Understanding tax terms can make tax preparation less stressful. Use TaxACT's Tax Dictionary to help clarify any confusion while filing taxes.

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28% rate gain

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.

401(k) Plan

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.

A

Abstract fees

Expenses generally paid by a buyer to research the title of real property.

Academic period

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.

Accelerated cost recovery system (ACRS)

The depreciation system for property placed in service after 1980 and before 1987. For property placed in service after 1986, MACRS must be used.

Accountable reimbursement plan

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.

Accrual method

Accounting method that reports income when earned (not necessarily received) and expenses when incurred (not necessarily paid), as opposed to the cash method.

Active conduct of a trade or business

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.

Active participation

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.

Active pay

The military income a service member receives while on active duty (versus retirement or retainer pay).

Actual expense method

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).

Adjusted basis

The original cost of property, plus certain additions and improvements, minus certain deductions such as depreciation allowed or allowable and casualty losses.

Adopted child

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.

Adoption Taxpayer Identification Number (ATIN)

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.

Adjusted gross income (AGI)

Total income reduced by certain amounts such as contributions made to a traditional IRA or for student loan interest payments.

Adjusted qualified education expenses (AQEE)

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.

Adjustments to income

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.

Age test

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.

Allocated tips

Tips an employer assigns to an employee. They are in addition to the tips the employee reported to the employer.

Alimony

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.

Alternative minimum tax

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.

Amended return

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.

Amortizable bond premium

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.

Amortization

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.

Amount realized

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.

Annuity

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.

Assets (business)

Property used in the conduct of a trade or business, such as business machinery and office furniture.

At-risk rule

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.)

B

Basis

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.

Beginning inventory

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.

Below-market loan

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.

Blind for tax purposes

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:

  1. You cannot see better than 20/200 in the better eye with glasses or contact lenses, or
  2. Your field of vision is not more than 20 degrees.

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

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.

Bona fide residence test

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.

Bonus depreciation

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.

Business assets

Property used in the conduct of a trade or business, such as business machinery and office furniture.

Business expenses

Business expenses are amounts that are ordinary and necessary to carry on a business.

Business use

Usually, a percentage showing how much an item of property, such as an automobile, is used for business purposes.

C

Capital gain distribution

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.

Capital gains

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.

Capitalization

Adding costs, such as improvements, to the basis of assets.

Call

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.

Candidate for a degree

A student who meets either of the following requirements.

  1. Attends a primary or secondary school or pursues a degree at a college or university, or
  2. Attends an accredited educational institution that is authorized to provide:
    1. A program that is acceptable for full credit toward a bachelor's or higher degree, or
    2. A program of training to prepare students for gainful employment in a recognized occupation.
Cancellation of debt

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.

Capitalized

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.

Cash method

Accounting method that reports income when constructively received (not earned) and expenses when paid (not incurred), as opposed to the accrual method.

Casualty loss

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.

Child and dependent care credit

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.

Circumstantial evidence

Details or facts which indirectly point to other facts.

Citizen or resident test

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.

Class life

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).

Combat zone

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.

Commodities trader

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.

Commodity future

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.

Community property

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.

Community income

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.

Commuting

Travel between a personal home and work or job site within the area of an individual's tax home.

Compensation

Wages, salaries, commissions, tips, bonuses, professional fees, earnings from self-employment, and alimony.

Constructive receipt of income

When an amount is credited to the taxpayer's account or made available to the taxpayer (or taxpayer's agent) without restriction.

Convention

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.

Conversion transaction

Any transaction that you entered into after April 30, 1993, that meets both of these tests.

  1. Substantially all of your expected return from the transaction is due to the time value of your net investment.
  2. The transaction is one of the following.
    1. A straddle, including any set of offsetting positions on stock.
    2. Any transaction in which you acquire property (whether or not actively traded) at substantially the same time that you contract to sell the same property or substantially identical property at a price set in the contract.
    3. Any other transaction that is marketed or sold as producing capital gains from a transaction described in (1).
Credit

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.

D

Date of transaction

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.

Decedent Estate

The real and personal property that an individual owns upon his/her death.

Declining balance method

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.

Defined benefit plan

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.

Defined contribution plan

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.

Degree candidate

A student who meets either of the following requirements.

  1. Attends a primary or secondary school or pursues a degree at a college or university, or
  2. Attends an accredited educational institution that is authorized to provide:
    1. A program that is acceptable for full credit toward a bachelor's or higher degree, or
    2. A program of training to prepare students for gainful employment in a recognized occupation.
Demand loan

A loan payable in full at any time upon demand by the lender.

Dependent

A person, other than the taxpayer or the taxpayer's spouse, for whom an exemption can be claimed. To be your dependent, a person must be your qualifying child or qualifying relative.

Dependent care benefits

These benefits include amounts employers pay to a taxpayer or directly to the care provider.

Dependent taxpayer test

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.

Depletion

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.

Depreciation

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.

Depreciation recapture

Amount of depreciation or section 179 deduction that must be reported as ordinary income when property is sold at a gain.

Designated beneficiary

The individual named in the document creating the account/plan who is to receive the benefit of the funds in the account/plan.

Disability income

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.

Disability pension

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.

Disabled child (permanently and totally disabled)

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.

Disposition

The permanent withdrawal from use in a trade or business or from the production of income.

DITY move

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.

Dividend

A distribution of money or other property made by a corporation to its shareholders out of its earnings and profits.

Documentary evidence

Written records that establish certain facts.

Domicile

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.

Dual status alien

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.

E

Earned income

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.

Earned income credit (EIC)

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.

Elective deferrals

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.

Eligible educational institution
  • American opportunity credit. Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.
  • Coverdell education savings account (ESA). Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Also included is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.
  • Education savings bond program. Same as American opportunity credit in this category.
  • IRA, early distributions from. Same as American opportunity credit in this category.
  • Lifetime learning credit. Same as American opportunity credit in this category.
  • Qualified tuition program (QTP). Same as American opportunity credit in this category.
  • Scholarships and fellowships. An institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
  • Student loan, cancellation of. Same as Scholarships and fellowships in this category.
  • Student loan interest deduction. Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Also included is an institution that conducts an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training.
  • Tuition and fees deduction. Same as American opportunity credit in this category.
Eligible student
  • American opportunity credit. A student who meets all of the following requirements for the tax year for which the credit is being determined.
    1. Did not have expenses that were used to figure an American opportunity or Hope credit in any 4 earlier tax years.
    2. Had not completed the first 4 years of postsecondary education (generally the freshman through senior years).
    3. For at least one academic period beginning in the tax year, was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.
    4. Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.
  • Lifetime learning credit. A student who is enrolled in one or more courses at an eligible educational institution.
  • Student loan interest deduction. A student who was enrolled at least half-time in a program leading to a postsecondary degree, certificate, or other recognized educational credential at an eligible educational institution.
  • Tuition and fees deduction. A student who has either a high school diploma or a General Educational Development (GED) credential, and who is enrolled in one or more courses at an eligible educational institution.
Employer identification number (EIN)

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.

Employee stock ownership plan (ESOP)

A type of defined contribution plan that is invested primarily in employer stock.

Equity option

Any option:

  • To buy or sell stock, or
  • That is valued directly or indirectly by reference to any stock or narrow-based security index.
Estimated tax

Method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.)

Exchange

To barter, swap, part with, give, or transfer property for other property or services.

Excludable income

Income that is not included in the taxpayer's gross income and therefore exempt from federal income tax.

Exempt (from withholding)

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.

Exemption

Amount that taxpayers can claim for themselves, their spouses, and eligible dependents. The total is subtracted from adjusted gross income before tax is figured on the remaining income (taxable income).

F

Fair market value (FMV)

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.

Federal Insurance Contributions Act (FICA)

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.

Fellowship

Generally an amount paid to an individual for the purpose of research.

Fiduciary

The one who acts on behalf of another as a guardian, trustee, executor, administrator, receiver, or conservator.

Filing statuses

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.

Flexible spending arrangements (FSA)

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.

Foreign earned income exclusion

The foreign earned income exclusion allows eligible taxpayers to avoid paying federal income tax on their foreign earned income.

Foreign tax credit

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.

Foregone interest

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.

Forward contract

A contract to deliver a substantially fixed amount of property (including cash) for a substantially fixed price.

Free application for student aid (FAFSA)

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.

Full-time student

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.

Fungible commodity

A commodity of a nature that one part may be used in place of another part.

Futures contract

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.

G

General limitation income

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.

General partner

A general partner is a partner who is personally liable for partnership debts.

General partnership

A general partnership is composed only of general partners.

Gift loan

Any below-market loan where the foregone interest is in the nature of a gift.

Going concern value

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.

Goodwill

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.

Grantor

The one who transfers property to another.

Gross income

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.

Gross income test

One of the dependency tests for qualifying relative. A qualifying relative's gross income for the year must be less than $3,650. There is an exception if the person is disabled and has income from a sheltered workshop.

Gross receipts

Total amounts received from all sources for the year without subtracting any costs or expenses.

Guaranteed payments

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.

H

Half-time student

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.

Head of household

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.

Health savings account

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.

High deductible health plan (HDHP)

An HDHP has:

  • A higher annual deductible than typical health plans, and,
  • A maximum limit on the sum of the annual deductible and out-of-pocket expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums.

An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible.

High withholding tax interest

Interest income on which at least 5% foreign gross income tax was withheld.

Holding period

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

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.

Household employees

Youhave 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.

I

Improvement

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.

Includable income

Income that is included in the taxpayer's gross income and therefore subject to federal income tax.

Income taxes

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).

Independent contractor

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.

Individual retirement arrangement (IRA)

A tax-sheltered savings plan set up by the taxpayer, generally for retirement income.

Individual Taxpayer Identification Number (ITIN)

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).

Injured spouse exception

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:

  1. You are not legally obligated to pay the past-due amount and
  2. You meet any of the following conditions:
    1. You made and reported tax payments (such as federal income tax withheld from wages or estimated tax payments).
    2. You had earned income (such as wages, salaries, or self-employment income) and claimed the earned income credit or the additional child tax credit.
    3. You claimed a refundable credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax.
Insolvent

A taxpayer is insolvent when his or her total liabilities exceed his or her total assets.

Installment sale

A sale of property where you receive at least one payment after the tax year of the sale.

Intangible property

Property that has value but cannot be seen or touched, such as goodwill, patents, copyrights, and computer software.

Interest income

Income a person receives from certain financial accounts or from lending money to someone else.

Interest

Compensation for the use or forbearance of money.

Inventory

Inventory is the items the taxpayer buys or makes for resale to others.

Investment income

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

Investment interest

The interest you paid or accrued on money you borrowed that is allocable to property held for investment.

Investment use

Usually, a percentage showing how much an item of property, such as an automobile, is used for investment purposes.

Involuntary conversion

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.

Itemized deductions

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.

J

Joint return test

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.

Joint return

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.

K

Keogh plans

Qualified plans for self-employed individuals.

Kiddie tax

Special tax rules apply to children under age 18, and certain older children who receive more than $1,900 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 $1,900 is taxed at the parent's rate. These special tax rules apply to children who meet all of the following conditions:

  1. The child had more than $1,900 of unearned income.
  2. The child is required to file a tax return.
  3. The child either:
    1. Was under age 18 at the end of 2010,
    2. Was age 18 at the end of 2010 and did not have earned income that was more than half of the child's support, or
    3. Was over age 18 and under age 24 at the end of 2010 and was a full-time student who did not have earned income that was more than half of the child's support.
  4. At least one of the child's parents was alive at the end of 2010.
  5. The child does not file a joint return for 2010.

L

Letter of determination

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.

Like-kind property

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.

Limited liability partnership

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.

Limited liability company

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.

Limited partner

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.

Listed option

Any option that is traded on, or subject to the rules of, a qualified board or exchange.

Listed property

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.

Lump-sum distribution

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.

M

MACRS

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.

Marked to market rule

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.

Market discount

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.

Market discount bond

Any bond having market discount except:

  • Short-term obligations with fixed maturity dates of up to 1 year from the date of issue,
  • Tax-exempt obligations that you bought before May 1, 1993,
  • U.S. savings bonds, and
  • Certain installment obligations.
Married filing jointly

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.

Married filing separately

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.

Material participation

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.

  1. You participated in the activity for more than 500 hours.
  2. Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the activity) for the year.
  3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year.
  4. The activity is a significant participation activity for the tax year, and you participated in all significant participation activities during the year for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests (other than this fourth test).
  5. You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
  6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or in any other trade or business in which capital is not a material income-producing factor.
  7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the tax year. You did not materially participate in the activity under this seventh test, however, if you participated in the activity for 100 hours or less during the tax year. Your participation in managing the activity does not count in determining whether you materially participated under this test if:
    1. Any person (except you) received compensation for performing services in the management of the activity, or
    2. Any individual spent more hours during the tax year performing services in the management of the activity than you did (regardless of whether the individual was compensated for the management services).
Archer medical savings account

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.

Medical severance pay

A type of includable military income given to service members who have been separated from the service for medical reasons

Member of household test

One of the dependency tests. To meet this test, a person must either:

  • Live with you all year as a member of your household, or
  • Be related to you in one of the following ways:
    • Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). A legally adopted child is considered your child.
    • Your brother, sister, half brother, half sister, stepbrother, or stepsister.
    • Your father, mother, grandparent or other direct ancestor, but not foster parent.
    • Your stepfather or stepmother.
    • A son or daughter of your brother or sister.
    • A brother or sister of your father or mother.
    • Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Modified adjusted gross income (MAGI)

The adjusted gross income before consideration of certain deductions.

  • American opportunity credit. Adjusted gross income (AGI) as figured on the federal income tax return, modified by adding back any:
    1. Foreign earned income exclusion,
    2. Foreign housing exclusion,
    3. Foreign housing deduction,
    4. Exclusion of income by bona fide residents of American Samoa, and
    5. Exclusion of income by bona fide residents of Puerto Rico.
  • Coverdell education savings account (ESA). Same as American opportunity credit in this category.
  • Education savings bond program. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any savings bond interest exclusion and modified by adding back any:
    1. Foreign earned income exclusion,
    2. Foreign housing exclusion,
    3. Foreign housing deduction,
    4. Exclusion of income by bona fide residents of American Samoa,
    5. Exclusion of income by bona fide residents of Puerto Rico,
    6. Exclusion for adoption benefits received under an employer's adoption assistance program,
    7. Deduction for student loan interest,
    8. Deduction for tuition and fees, and
    9. Deduction for domestic production activities.
  • Lifetime learning credit. Same as American opportunity credit in this category.
  • Qualified adoption expenses. Adjusted gross income (AGI) as figured on the federal income tax return, modified by adding back any:
    1. Foreign earned income exclusion,
    2. Foreign housing exclusion,
    3. Foreign housing deduction,
    4. Exclusion of income by bona fide residents of American Samoa, and
    5. Exclusion of income by bona fide residents of Puerto Rico.
  • Rental real estate activities with active participation. Adjusted gross income (AGI) as figured on the federal income tax return less passive activity income, taxable social security benefits and modified by adding back any:
    1. Passive activity loss,
    2. Rental real estate loss allowed to real estate professionals,
    3. Any overall loss from a publicly traded partnership (PTP),
    4. Deduction for one-half of self-employment tax,
    5. Deduction for IRA contributions,
    6. Deduction for student loan interest,
    7. Deduction for tuition and fees,
    8. Deduction for domestic production activities,
    9. Exclusion of income from interest from series EE and I U.S. savings bonds used to pay higher education expenses,
    10. Exclusion for adoption benefits received under an employer's adoption assistance program,
  • Student loan interest deduction. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any student loan interest deduction, tuition and fees deduction, or domestic production activities deduction, and modified by adding back any:
    1. Foreign earned income exclusion,
    2. Foreign housing exclusion,
    3. Foreign housing deduction,
    4. Exclusion of income by bona fide residents of American Samoa, and
    5. Exclusion of income by bona fide residents of Puerto Rico.
  • Traditional IRA contributions deduction. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any IRA contribution deduction and modified by adding back any:
    1. Foreign earned income exclusion,
    2. Foreign housing exclusion,
    3. Foreign housing deduction,
    4. Exclusion for adoption benefits received under an employer's adoption assistance program,
    5. Deduction for student loan interest,
    6. Deduction for tuition and fees, and
    7. Deduction for domestic production activities.
  • Tuition and fees deduction. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any tuition and fees deduction or domestic production activities deduction, and modified by adding back any:
    1. Foreign earned income exclusion,
    2. Foreign housing exclusion,
    3. Foreign housing deduction,
    4. Exclusion of income by bona fide residents of American Samoa, and
    5. Exclusion of income by bona fide residents of Puerto Rico.
Mortgage interest

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.

N

Net capital gain

The excess of net long-term capital gain over any net short-term capital loss.

Net investment income

The total of all investment income (other than tax-exempt income) reduced by the sum of:

  1. Any adjustments to income related to the investment income, plus
  2. The larger of:
    1. $950 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29, that are directly connected with producing the investment income, or
    2. $1,900.
Net operating losses (NOL)

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.

Nominee

A person who receives, in his or her name, income that actually belongs to someone else.

Nondeductible traditional IRA contributions

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.

Nonequity option

Any listed option that is not an equity option, such as debt options, commodity futures options, currency options, and broad-based stock index options.

Nonpassive income

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.

Nonqualified deferred compensation (NQDC)

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.

Nonrefundable credit

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.

Nonresidential real property

Most real property other than residential rental property.

Nontaxable income

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.

O

Options dealer

Any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.

Original issue discount (OID)

The amount by which the stated redemption price at maturity of a debt instrument is more than its sue price.

P

Partnership

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.

Passive income

Taxable income that comes from passive activity (see passive activity).

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.

  • More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate.
  • You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate.
Passive activity loss (PAL)

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.

Pension

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.

Per diem

The phrase is often used when referring to daily employee expenses or reimbursements.

Period of stay

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.

Personal property

Property, such as machinery, equipment, or furniture, that is not real property.

Phaseout

The amount of credit or deduction allowed is reduced when modified adjusted gross income (MAGI) is greater than a specified amount of income.

Physical presence test

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.

Placed in service

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.

Points

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.

Portfolio income

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.

Post-secondary education

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.

Premium

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).

Private activity bond

A bond that is part of a state or local government bond issue of which:

  1. More than 10% of the proceeds are to be used for a private business use, and
  2. More than 10% of the payment of the principal or interest is:
    1. Secured by an interest in property to be used for a private business use (or payments for the property), or
    2. Derived from payments for property (or borrowed money) used for a private business use.
Property class

A category for property under MACRS. It generally determines the depreciation method, recovery period, and convention.

Personal property taxes

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.

Publicly traded partnership (PTP)

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.

Put

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.

Q

Qualified 5-year gain

Long term capital gain from property held more than five years and sold or otherwise disposed of before May 6, 2003.

Qualified dividends

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.

Qualified education expenses
  • American opportunity credit. Tuition and certain related expenses (including student activity fees) required for enrollment or attendance at an eligible educational institution. Books, supplies, and equipment needed for a course of study are included even if not purchased from the educational institution. Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program.
  • Coverdell education savings account (ESA). Expenses related to or required for enrollment or attendance of the designated beneficiary at an eligible elementary, secondary, or postsecondary school. Many specialized expenses included for K–12. Also includes expenses for special needs services and contributions to a qualified tuition program (QTP).
  • Education savings bond program. Tuition and fees required to enroll at or attend an eligible educational institution. Also includes contributions to a qualified tuition program (QTP) or Coverdell education savings account (ESA). Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.
  • IRA, early distributions from. Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half time. Also includes expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.
  • Lifetime learning credit. Tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program or a course taken by the student to acquire or improve job skills.
  • Qualified tuition program (QTP). Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half time. Includes expenses for special needs services and computer access.
  • Scholarships and fellowships. Expenses for tuition and fees required to enroll at or attend an eligible educational institution, and course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Course-related items must be required of all students in the course of instruction.
  • Student loan interest deduction. Total costs of attending an eligible educational institution, including graduate school (however, limitations may apply to the cost of room and board allowed).
  • Tuition and fees deduction. Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program.
Qualifying child

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:

  • Is your child, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them,
  • Lived with you for more than half of the year,
  • Did not provide more than half of his or her own support for the year,
  • Was under age 19 at the end of the year and younger than you (or your spouse if filing jointly) (or was under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or was any age and permanently and totally disabled), and
  • Did not file a joint return with his or her spouse.
Qualified performing artist (QPA)

You are a qualified performing artist if you:

  1. Performed services in the performing arts as an employee for at least two employers during the tax year,
  2. Received from at least two of those employers wages of $200 or more per employer,
  3. Had allowable business expenses attributable to the performing arts of more than 10% of gross income from the performing arts, and
  4. Had adjusted gross income of $16,000 or less before deducting expenses as a performing artist.

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.

Qualifying relative

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:

  • Lives with or is related to you and qualifies as a relative who does not have to live with you,
  • Does not have $3,650 or more of gross (total) income,
  • Is supported (generally more than 50%) by you, and
  • Is neither your qualifying child nor the qualifying child of anyone else.
Qualifying widow(er) with dependent child

Filing status is for widow or widower with one or more qualifying dependent children who lived in your home all year.

R

Railroad retirement benefits (RRBs)

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.

Real estate mortgage investment conduit (REMIC)

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.

Real estate professional

You were a real estate professional for the year if you met both of the following conditions:

  • More than half of the personal services you performed in trades or businesses during the year were performed in real property trades or businesses in which you materially participated.
  • You performed more than 750 hours of services during the year in real property trades or businesses in which you materially participated.

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.

Real estate taxes

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.

Real property

Land and generally anything erected on, growing on, or attached to land, for example, a building.

Recapture

To include as income on your current year's return an amount allowed as a credit or deduction in a prior year.

Recovery period

The number of years over which the basis of an item of property is recovered.

Regular method

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.

Regulated futures contract

A section 1256 contract that:

  • Provides that amounts that must be deposited to, or may be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and
  • Is traded on, or subject to the rules of, a qualified board of exchange, such as a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission or any board of trade or exchange approved by the Secretary of the Treasury.
Relationship test

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.

Resident alien

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.

Restricted stock

Stock you get for services you perform that is nontransferable and is subject to a substantial risk of forfeiture.

Refundable credit

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.

Relative

Someone related to the taxpayer by blood, marriage, or adoption, including the following:

  • Child, grandchild, great grandchild
  • Stepchild, stepbrother, stepsister
  • Brother, sister
  • Half-brother, half sister
  • Parent, grandparent, or other direct ancestor (but not foster parent)
  • Stepmother or stepfather
  • Brother or sister of one's father or mother
  • Son or daughter of one's brother or sister
  • Father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law.
Remainder interest

That part of an estate that is left after all the other provisions of a will have been satisfied.

Rental expenses

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.

Rental income

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.

Residential rental property

Real property, generally buildings or structures, if 80% or more of its annual gross rental income is from dwelling units.

Rollover

A tax-free distribution to you of cash or other assets from a tax-favored plan that you contribute to another tax-favored plan.

Roth IRA

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.

S

S corporation

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.

Sales tax

A tax levied by a state, county or city and collected by retailers and certain service providers when they make taxable retail sales.

Salvage value

An estimated value of property at the end of its useful life. Not used under MACRS.

Scholarship

Generally an amount paid or allowed to a student at an educational institution for the purpose of study.

Savings incentive match plan for employees of small employers (SIMPLE)

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.

Section 179 deduction

This is a special deduction allowed against the cost of certain property purchased for use in the active conduct of a trade or business.

Section 197 intangibles

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.

Section 1245 property

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.

Section 1250 property

Real property (other than section 1245 property) which is or has been subject to an allowance for depreciation.

Section 1256 contract

Any:

  • Regulated futures contract,
  • Foreign currency contract as defined under Section 1256 Contracts Marked to Market,
  • Nonequity option,
  • Dealer equity option, or
  • Dealer securities futures contract.
Securities futures contract

A contract of sale for future delivery of a single security or of a narrow-based security index.

Self-employment income

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.

Self-employment individual

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.

Self-employment tax

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.

Seller-financed mortgage

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.

Short sale

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.

Simplified employee pension plan (SEP)

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.

Single

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.

Social Security Administration (SSA)

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.

Social security benefits

Payments made under Title II of the Social Security Act. They include old-age, survivors, disability insurance, and some workers' compensation benefits.

Standard deduction

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.

Standard mileage method

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).

Standard mileage rate

The established amount for optional use in determining a tax deduction for automobiles instead of deducting depreciation and actual operating expenses.

Statutory employee

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

Stock dividends merely increase the taxpayer's number of shares in the company and generally are not taxable.

Stock options

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.

Straddle

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.

Straight line method

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.

Stripped preferred stock

Stock that meets the following tests.

  1. There has been a separation in ownership between the stock and any dividend on the stock that has not become payable.
  2. The stock:
    1. Is limited and preferred as to dividends,
    2. Does not participate in corporate growth to any significant extent, and
    3. Has a fixed redemption price.
Structural components

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.

Student loan interest

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.

Supplemental security income

A federal income supplement program funded by general tax revenues (not Social Security taxes):

  • It is designed to help aged, blind, and disabled people, who have little or no income; and
  • It provides cash to meet basic needs for food, clothing, and shelter.
Support

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.

T

Tangible property

Property you can see or touch, such as buildings, machinery, vehicles, furniture, and equipment.

Tax-exempt

Not subject to tax.

Tax-exempt interest

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.

Tax forgiveness

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.

Tax home

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.

Tax liability (or total tax bill)

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.

Tax year

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.

Taxable income

Gross income minus any adjustments to income, any allowable exemptions, and either itemized deductions or the standard deduction.

Temporary Assistance for Needy Families (TANF)

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.

Temporary work location

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.

Term interest

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.

Term loan

Any loan that is not a demand loan.

Theft loss

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.

Third-party designee

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.

Traditional IRA

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.

Transfer

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.

Transportation expenses

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).

Travel expenses

Expenses service members incur when traveling away from their tax home or post of duty (versus transportation expenses).

Trust

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.

U

Unadjusted basis

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.

Underpayment of estimated tax penalty

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.

Unearned income

Income other than pay for work performed. Interest and dividends from savings or investments are common types of unearned income.

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.

Unit-of-production method

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 ma chine 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.

Unrecaptured section 1250 gain

Generally, any part of your net capital gain from selling section 1250 property (real property) that is due to depreciation.

Unstated interest

The part of the sales price treated as interest when an installment contract provides for little or no interest.

Useful life

An estimate of how long an item of property can be expected to be usable in trade or business or to produce income.

Use tax

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.

W

Wash sale

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.

Withholding allowance

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.

Withholding tax

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 2011

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Upcoming Tax Dates

April 10 (Employees who work for tips)
If you received $20 or more in tips during March, report them to your employer - Details

April 15 (Individuals)
File a 2013 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due - Details

April 15 (Household Employers)
If you paid cash wages of $1,800 or more in 2013 to a household employee, you must file Schedule H - Details

April 15 (Individuals)
If you are not paying your 2014 income tax through withholding (or will not pay in enough tax during the year that way), pay the first installment of your 2014 estimated tax. Use Form 1040-ES - Details

April 15 (Partnerships)
File a 2013 calendar year return (Form 1065) - Details

April 15 (Partnerships)
Electing large partnerships: File a 2013 calendar year return (Form 1065-B) - Details

April 15 (Corporations)
Deposit the first installment of estimated income tax for 2014 - Details

April 16 (Everyone)
Federal Holiday (District of Columbia Emancipation Day) - Details

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