with the IRS. If you do not have a complex tax return, you may be able to use the simplified versions: Form 1040A or 1040EZ. For more information, see "Which Form Should I Use?" in IRS Publication 17, Your Federal Income Tax.

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Form 1040A, U.S. Individual Income Tax Return

A simplified version of Form 1040, U.S. Individual Income Tax Return. You can usually use this form if you do not itemize or own a business and your taxable income is under $50,000. For specific rules, see "Which Form Should I Use?" in IRS Publication 17, Your Federal Income Tax.

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Form 1040EZ, U.S. Individual Income Tax Return

The simplest version of Form 1040, U.S. Individual Income Tax Return, used by taxpayers with no deductions, no adjustments, income of only wages, interest, or unemployment compensation, and no dependents. For specific rules, see "Which Form Should I Use?" in IRS Publication 17, Your Federal Income Tax.

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Form 1099-DIV

A required statement from your broker or a company whose stock you own that summarizes your dividends. The main purpose of this form is to report the dividends you received, income tax withheld from dividends, and foreign taxes paid on dividends. Your broker may send a substitute statement that may also include amounts you earned from mutual funds, purchases of stock, sales of stock, purchases and sales of shares in mutual funds, and a summary of the investments you still own at the end of the year.

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Form 1099-INT

The statement you receive from payers of interest income, such as banks and savings institutions, that summarizes your interest income for the year. This form is also used to report other tax items related to your interest income, such as early withdrawal penalties, federal tax withheld, and foreign tax paid.

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Form W-2

The form your employer sends to you and the IRS at the end of the year to report your annual wages, taxes withheld, and other information.

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Form W-4

The form you file with your employer so that your employer can calculate the amount of tax to withhold from your pay. You can file a new Form W-4 anytime your tax situation changes and you choose to have more or less tax withheld.

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Fringe Benefit

Employee compensation other than your wages, tips, and salaries, such as health insurance, life insurance, and pension plans. Most fringe benefits are deductible by your employer and you do not include them in your income. In some cases, your tax-free fringe benefit amount may be limited. For instance, the cost of $50,000 of life insurance is a tax-free fringe benefit. However, if your employer pays for more than $50,000 of life insurance for you, your employer must include the cost of providing the excess life insurance with your income on your Form W-2.

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