Glossary of Tax Terms

Parsonage Allowance

A housing allowance for clergy, designated by the church or other employer organization, for the expenses of providing and maintaining a home. Your designated housing allowance is not included in your taxable income to the extent that you use it for qualified expenses, although the allowance is subject to social security tax.

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Partnership

An unincorporated business or investment organization having two or more owners. A partnership is not subject to tax but passes income, losses, and other tax items through to its partners.

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Passive Activity

An activity in which you do not materially participate. Real estate rentals and limited partnerships are examples of passive activities. Passive loss rules apply to losses from passive activities.

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Passive Income

Income from a passive activity. If you have a passive loss, you can use it to offset your passive income. This is important because you cannot offset ordinary income with passive losses.

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Passive Loss

Loss from a passive activity. Passive loss rules limit the amount of passive loss you can deduct to the total of your other income from passive activities. There is a $25,000-per-year exception for rental real estate activities, subject to limitations for high-income taxpayers. Passive losses that have not been used as a deduction can be carried forward to later years until they are used completely or until you sell or dispose of your interest in the business.

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Patronage Dividend

Taxable distributions of a cooperative's profits to its members, also called "patrons."

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Payment-in-Kind (PIK) Wages

Payment to farm employees in the form of farm commodities, such as livestock or food, instead of cash wages. If you make payments in kind to your farm employees, you must report the value of the goods given in place of wages on the employees' W-2 forms.

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Payroll Tax

A tax based on wages, tips, and salaries paid. Part of the tax is deducted from the employee's pay, and the rest is paid by the employer. Federal, state, and local governments collect payroll taxes for expenses such as social security, Medicare, unemployment compensation, worker's compensation insurance, and local transit.

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Penalty

For taxes, a fine charged by the IRS for paying or filing your taxes late. You may be charged interest in addition to penalties. Tax penalties are not deductible.

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Pension

A retirement plan funded by the employer. Payments made to retired employees are for past services rendered.

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Percentage Depletion

A deductible expense allowed for the using up, or depletion, of an asset, such as underground minerals. You can claim a percentage depletion expense based on a percentage of gross income from your mineral property.

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Personal Exemptions

Exemptions for yourself and your spouse. Your taxable income is reduced for each exemption.

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Personal Interest Expense

Interest expense other than home mortgage interest, investment interest, or business interest. Personal interest is no longer deductible.

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Personal Property

Property other than land, permanent improvements to land, and buildings. Business equipment, vehicles, collectibles, and inventory are examples of personal property.

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Personal Representative

An individual or bank who is in charge of a decedent's property and responsible for distributing property to the beneficiaries.

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Personal Service Activity

A business whose principal activity is the performance of personal services. The fields of health, law, engineering, architecture, accounting, actuarial sciences, performing arts, and consulting are personal service activities.

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Personal-Use Property

Property you do not use in a trade or business and that you are not holding as an investment. Your personal car and home furnishings are examples of personal-use property.

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Physical Presence Test

One of the two residency tests you can meet to qualify for the foreign earned income exclusion and the foreign housing exclusion and deduction. To meet the physical presence test, you must live in a foreign country or countries for 330 full days during any 12 consecutive months.

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Placed in Service

For business assets, the date an asset is ready for use for business purposes. Usually the date you place an asset in service is the same as the date you purchased it. You use the date placed in service as a starting point for depreciation purposes.

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Points

A charge paid by a borrower for taking out a loan, in which each point is 1 percent of the loan amount. You must amortize most points over the life of the loan; however, you can deduct points you pay for acquiring or making improvements to your main residence in the year paid.

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Portfolio Income

Income such as interest, dividends, royalties, and gains or losses from investments.

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Power of Attorney

A legal document authorizing one person to act as another person's attorney or agent. You can give a specific power of attorney to someone such as your accountant to represent you on tax matters with the IRS.

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Premature Distribution

A withdrawal from a qualified retirement plan before age 59½. You must pay a penalty on premature distributions unless you meet specific exceptions.

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Principal

The amount of money owed on a loan. When you make payments on a loan, the principal amount of each payment is the portion that reduces the amount you owe.

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Principal Place of Business

Your main work location, determined by how much of your working time you spend there and the importance of the work you do there. Your principal place of business is a factor in determining if you can deduct business expenses for the use of your home.

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Principal Residence

Your main home. Your principal residence may be a house, condominium, mobile home, or houseboat, as long as it is the place where you live most of the time.

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Probate Estate

Property passing from a decedent's estate by his or her will or by operation of state intestate succession law.

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Profit-Sharing Plan

A plan for distributing a predetermined percentage of a company's profits to its employees' accounts.

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Progressive Tax

A tax that uses higher rates at higher income levels. The U.S. federal income tax system is based on the progressive tax, with rates starting at 15 percent and rising to 39.6 percent for higher-income taxpayers.

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Property Tax

A tax levied by local governments, based on the value of property you own. Property tax on real estate is the main source of financing for local governments and school districts. You may also pay tax on personal property, such as business equipment.

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Provisional Income

Your total income, including certain tax-exempt income, used for determining if your social security benefits are taxable.

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Publicly Traded Partnership

A limited partnership that has limited partnership interests traded in the securities markets.

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Publicly Traded Security

A security that is traded on a national stock exchange.

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