Understanding tax terms can make tax preparation less stressful. Use TaxAct's Tax Dictionary to help clarify any confusion while filing taxes.
Gain from the sale of collectibles and, generally, the taxable part of your gain from the sale of qualified small business stock held more than 5 years.
A defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as, matching the employee's contributions up to a certain percentage. SIMPLE and safe harbor 401(k) plans have mandatory employer contribution requirements.
Expenses generally paid by a buyer to research the title of real property.
A semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. If an educational institution uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.
The depreciation system for property placed in service after 1980 and before 1987. For property placed in service after 1986, MACRS must be used.
An employee reimbursement plan with the following conditions, (1) There must be a business connection and the expense must be reasonable, (2) There must be reasonable accounting for the expenses, (3) All excess reimbursements must be repaid in the reasonable time.
Accounting method that reports income when earned (not necessarily received) and expenses when incurred (not necessarily paid), as opposed to the cash method.
Generally, for the section 179 deduction, a taxpayer is considered to conduct a trade or business actively if he or she meaningfully participates in the management or operations of the trade or business. A mere passive investor in a trade or business does not actively conduct the trade or business.
When a taxpayer makes significant rental or business management decisions, such as approving rental terms, repairs, expenditures, and new tenants. Taxpayers who use a leasing agent or property manager are still considered active participants if they retain final management rights. Active participation should not be confused with material participation.
The military income a service member receives while on active duty (versus retirement or retainer pay).
One of two methods for calculating business automobile expenses. For the actual expense method, the taxpayer determines the business portion of expenses for fuel, auto maintenance, parking fees and tolls, and auto loan interest. (The other method is the standard mileage method).
The original cost of property, plus certain additions and improvements, minus certain deductions such as depreciation allowed or allowable and casualty losses.
An adopted child is always treated as your own child. The term adopted child includes a child who was lawfully placed with you for legal adoption.
A number issued by the Internal Revenue Service as a temporary taxpayer identification number for the child in a domestic adoption where the adopting taxpayers do not have and/or are unable to obtain the child's Social Security number (SSN). The ATIN is used by the adopting taxpayers on their federal income tax return to identify the child while final domestic adoption is pending.
Total income reduced by certain amounts such as contributions made to a traditional IRA or for student loan interest payments.
Qualified education expenses reduced by any tax-free educational assistance, such as a tax-free scholarship or employer-provided educational assistance. They must also be reduced by any qualified education expenses deducted elsewhere on your return, used to determine an education credit or other benefit, or used to determine a tax-free distribution.
Deductions that are subtracted from gross income in figuring adjusted gross income. They include deductions for moving expenses, alimony paid, a penalty on early withdrawal of savings, and contributions to an individual retirement arrangement (IRA). Adjustments to income can be taken even if itemized deductions are not claimed.
One of the dependency tests for qualifying child. The child must be (a) under age 19 at the end of the year and younger than you (or your spouse, if filing jointly), (b) under age 24 at the end of the year, a full-time student and younger than you (or your spouse, if filing jointly) or (c) any age if permanently and totally disabled.
Tips an employer assigns to an employee. They are in addition to the tips the employee reported to the employer.
Payment to a spouse or former spouse under a divorce or separation instrument. The payments do not have to be made directly to the ex-spouse. For example, payments made on behalf of the ex-spouse for expenses specified in the instrument, such as medical bills, housing costs, and other expenses can qualify as alimony. Alimony does not include child support or voluntary payments outside the instrument. The person paying alimony can subtract it as an adjustment to income; the person receiving alimony must treat it as income.
A tax designed to collect at least a minimum amount of tax from taxpayers who benefit from the tax laws that give special treatment to certain kinds of income and allow deductions and credits for certain kinds of expenses.
Form 1040X is used to file an amended return to correct a previously filed Form 1040, 1040A, 1040EZ. Other reasons would be to make certain elections after the prescribed deadline, change amounts previously adjusted by the IRS, and make a claim for a carryback due to a loss or unused credit.
In general, if the amount you pay for a bond is greater than its stated principal amount, the excess is bond premium. You can elect to amortize the premium on taxable bonds. The amortization of the premium is generally an offset to interest income on the bond rather than a separate deduction item.
A ratable deduction for the cost of certain intangible property over the period specified by law. Examples of costs that can be amortized are goodwill, agreement not to compete, and research and mining exploration costs.
The total of all money received plus the fair market value of all property or services received from a sale or exchange. The amount realized also includes any liabilities assumed by the buyer and any liabilities to which the property transferred is subject, such as real estate taxes or a mortgage.
A series of payments under a contract from an insurance company, a trust company, or an individual. Annuity payments are made at regular intervals over a period of more than one full year.
Property used in the conduct of a trade or business, such as business machinery and office furniture.
One of two restrictions on how much a loss from passive activity can offset other sources of income. Taxpayers are restricted from claiming a loss for more than they could actually lose from the activity; they can claim a loss only up to the amount for which they are personally at-risk in the activity. (The other restriction is the passive activity rule.)
Basis is the amount of your investment in property for tax purposes. The basis of property you buy is usually the cost. Basis is used to figure gain or loss on the sale or disposition of investment property.
The cost of merchandise on hand at the beginning of the year that is available for sale to customers. A manufacturer or producer should include the total cost of raw materials, work in process, finished goods and materials and supplies used in manufacturing the goods as part of the beginning inventory amount. Generally, the beginning inventory amount will be identical to the closing inventory of the prior year.
A demand loan on which interest is payable at a rate below the applicable federal rate, or a term loan where the amount loaned is more than the present value of all payments due under the loan.
If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. You qualify for this benefit if you are totally or partly blind. If you are partly blind, you must get a certified statement from an eye doctor or registered optometrist that:
If your eye condition will never improve beyond these limits, the statement should include this fact. You must keep the statement in your records. If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers, you can take the higher standard deduction for blindness if you otherwise qualify.
Blocked income is when a taxpayer cannot convert foreign currency to U.S. dollars due to local law or local government policy. Special tax rules allow taxpayers with blocked income to delay reporting part of their income.
To meet the bona fide residence test for the foreign earned income exclusion, taxpayers must show that they have set up permanent quarters in a foreign country for an entire, uninterrupted tax year.
An additional amount of deductible depreciation that is awarded above and beyond what would normally be available. Bonus depreciation is always taken right away, in the first year that the depreciable item is placed in service. This type of incentive is offered either as an additional incentive or as a measure of relief for small businesses that want to buy additional equipment. The actual amount of bonus depreciation varies from year to year, but it is offered on top of the maximum allowable Section 179 expensing limits and standard first-year depreciation.
Property used in the conduct of a trade or business, such as business machinery and office furniture.
Business expenses are amounts that are ordinary and necessary to carry on a business.
Usually, a percentage showing how much an item of property, such as an automobile, is used for business purposes.
An allocated amount paid to, or treated as paid to, a shareholder by a mutual fund, regulated investment company, or real estate investment trust from its net realized long-term capital gains. This amount is in addition to any ordinary dividend paid to the shareholder. You will receive a statement from the payer if this applies to you.
Almost everything owned and used for personal or investment purposes is a capital asset. Examples are a home, home furnishings, and stocks or bonds held in a personal account. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss.
Adding costs, such as improvements, to the basis of assets.
An option that entitles the purchaser to buy, at any time before a specified future date, property such as a stated number of shares of stock at a specified price.
A student who meets either of the following requirements.
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Expended or treated as an item of a capital nature. A capitalized amount is not deductible as a current expense and must be included in the basis of property.
Accounting method that reports income when constructively received (not earned) and expenses when paid (not incurred), as opposed to the accrual method.
A loss that results from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.
A nonrefundable credit that allows taxpayers to claim a credit for paying someone to care for their qualifying Dependents under the age of 13 or Spouses or dependents who are unable to care for themselves.
Details or facts which indirectly point to other facts.
One of the dependency tests. You cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. There is an exception for certain adopted children.
A number of years that establishes the property class and recovery period for most types of property under the General Depreciation System (GDS) and Alternative Depreciation System (ADS).
Any area (1) the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat, (2) the Department of Defense has certified for combat zone tax benefits due to its direct support of military operations, or (3) a Qualified Hazardous Duty Area established by statute where the service member receives imminent danger pay. Members of the U.S. Armed Forces who serve in a combat zone may exclude military pay from their taxable income.
A person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade designated as a contract market by the Commodities Futures Trading Commission.
A contract made on a commodity exchange, calling for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price.
Generally, property that (1) you, your spouse, or both acquire during your marriage while you and your spouse are domiciled in a community property state, (2) you and your spouse agreed to convert from separate to community property, (3) cannot be identified as separate property.
Generally, income from (1) community income, (2) salaries, wages, and other pay received for the services performed by you, your spouse, or both during the marriage, (3) real estate that is treated as community property under the laws of the state where the property is located.
Travel between a personal home and work or job site within the area of an individual's tax home.
Wages, salaries, commissions, tips, bonuses, professional fees, earnings from self-employment, and alimony.
When an amount is credited to the taxpayer's account or made available to the taxpayer (or taxpayer's agent) without restriction.
A method established under the Modified Accelerated Cost Recovery System (MACRS) to determine the portion of the year to depreciate property both in the year the property is placed in service and in the year of disposition.
Any transaction that you entered into after April 30, 1993, that meets both of these tests.
A direct reduction of the taxpayer's liability. Credits are allowed for such purposes as child care expenses, higher education costs, qualifying children, and earned income of low-income taxpayers.
Either the date on a check made payable to the taxpayer or the date money is credited to the taxpayer's account. When converting foreign currency to U.S. dollars, the date of transaction is the date determines the exchange rate to use.
The real and personal property that an individual owns upon his/her death.
An accelerated method to depreciate property. The General Depreciation System (GDS) of MACRS uses the 150% and 200% declining balance methods for certain types of property. A depreciation rate (percentage) is determined by dividing the declining balance percentage by the recovery period for the property.
This type of plan, also known as a traditional pension plan, promises the participant a specified monthly benefit at retirement. Often, the benefit is based on factors such as the participant's salary, age and the number of years he or she worked for the employer. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service.
In a defined contribution plan, the employee and/or the employer contribute to the employee's individual account under the plan. The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. The contributions and earnings are not taxed until distribution. The value of the account will change based on contributions and the value and performance of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.
A student who meets either of the following requirements.
A loan payable in full at any time upon demand by the lender.
A person, other than the taxpayer or the taxpayer's spouse who is a qualifying child or qualifying relative.
These benefits include amounts employers pay to a taxpayer or directly to the care provider.
One of the dependency tests. You cannot claim any dependents if you, or your spouse if filing jointly, could be claimed as a dependent by another taxpayer.
Yearly deduction allowed to recover your investment in minerals in place or standing timber. To take the deduction, you must have the right to income from the extraction and sale of the minerals or the cutting of the timber.
An annual deduction that allows taxpayers to recover the cost of property used in a trade or business or held for the production of income. The amount of depreciation depends on the basis of the property, its recovery period, and the depreciation method.
Amount of depreciation or section 179 deduction that must be reported as ordinary income when property is sold at a gain.
The individual named in the document creating the account/plan who is to receive the benefit of the funds in the account/plan.
This income comes from an employer's disability insurance, health plan, or pension plan. The payments replace wages for the time the taxpayer missed work because of the disability. The plan must provide for disability retirement for the payments to be considered disability income.
Generally paid to a taxpayer who retires because of a disability before the minimum retirement age (set by the employer). The disability pension is considered regular pension income when the taxpayer reaches the minimum retirement age.
A permanently and totally disabled child must meet both of the following tests: the child cannot engage in any substantial gainful activity because of a physical or mental condition and a doctor determines the condition has lasted or can be expected to last continuously for at least a year or can lead to death.
The permanent withdrawal from use in a trade or business or from the production of income.
Do-it-yourself move. The most common form of military move is the partial DITY move, where the military provides a moving company to transport some of the service member's goods. Service members who receive DITY payments must include them in their gross income.
A distribution of money or other property made by a corporation to its shareholders out of its earnings and profits.
Written records that establish certain facts.
A taxpayer's legal, permanent residence. It is not always where the person presently lives. Your domicile is the place to which you always return or intend to return.
An alien who is both a nonresident and resident alien during the same tax year. The most common dual-status tax years are the years of arrival and departure.
Includes all income from employment, but only if it is includable in gross income. Examples of earned income are: wages; salaries; tips; and other taxable employee compensation. Earned income also includes net earnings from self-employment. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits. For tax years after 2003, members of the military who receive excludable combat zone compensation may elect to include it in earned income.
A credit that can be paid to low-income workers, even if no income tax was withheld from the worker's pay. To receive the credit, a taxpayer must file a tax return.
Amounts contributed to a plan by the employer at the employee's election and which, except to the extent they are designated Roth contributions, are excludable from the employee's gross income. Elective deferrals include deferrals under a 401(k), 403(b), SARSEP and SIMPLE IRA plan.
A nine-digit number assigned by the IRS in the following format: XX-XXXXXXX. It is used to identify the tax accounts of employers and certain others who have no employees.
A type of defined contribution plan that is invested primarily in employer stock.
Method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.)
To barter, swap, part with, give, or transfer property for other property or services.
Income that is not included in the taxpayer's gross income and therefore exempt from federal income tax.
Free from withholding of federal income tax. Must meet certain income, tax liability, and dependency criteria. Does not exempt a person from other kinds of tax withholding, such as social security tax.
The price at which property would change hands between a willing buyer and a willing seller, both having reason able knowledge of the relevant facts.
This act mandates that an employer withhold a set percentage of an employee's salary each pay period. FICA also requires that the employer match the employee's amount and contribute the money to a government account known as the Social Security Trust Fund. This fund provides retirement income, as well as disability insurance, Medicare, and benefits for survivors.
Generally an amount paid to an individual for the purpose of research.
The one who acts on behalf of another as a guardian, trustee, executor, administrator, receiver, or conservator.
Five taxpayer categories that determine the amount of tax and/or tax credits that apply to different taxpayers. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits, and your correct tax. If more than one filing status applies to you, choose the one that will result in the lowest amount of tax.
Allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from your contributions. The employer may also contribute.
The foreign earned income exclusion allows eligible taxpayers to avoid paying federal income tax on their foreign earned income.
U.S. tax credit used to offset any foreign income tax taxpayers have paid on qualified income that is also subject to U.S. federal income tax.
The amount of interest that would be payable for any period if interest accrued at the applicable federal rate and was payable annually on December 31, minus any interest payable on the loan for that period.
A contract to deliver a substantially fixed amount of property (including cash) for a substantially fixed price.
A form that can be prepared annually by current and prospective college students to determine their eligibility for student financial aid and work-study programs.
A child who during any part of 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.
A commodity of a nature that one part may be used in place of another part.
An exchange-traded contract to buy or sell a specified commodity or financial instrument at a specified price at a specified future date. See also Commodity future.
Wages earned in a foreign country that an individual does not exclude, or excludes only part of, under the foreign earned income exclusion; also, any foreign income that is not either Passive income or High Withholding Tax Interest income.
A general partner is a partner who is personally liable for partnership debts.
A general partnership is composed only of general partners.
Any below-market loan where the foregone interest is in the nature of a gift.
Going concern value is the additional value that attaches to property because the property is an integral part of an ongoing business activity. It includes value based on the ability of a business to continue to function and generate income even though there is a change in owner ship.
An intangible property such as the advantage or benefit received in property beyond its mere value. It is not confined to a name but can also be attached to a particular area where business is transacted, to a list of customers, or to other elements of value in business as a going concern.
The one who transfers property to another.
All income from all sources (other than tax-exempt income) that must be included on your tax return. Gross income is the total of your earned and unearned income.
One of the dependency tests for qualifying relative. A qualifying relative's gross income for the year must be less than $4,000. There is an exception if the person is disabled and has income from a sheltered workshop.
Total amounts received from all sources for the year without subtracting any costs or expenses.
Payment paid to a partner that is determined without regard to the partnership income and is made to a partner acting in his or her capacity as a partner.
A student who is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.
Filing status is generally for unmarried taxpayers who paid more than half the cost of keeping up a home for a qualified person during the tax year.
A tax-exempt account that you set up with a trustee, such as a bank or insurance company, to pay or reimburse certain medical expenses you incur. An HSA is similar to a MSA, but is more attractive. Funds may be rolled from an Archer MSA to an HSA, but not the other way around. You can claim a tax deduction for contributions you make. Contributions made by your employer may be excluded from your gross income. The contributions remain in your account from year to year until you use them. The earnings generated within the account are tax free. You are the owner of the HSA. It is portable so you continue to own the account even if you change jobs or leave the workforce. You must be covered under a High Deductible Health Plan (HDHP) and meet other requirements to be eligible to have contributions made to your HSA.
An HDHP has:
An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible.
Interest income on which at least 5% foreign gross income tax was withheld.
The length of time an asset was held. The time between the trade date of the purchase and the trade date of the sale. The holding period determines whether a gain or loss is short-term or long-term for tax purposes.
Hospitalization that qualifies for combat zone benefits and filing extensions means any hospitalization outside the United States and any hospitalization in the United States of not more than five years that is a result of wounds, disease, or injury incurred while serving in the combat zone.
You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.
An addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use.
Income that is included in the taxpayer's gross income and therefore subject to federal income tax.
Taxes on income, both earned (for example, salaries, wages, tips, commissions) and unearned (for example, interest and dividends). Income taxes can be levied both on individuals (personal income tax) and businesses (business and corporate income taxes).
The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
A tax-sheltered savings plan set up by the taxpayer, generally for retirement income.
A tax processing number issued by the Internal Revenue Service to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, a Social Security number (SSN) from the Social Security Administration (SSA).
When a joint return is filed and the refund is used to pay one spouse's past-due child support, spousal support, or a federal debt, the other spouse can be considered an injured spouse. An injured spouse can get a refund for his or her share of the overpayment that would otherwise be used to pay the past-due amount.
You are considered an injured spouse if:
A taxpayer is insolvent when his or her total liabilities exceed his or her total assets.
A sale of property where you receive at least one payment after the tax year of the sale.
Property that has value but cannot be seen or touched, such as goodwill, patents, copyrights, and computer software.
Income a person receives from certain financial accounts or from lending money to someone else.
Compensation for the use or forbearance of money.
Inventory is the items the taxpayer buys or makes for resale to others.
Investment income includes taxable interest and dividends, tax-exempt interest, capital gain net income, net income from rents and royalties not derived from a trade or business, and net income from passive activities
The interest you paid or accrued on money you borrowed that is allocable to property held for investment.
Usually, a percentage showing how much an item of property, such as an automobile, is used for investment purposes.
When your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Involuntary conversions are also called involuntary exchanges.
Deductions allowed on Schedule A (Form 1040) for medical and dental expenses, taxes, home mortgage interest and investment interest, charitable contributions, casualty and theft losses, and miscellaneous deductions. They are subtracted from adjusted gross income in figuring taxable income. Itemized deductions cannot be claimed if the standard deduction is chosen.
One of the dependency tests. You cannot claim a married person who files a joint return as a dependent unless that joint return is only a claim for refund and there would be no tax liability for either spouse on separate returns.
Filing status for taxpayers who are married to each other or live together in a common law marriage and combine their income and deductions on the same tax return. The status also applies to taxpayers who are separated but not divorced and to taxpayers whose spouse died during the tax year and has not remarried, as long as one tax return is used for both individuals.
Qualified plans for self-employed individuals.
Special tax rules apply to children under age 18, and certain older children who receive more than $2,100 of unearned income, including the Alaska Permanent Fund Dividend and Native Corporation Dividends.
For children under age 18 and certain older children (described below), unearned income over $2,100 is taxed at the parent's rate. These special tax rules apply to children who meet all of the following conditions:
Document from the Department of Veterans Affairs (VA) sent to discharged service members who qualify for severance pay subject to medical disability, which is nontaxable.
Items of property with the same nature or character. The grade or quality of the properties does not matter. Examples are two vacant plots of land.
A limited liability partnership (LLP) is formed under a state limited liability partnership law. Generally, a partner in an LLP is not personally liable for the debts of the LLP or any other partner, nor is a partner liable for the acts or omissions of any other partner, solely by reason of being a partner.
A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for federal income tax purposes as a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301.7701-3.
A partner whose participation in partnership activities is restricted, and whose personal liability for partnership debts is limited to the amount of money or other property that he or she contributed or may have to contribute.
Any option that is traded on, or subject to the rules of, a qualified board or exchange.
Passenger automobiles; any other property used for transportation; property of a type generally used for entertainment, recreation or amusement; computers and their peripheral equipment (unless used only at a regular business establishment and owned or leased by the person operating the establishment); and cellular telephones or similar telecommunications equipment.
The distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. All the participant's accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.
Modified Accelerated Cost Recovery System, a method for calculating a taxpayer's depreciation deduction that uses the property's placed-in-service date, recovery period, and depreciable basis.
The treatment of each section 1256 contract held by a taxpayer at the close of the year as if it were sold for its fair market value on the last business day of the year.
The stated redemption price of a bond at maturity minus your basis in the bond immediately after you acquire it. Market discount arises when the value of a debt obligation decreases after its issue date.
Any bond having market discount except:
Filing status for taxpayers who are married to each other or live together in a common law marriage and combine their income and deductions on the same tax return. The status also applies to taxpayers who are separated but not divorced and to taxpayers whose spouse died during the tax year and has not remarried, as long as one tax return is used for both individuals.
Filing status for taxpayers who are married to each other or live together in a common law marriage and report their own incomes and deductions on separate returns.
Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. Specifically for individuals, you materially participated for the tax year in an activity if you satisfy at least one of the following tests.
A tax-exempt account that you set up with a trustee, such as a bank or insurance company, to pay or reimburse certain medical expenses you incur. You can claim a tax deduction for contributions you make. The contributions remain in your account from year to year until you use them. The earnings generated within the account are tax free. You are the owner of the MSA. An MSA is portable so you retain ownership of the account even if you change jobs or leave the workforce. You must be covered under a High Deductible Health Plan (HDHP) and meet other requirements to be eligible to have contributions made to your MSA.
A type of includable military income given to service members who have been separated from the service for medical reasons
One of the dependency tests. To meet this test, a person must either:
The adjusted gross income before consideration of certain deductions.
The interest paid on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.
The excess of net long-term capital gain over any net short-term capital loss.
The total of all investment income (other than tax-exempt income) reduced by the sum of:
If your deductions for the year are more than your income for the year (line 41 of your Form 1040 is a negative number), you may have a net operating loss (NOL). You can use an NOL by deducting it from your income in another year or years.
A person who receives, in his or her name, income that actually belongs to someone else.
Traditional IRA contributions that taxpayers may not deduct from their adjusted gross income because the taxpayers do not meet the requirements; also includes remaining contributions from a partial IRA deduction.
Any listed option that is not an equity option, such as debt options, commodity futures options, currency options, and broad-based stock index options.
Income that does not come solely from the use of property or is not otherwise considered passive income (see passive income). Examples of nonpassive income are salaries, wages, commissions, tips, self-employment income, interest, dividends, annuities, and some royalties.
Any elective or nonelective plan, agreement, method, or arrangement between an employer and an employee (or service recipient to service provider) to pay the employee compensation sometime in the future.
Occurs when the amount of a credit is greater than the tax owed. However, taxpayers can only reduce their tax to zero; they cannot receive a "refund" for any excess nonrefundable credit.
Most real property other than residential rental property.
Any income exempt from federal income tax. Although some types of nontaxable income are reported on the return, it is not added into the amount of income subject to tax.
Any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.
The amount by which the stated redemption price at maturity of a debt instrument is more than its sue price.
The relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
Taxable income that comes from passive activity (see passive activity).
An activity involving the conduct of a trade or business in which you do not materially participate and any rental activity. However, the rental of real estate is not a passive activity if both of the following are true.
Occurs when total losses (including prior year unallowed losses) from all your passive activities exceed the total income from all your passive activities. Passive activity losses cannot be used to offset income from nonpassive activities. Passive activity losses not allowed in the current year are carried forward until they are allowed either against passive activity income, against the special allowance for rental real estate activities, if applicable, or when you sell or exchange your entire interest in the activity in a fully taxable transaction to an unrelated party.
A series of definitely determinable payments made to an employee or survivor (the beneficiary of a deceased employee's pension) after the employee retires from work.
The phrase is often used when referring to daily employee expenses or reimbursements.
Amount of time a taxpayer stays in a foreign country, which is one of the factors used to determine whether the taxpayer is eligible for the foreign earned income exclusion. To meet the period of stay requirement, the taxpayer must meet either the Bona Fide Residency test or the Physical Presence test.
Property, such as machinery, equipment, or furniture that is not real property.
The amount of credit or deduction allowed is reduced when modified adjusted gross income (MAGI) is greater than a specified amount of income.
To meet the physical presence test for the foreign earned income exclusion, a taxpayer must be physically present in a foreign country 330 full days during a period of twelve consecutive months.
Ready and available for a specific use whether in a trade or business, the production of income, a tax-exempt activity, or a personal activity.
Term used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may be called loan origination fees, maximum loan charges, loan discount, or discount points.
Gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. It includes gains from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment.
An advanced level of academic instruction following the completion of a school providing a secondary education, such as high school, often referred to as college or university. This type of program can be focused on academic (Associates, Bachelor's or Master's degrees), career-oriented (professional certification or licensing), and/or continuing professional (Master's) purposes.
The amount by which your cost or other basis in a bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest).
A bond that is part of a state or local government bond issue of which:
A category for property under MACRS. It generally determines the depreciation method, recovery period, and convention.
Taxes on property, especially real estate. It can also be levied on boats, automobiles (often paid along with license fees), recreational vehicles, and business inventories.
Any partnership regularly traded on an established securities market regardless of the number of partners. This does not include a publicly traded partnership treated as a corporation under section 7704 of the Internal Revenue Code.
An option that entitles the purchaser to sell, at any time before a specified future date, property such as a stated number of shares of stock at a specified price.
Long term capital gain from property held more than five years and sold or otherwise disposed of before May 6, 2003.
Dividends eligible for the lower tax rates that apply to a net capital gain. They are reported to you in box 1b of Form 1099-DIV.
To be your dependent, a person must be either your qualifying child or your qualifying relative. Generally, a person is your qualifying child if that person:
You are a qualified performing artist if you:
In addition, if you are married, you must file a joint return unless you lived apart from your spouse for all of the tax year. If you file a joint return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. However, requirement (4) applies to the combined adjusted gross income of both you and your spouse.
To be your dependent, a person must be either your qualifying child or your qualifying relative. Generally, a person is your qualifying relative if that person:
Filing status is for widow or widower with one or more qualifying dependent children who lived in your home all year.
Benefits paid to railroad employees working in jobs that are covered by the Railroad Retirement Act. The RRA has two components. Tier 1 is the equivalent of social security benefits and Tier 2 is like an employer's pension plan.
An entity that is formed for the purpose of holding a fixed pool of mortgages secured by interests in real property, with multiple classes of interests held by investors. These interests may be either regular or residual.
You were a real estate professional for the year if you met both of the following conditions:
A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Services you performed as an employee are not treated as performed in a real property trade or business unless you owned more than 5% of the stock (or more than 5% of the capital or profits interest) in the employer.
Most state and local governments charge an annual tax on the value of real property that you own. This is called a real estate tax and is also sometimes referred to as a property tax. Real estate taxes paid on your primary and second residence are generally deductible. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare. Deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property.
Land and generally anything erected on, growing on, or attached to land, for example, a building.
To include as income on your current year's return an amount allowed as a credit or deduction in a prior year.
The number of years over which the basis of an item of property is recovered.
Most common method for computing self-employment tax. Under the regular method, the net self-employment income entered on Schedule SE is the sum of net self-employment earnings from the taxpayer's Schedules C, C-EZ, F, and K-1.
A section 1256 contract that:
One of the dependency tests for qualifying child. The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
An individual is considered to be a U.S. resident alien if he or she meets either the Green Card Test or the Substantial Presence Test.
Stock you get for services you perform that is nontransferable and is subject to a substantial risk of forfeiture.
Occurs when the amount of a credit is greater than the tax owed. Taxpayers not only can have their tax reduced to zero; they can also receive a "refund" of excess credit.
Someone related to the taxpayer by blood, marriage, or adoption, including the following:
That part of an estate that is left after all the other provisions of a will have been satisfied.
Ordinary and necessary expenses attributable to the production of rental income and maintenance of the rental property, such as advertising, cleaning and repairs, insurance premiums, and property management fees.
Payments received by a taxpayer from tenants who rent the taxpayer's property, including regular and advanced rent, payments for breaking a lease, expenses paid by the tenant, and the fair market value of property or services received in lieu of monetary rental payments.
Real property, generally buildings or structures, if 80% or more of its annual gross rental income is from dwelling units.
A tax-free distribution to you of cash or other assets from a tax-favored plan that you contribute to another tax-favored plan.
An individual retirement arrangement where contributions are not deductible. If you satisfy the requirements, qualified distributions are tax free. Contributions can be made to a Roth IRA after 70 ½ and you can leave amounts in the Roth IRA as long as you live.
Corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S Corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual tax rates. This allows S Corporations to avoid double taxation on the corporate income. S Corporations are responsible for tax on certain built-in gains and passive income.
A tax levied by a state, county or city and collected by retailers and certain service providers when they make taxable retail sales.
An estimated value of property at the end of its useful life. Not used under MACRS.
Generally an amount paid or allowed to a student at an educational institution for the purpose of study.
A plan in which a small business with 100 or fewer employees can offer retirement benefits through employee salary reductions and employer non-elective or matching contributions (similar to those found in a 401(k) plan). It can be either a SIMPLE IRA or a SIMPLE 401(k). SIMPLE IRA plans impose few administrative burdens on employers because IRAs are owned by the employees, and the bank or financial institution receiving the funds does most of the paperwork. While each has some different features, including contribution limits and the availability of loans, required employer contributions are immediately 100 percent vested in both.
This is a special deduction allowed against the cost of certain property purchased for use in the active conduct of a trade or business.
Certain intangibles held in connection with the conduct of a trade or business or an activity entered into for profit, including goodwill, going concern value, patents, copyrights, formulas, franchises, trademarks, and trade names.
Property that is or has been subject to an allowance for depreciation or amortization. Section 1245 property includes personal property, single purpose agricultural and horticultural structures, storage facilities used in connection with the distribution of petroleum or primary products of petroleum, and railroad grading or tunnel bores.
Real property (other than section 1245 property) which is or has been subject to an allowance for depreciation.
A contract of sale for future delivery of a single security or of a narrow-based security index.
Earned income from a trade, business, farming or profession that is not paid by an employer. For example, seamstresses and lawn care workers who work for themselves (and not for someone else) are considered self-employed.
An individual in business for himself or herself, and whose business is not incorporated, is self-employed. Sole proprietors and partners are self-employed. Self-employment can include part-time work.
Social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. SE tax is calculated using Schedule SE (Form 1040). Social security and Medicare taxes of most wage earners are figured by their employers. You can deduct half of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct social security and Medicare taxes.
If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive generally consist of both interest and principal. You must separately report as interest income the interest you receive as part of each payment. If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of Schedule B (Form 1040A or Form 1040). The buyer must give you his or her SSN and you must give the buyer your SSN. Failure to meet these requirements may result in a $50 penalty for each failure.
The sale of property that you generally do not own. You borrow the property to deliver to a buyer and, at a later date, you buy substantially identical property and deliver it to the lender.
A plan in which an employer contributes on a tax-favored basis to IRAs owned by its employees. If the employer meets certain conditions, it is not subject to the reporting and disclosure requirements of most retirement plans. Under a SEP, an IRA is set up by or for an employee to accept the employer's contributions.
Filing status that applies to a taxpayer who, on the last day of the year, is unmarried or legally separated from their spouse under a divorce or separate maintenance decree, and does not qualify for another filing status.
An independent government agency that manages the social insurance program, consisting of retirement, disability and survivors benefits. To qualify for these benefits, most American workers pay Social Security taxes on their earnings; future benefits are based on the employees' contributions.
Payments made under Title II of the Social Security Act. They include old-age, survivors, disability insurance, and some workers' compensation benefits.
A deduction that reduces the amount of income on which you are taxed. You cannot take the standard deduction if you claim itemized deductions. Your standard deduction consists of the basic standard deduction amount based on your filing status and additional standard deduction amounts for age and blindness.
One of two methods for calculating business automobile expenses. For the standard mileage method, the taxpayer multiplies the business miles by the mileage rate for that tax year. (The other method is the actual expense method).
The established amount for optional use in determining a tax deduction for automobiles instead of deducting depreciation and actual operating expenses.
Independent contractors under the common law rules if they fall within one of the following (1) driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is an agent or is paid on commission, (2) full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both primarily for one life insurance company (3) individual who works at home on materials or goods that are supplied and must be returned, and there are specifications for the work to be done, (4) full-time traveling or city salesperson who works on the behalf of another and turns in orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods must be merchandise for resale or supplies for use in the buyer's business operation. The work must be the salesperson's principal business activity.
The following three conditions apply (1) the service contract states or implies that substantially all the services are to be performed personally, (2) they do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities), (3) the services are performed on a continuing basis.
Statutory employee income and expenses would be reported on a Schedule C.
Stock dividends merely increase the taxpayer's number of shares in the company and generally are not taxable.
If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Your employer can tell you which kind of option you hold.
Generally, a set of offsetting positions on personal property. A straddle may consist of a purchased option to buy and a purchased option to sell on the same number of shares of the security, with the same exercise price and period.
A way to figure depreciation for property that ratably deducts the same amount for each year in the recovery period. The rate (in percentage terms) is determined by dividing 1 by the number of years in the recovery period.
Stock that meets the following tests.
Parts that together form an entire structure, such as a building. The term includes those parts of a building such as walls, partitions, floors, and ceilings, as well as any permanent coverings such as paneling or tiling, windows and doors, and all components of a central air conditioning or heating system including motors, compressors, pipes and ducts. It also includes plumbing fixtures such as sinks, bathtubs, electrical wiring and lighting fixtures, and other parts that form the structure.
The interest paid during the year on a loan for qualified higher education expenses that were for the taxpayer, the taxpayer's spouse, or a person who was the taxpayer's dependent when the loan was obtained.
A federal income supplement program funded by general tax revenues (not Social Security taxes):
All amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your child's support, count support provided by you, your child, and others.
Property you can see or touch, such as buildings, machinery, vehicles, furniture, and equipment.
Not subject to tax.
Interest that is exempt from federal income tax such as bonds issued by state and political subdivisions (county or city), District of Columbia, and U.S. possessions and political subdivisions.
For U.S. military personnel who die while serving in a combat zone or as a result of wounds, disease, or injury incurred while so serving, any unpaid tax liability is waived and any forgiven tax liability that has already been paid is refunded.
The country in which the taxpayer is permanently or indefinitely engaged to work as an employee or self-employed individual, regardless of where the taxpayer maintains his or her family home. For taxpayers who work abroad, but do not have a regular place of business because of the nature of the work, their tax home is the place where they regularly live.
The amount of tax that must be paid. Taxpayers meet (or pay) their federal income tax liability through withholding, estimated tax payments, and payments made with the tax forms they file with the government.
The time period covered by a tax return. Usually this is January 1 to December 31, a calendar year, but taxpayers can elect a fiscal tax year with different beginning and ending dates.
Gross income minus any adjustments to income and either itemized deductions or the standard deduction.
A welfare benefit that provides assistance and work opportunities to needy families by granting states the federal funds to develop and implement their own welfare programs.
A work location is considered temporary if the service member's employment is realistically expected to last (and in fact does last) for one year or less. Service members assigned to temporary work locations can deduct travel expenses.
A life interest in property, an interest in property for a term of years, or an income interest in a trust. It generally refers to a present or future interest in income from property or the right to use property that terminates or fails upon the lapse of time, the occurrence of an event, or the failure of an event to occur.
Any loan that is not a demand loan.
The taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and it must have been done with criminal intent.
Person authorized by a taxpayer to discuss the taxpayer's return with the IRS, give the IRS information missing from the return, request copies of notices or transcripts related to the return, and respond to certain IRS notices. The taxpayer designates third party by checking the Yes box and entering the person's name, phone number, and personal identification number (PIN) in the "Third party designee" section of the return.
IRAs other than Roth IRAs, SIMPLE IRAs, or Coverdell education savings accounts (ESAs). Contributions to the nontraditional IRAs are not deductible as adjustments to income.
A movement of funds in a tax-favored plan from one trustee directly to another, either at your request or at the trustee's request.
Expenses service members incur when traveling to locations within their city or general area that is their tax home or post of duty (versus travel expenses).
Expenses service members incur when traveling away from their tax home or post of duty (versus transportation expenses).
A separate legal entity that holds property or assets of some kind for the benefit of a specific person, group of people or organization known as the beneficiary/beneficiaries.
The basis of an item of property for purposes of figuring gain on a sale without taking into account any depreciation taken in earlier years but with adjustments for other amounts, including amortization, the section 179 deduction, any special depreciation allowance, any deduction claimed for clean-fuel vehicles or clean-fuel vehicle refueling property placed in service before January 1, 2006, and any electric vehicle credit.
The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
Income other than pay for work performed. Interest and dividends from savings or investments are common types of unearned income.
Income other than earned income. This is investment-type income and includes interest, dividends, and capital gains. Distributions of interest, dividends, capital gains, and other unearned income from a trust are also unearned income to a beneficiary of the trust. However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income.
A way to figure depreciation for certain property. It is determined by estimating the number of units that can be produced before the property is worn out. For example, if it is estimated that a machine will produce 1000 units before its useful life ends, and it actually produces 100 units in a year, the percent age to figure depreciation for that year is 10% of the machine's cost less its salvage value.
Generally, any part of your net capital gain from selling section 1250 property (real property) that is due to depreciation.
The part of the sales price treated as interest when an installment contract provides for little or no interest.
An estimate of how long an item of property can be expected to be usable in trade or business or to produce income.
A tax on purchases made outside the state for use in the state. Residents are responsible for paying the tax on purchases for which no state sales tax has been charged. The tax applies to transactions that would be subject to sales tax if the purchase were made in the state.
A sale of stock or securities at a loss within 30 days before or after you buy or acquire in a fully taxable trade, or acquire a contract or option to buy, substantially identical stock or securities.
Claimed by an employee on Form W-4. An employer uses the number of allowances claimed, together with income earned and marital status, to determine how much income tax to withhold from wages.
Money that employers withhold from employees' paychecks. This money is deposited for the government. (It will be credited against the employees' tax liability when they file their returns.) Employers withhold money for federal income taxes, federal social security taxes, and state and local income taxes in some states and localities.
Updated for tax year 2018
April 10 — Employees who work for tips
If you received $20 or more in tips during March, report them to your employer. You can use Form 4070.
April 15 — Individuals
File a 2018 income tax return (Form 1040) and pay any tax due. If you want an automatic 6 month extension of time to file the return, file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. For more information, see Form 4868. Then, file Form 1040 by October 15.
April 15 — Corporations
File a 2018 calendar year income tax return (Form 1120) and pay any tax due. Details
April 15 — Individuals
If you are not paying your 2019 income tax through withholding (or will not pay in enough tax during the year that way), pay the first installment of your 2019 estimated tax. Use Form 1040ES.
April 15 — Household Employers
If you paid cash wages of $2,000 or more in 2018 to a household employee, you must file Schedule H Details
April 15 — Corporations
Deposit the first installment of estimated income tax for 2018 Details
April 15 — Social security, Medicare, and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in March.
April 15 — Household employers
If you paid cash wages of $2,000 or more in 2018 to a household employee, you must file Schedule H (Form 1040). If you are required to file a federal income tax return (Form 1040), file Schedule H (Form 1040) with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H (Form 1040) if you paid total cash wages of $1,000 or more in any calendar quarter of 2017 or 2018 to household employees. Also, report any income tax you withheld for your household employees.
April 30 — Social security, Medicare, and withheld income tax
File Form 941 for the first quarter of 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter timely, properly, and in full, you have until May 10 to file the return.
April 30 — Federal unemployment tax.
Deposit the tax owed through March if more than $500.