An employer-provided retirement savings plan to which employees can contribute a portion of their salary as tax-deferred savings. Employers can match some or all of the employee's contributions. The plan allows the employees contributions to grow tax deferred until the money is withdrawn. Withdrawals made before age 59½ can incur tax penalties, although employees can borrow tax- and penalty-free from most 401(k) accounts.
Starting in 2008, the maximum contribution limit will be increased each year based on the cost-of-living increase from the prior year. The federal government will announce the new limits in mid-October.
The system of depreciation in effect from 1981 through 1986. The Tax Reform Act of 1986 contained several changes to the rules for property placed in service after 1986.
See also modified accelerated cost recovery system.
Various methods of depreciation that yield larger deductions in the earlier years of the life of an asset than the straight-line method does. The 200% double-declining balance method and the 150% double-declining balance method are examples of accelerated depreciation methods. You can elect to use either the double-declining balance method or the straight-light method except for farm property, which can be depreciated using the 150% double-declining method or straight-line method.
The method used to determine income and expenses for tax purposes. The 2 most common accounting methods are the cash method and the accrual method.
The 12-month period that you use to determine your federal income tax liability. Unless you make a specific choice to the contrary, your accounting period is the calendar year.
One of the 2 most common accounting methods, the other being the cash method. Under the accrual method of accounting, income is reported in the tax year it's earned, whether or not it's received in the same tax year. Deductions are claimed in the tax year the expenses are incurred, whether or not they're paid in that tax year.
Interest that has been earned but not yet paid or credited; for example, interest earned on a bond since the last interest payment was made.
The debt you owe when taking out a loan to buy or acquire your main or second home. This term also refers to a loan that is used to build or substantially improve your main or second home, such as rebuilding the back deck or adding an addition. The loan must be secured by your home to qualify as acquisition indebtedness. You can deduct the interest on up to $1 million of acquisition indebtedness.
For purposes of the passive loss rules, income and losses must be divided into 3 categories: active, passive, and portfolio. Active income and losses are those for which you perform services. Examples are wages, salaries, tips, bonuses, and income and losses from business and partnership activities in which you materially participate.
See also passive income and losses, portfolio income and losses, and material participation.
The amount of participation needed in a rental activity in order for a taxpayer to deduct losses up to $25,000, assuming the losses are otherwise qualified. The rules for active participation are not as stringent as those for material participation.
A taxpayer who makes management decisions in a significant and bona fide sense is considered to actively participate.
The method of deducting automobile expenses that's based on actual costs incurred, such as gas, oil, repairs, washing, and so on, plus a deduction for depreciation.
A refundable credit available to taxpayers with earned income of more than $3,000 or with 3 or more qualifying children, and whose regular child tax credit exceeds the taxpayer's tax liability, minus other nonrefundable credits. The additional child tax credit is computed on Form 8812.
See also child tax credit.
The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.
Adjusted gross income equals gross income such as wages, interest, and dividends, minus reductions (called adjustments) that are allowed regardless of whether personal deductions are itemized. Adjustments include the IRA deduction and the student loan interest deduction, as well as other items grouped near the bottom of page 1 of Form 1040 and Form 1040A.
On the tax forms, AGI is found on Form 1040EZ, line 4 and at the bottom of page 1 of Form 1040 and Form 1040A.
An expense that can be deducted from your income even if you don't itemize deductions. Adjustments to income are subtracted from gross income to arrive at adjusted gross income.
A child is considered a child with special needs if all 3 of these statements are true:
The child was a citizen or resident of the United States or its possessions at the time the adoption process began.
A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parent's home.
The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:
The child's ethnic background and age
Whether the child is a member of a minority or sibling group
Whether the child has a medical condition or a physical, mental, or emotional handicap
A nonrefundable credit that's available for the qualified adoption expenses incurred for each eligible child. The credit cannot exceed $13,170 per child for 2010. The limit is a per-child limit, not an annual limit, and can be carried forward for up to 5 years or until used.
Payment by an employer based on an employees claim to entitlement to the Earned Income Credit. Advance Earned Income Credit payments are treated as additional taxes on the employee's tax return.
Payments made by one spouse to the other spouse or former spouse under a written separation or divorce agreement. Qualified alimony and separate maintenance payments must be included in the gross income of the recipient and are deductible by the payer. Child support payments and property settlements aren't treated as alimony.
Tips allocated to you by your employer if you have under-reported the tips you've received. If you wait or bus tables, park cars, bar tend, serve cocktails, deliver food, or entertain, your employer has to determine if the employees have reported tips in the aggregate of at least 8% of the establishments gross sales subject to tipping. To do this, the employer adds all the establishments gross receipts (sales where tipping is involved) and then calculates 8% of that number. If all of the employees reported tips total less than 8% of gross receipts, the employer determines the difference between what the employees reported and the 8% amount. The employer then allocates that difference among all tipped employees. If you, as an employee, reported less than the allocated amount to your employer, the allocated amount is reported on your W-2 form in box 8, Allocated Tips.
Under this method, the MACRS (or ACRS) deduction is computed using a straight-line depreciation method percent and, in some cases, an optional longer recovery period.
The Alternative Minimum Tax was designed to prevent higher-income taxpayers from escaping taxation through excessive use of certain tax breaks. Taxpayers might be subject to AMT if they have certain minimum tax adjustments or tax preference items and their alternative minimum taxable income is more than the exemption allowed for their filing status and income level. The Alternative Minimum Tax is computed on Form 6251.
A tax return filed on Form 1040X after the original return has been filed. An amended return is used to correct an error or to claim deductions or credits you are entitled to but failed to claim on your original return.
A maximum credit of $2,500 per qualified student for tuition and fees.
Available for all 4 years of undergraduate education.
Income limit up to $90,000 ($180,000 for joint filers).
Can be used for books, supplies and materials even if not purchased from the school.
40% of the credit can be added to your refund.
Known as the Hope Credit previously.
The deduction of capital expenses over a fixed period of time instead of deducting the entire expense in a single tax year. Expenses that are amortized include business startup expenses, qualified forestation or reforestation costs, and Section 179 intangibles such as goodwill, going-concern value, covenants not to compete, franchises, trademarks, and trade names. Amortization is claimed on Form 4562.
The amount received by a taxpayer on the sale or exchange of property. The amount received is the sum of the cash received and the fair market value of any property or services plus any of the sellers liabilities assumed by the purchaser. Determining the amount realized is the starting point for arriving at realized gain or loss.
A fixed sum payable to a person at specified intervals for a specific period of time or for life. Payments represent a partial return of capital and a return on capital investment.
A trust or custodial account created exclusively for the purpose of paying the qualified medical expenses of the account holder.
The tax code seems to favor and encourage the use of health savings account (HSAs) over Archer MSAs as time goes by.
Special rules limiting the taxpayer's deductible business, partnership, S corporation, or real estate loss to cash invested plus debt that the taxpayer is legally obligated to pay plus the adjusted basis of any property contributed.
An Adoption Taxpayer Identification Number issued by the Internal Revenue Service as a temporary taxpayer identification number for the child in a domestic adoption where the adopting taxpayers don't have and/or are unable to obtain the child's Social Security Number (SSN). The ATIN is to be used by the adopting taxpayers on their federal income tax return to identify the child while final domestic adoption is pending.
An IRS examination and verification of a taxpayer's return or other transactions with tax consequences. An office audit is an audit by the IRS that is conducted in the agent's office. A field audit is conducted by the IRS on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer.
The following may be deductible as bad debts:
Business accounts receivable that were included in income in a prior year and are uncollectible
Legally binding debts owed to the taxpayer that are totally worthless and uncollectible
Debts the taxpayer must pay that he guaranteed in connection with his business or for a profit
If you sell or exchange property for less than fair market value with the intent of making a charitable donation, the transaction is partly a sale or exchange and partly a donation.
Basis is a term that is used in different ways for different tax purposes.
The cost of a business asset minus depreciation plus improvements. See also adjusted basis.
The amount you paid (or amount not considered income) for a capital asset you sold (often shares of a stock or mutual fund). See also basis of stock.
Your basis in a partnership, that is, the amount you contributed plus income, minus distributions, and so on. See also partnership basis.
If purchased, the amount paid for the stock. If the stock is received as a gift, basis is generally the basis of the previous owner or the fair market value when received. The basis of inherited stock is usually its fair market value on the date of the decedent's death.
A loan where interest is payable at a rate below the going market rate. You must report as interest income any forgone interest from that loan.
A gift by will of personal property. A bequest is not includable in the income of the recipient. The basis is usually the value of the property at the date of death of the decedent. If a bequest of money is to be paid at intervals, then to the extent that it is paid out of income from property, it is taxable income to the recipient.
A person is considered legally blind if:
The person is totally blind,
The person cant see better than 20/200 in his or her better eye with glasses or contact lenses, or
The person's field of vision is 20 degrees or less.
A bond is a financial instrument that generally pays stated interest over time. A premium on a bond is extra money paid for the bond -- an amount greater than its face value. You're allowed to reduce your interest income by a part of the bond premium you paid.
Bunching is a term used to describe the process of maximizing your deductions so that they total more than the standard deduction. If you have expenses every year that are deductible, but you don't have enough in any 1 year to itemize your deductions, you might want to consider bunching. For example, in December 2010, make sure you're paid up on your mortgage, state and local taxes, medical expenses, and charitable contributions so that you can itemize. Or, conversely, if you think you won't have enough expenses to itemize your deductions in 2010, then defer as many of those payments as you can until 2011. Hold off on making charitable contributions until 2011 and make both your 2010 and 2011 contributions at one time. Make your last 2010 estimated state income tax payment in January 2011, and so on.
Taxpayers must prove that the information they report on their tax return is true, if and when the IRS asks them to do so. This means having receipts, cancelled checks, and bookkeeping records for a number of items. It is a case of "guilty until proven innocent." If the IRS asks for your records and you can't produce them, your expenses often will be disallowed.
A major repair to property that extends its useful life, adds to its value, or adapts it to new uses. The replacement of a roof, as opposed to patching the roof, is a capital improvement. The costs of capital improvements to business property can be depreciated.
A capital gain is the profit you earn from the sale of capital assets. Capital assets are assets such as stocks, bonds, mutual fund shares, and real estate. The profit is the difference between the amount you receive from the sale and the amount you originally paid for the asset. A capital gain may be short-term, which means you held the property for 1 year or less, or it may be long-term, which means you held the property for more than 1 year before you sold it. Long-term capital gains are usually taxed at a more favorable rate than short-term capital gains (some exceptions are long-term gains on the sale of collectibles and unrecaptured Section 1250 gains).
The loss from the sale of a capital asset (stocks, bonds, mutual-fund shares, and so on). Losses are deductible, first from any capital gains and then from income. The amount of net loss that is deductible from income is limited to $3,000 per year ($1,500 if married filing separately). Any losses you still have can be carried forward until used up. Losses on personal assets such as your car aren't deductible.
Certain losses are allowed to be carried forward if they are not used in the current year. This includes capital losses. Any net capital losses that exceed $3,000 ($1,500 if married filing jointly) can be carried forward to future tax years until they are used up.
Any payment made by cash, check, credit card, or money order is considered to be made with cash. This is also called a money donation.
One of the 2 most common methods of accounting, the other being the accrual method. Under the cash method of accounting, income is reported in the tax year actually or constructively received, and expenses are deducted in the tax year paid.
A casualty is the complete or partial destruction of property resulting from a sudden, unexpected, or unusual event. Examples of this are floods, storms, fires, earthquakes, auto accidents, and terrorist attacks. A casualty loss to personal use property is deductible on an individual return if it is more than $500 and more than 10% of your adjusted gross income (AGI). A casualty loss to personal use property that is caused by a federally declared disaster is deductible if it is more than $500 and may be claimed even if you do not itemize deductions. A casualty loss to business use property or property held for investment has different limitations. Use Form 4684 to claim all of your casualty or theft losses.
Money or property donated to a qualified charitable organization. Household items and clothing contributed to charity after August 17, 2006, must be in at least good used condition to be deductible. You must obtain and keep a bank record or a written communication from the organization as a record of the contribution.
The child tax credit allows taxpayers to claim a tax credit of up to $1,000 per qualifying child. When a taxpayer's child tax credit is more than his or her tax liability, the taxpayer might be eligible to claim the additional child tax credit. The total of the 2 credits is limited to $1,000 per eligible child.
A credit you can claim if you pay someone to care for a dependent under age 13, or your spouse or dependent that is not able to care for himself or herself, so that you can work or look for work. The credit is worth up to 35% of your child and dependent care expenses.
Payments intended to support a child that come from a court order, divorce decree, or other legal obligation. Child support payments do not constitute alimony and are not deductible as alimony by the payer. The person who receives the child support does not include it income or pay taxes on it.
A term used in the tax code in connection with money or other property that a recipient receives and holds as income but is required to restore to the payer in whole or in part in a later year because it turns out that the recipient didn't have an unrestricted right to the income.
Usually a tax year is considered closed 3 years after the date that a tax return for that year is filed. This means that the taxpayer can't claim a refund for that year and the IRS can't collect additional taxes, with certain uncommon exceptions.
The American Opportunity Credit (previously the Hope Credit) is worth up to $2,500 per year per student and is available for the first 4 years of vocational school or college. The Lifetime Learning Credit is worth up to $2,000 per year for additional schooling after the first 4 years. You can claim the American Opportunity Credit for each qualifying student yourself, your spouse, or your dependent child) for whom you pay tuition and other qualifying fees including cost of books (but not the cost of room and board). You can only claim 1 Lifetime Learning Credit each year, however, for a maximum credit of $2,000 per tax return. The right to the American Opportunity credit disappears as 2010 adjusted gross income rises from $80,000 to $90,000 on an individual return and from $160,000 to $180,000 on a joint return. The right to the Lifetime Learning credit disappears as 2010 adjusted gross income rises from $50,000 to $60,000 on an individual return and from $100,000 to $120,000 on a joint return.
See also American Opportunity Credit, Hope Credit, Lifetime Learning Credit, education expense deduction, and tuition and fees deduction.
Members of the U.S. armed forces serving in designated combat zones can exclude pay from income. An enlisted member, warrant officer, or commissioned warrant officer serving in a combat zone during any part of a month can exclude all military pay for that month. Military pay earned while hospitalized as a result of wounds, disease, or injury incurred in a designated combat zone can also be excluded. If hospitalized, military pay received for any month of service that begins more than 2 years after the end of combat activities in the combat zone cannot be excluded.
A commissioned officer (other than a commissioned warrant officer) can exclude combat pay. However, the amount of the exclusion is limited to the highest rate of enlisted pay (plus imminent danger / hostile fire pay received) for each month during which the commissioned officer served in a combat zone or was hospitalized as a result of service there.
The broker's fee for purchasing or selling securities or property for a client.
An allowance paid to a salesperson or agent for services rendered.
A marriage established in a state that legally recognizes nonceremonial marriages. The parties must have the legal capacity and the intent to marry, and must live together and present themselves publicly as husband and wife.
Shares in the ownership of a corporation that are entitled to dividends, after bonds and preferred stock have first received interest and dividends. A common stockholder usually has a vote in deciding company affairs, including the election of a corporation's board of directors.
Income of a married couple living in a community property state that is considered to belong equally to each spouse, regardless of which spouse receives the income.
Property considered to belong in equal shares to a husband and wife. This concept of ownership for property acquired after marriage is followed in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
Alaska is also a community property state, but its system allows for separate property as well. Couples there must opt-in to the community property system.
Travel from your residence to your regular place of business and back to your residence.
Wages, commissions, tips, professional fees, and net self-employment income from services rendered; that is, earned income. For IRA purposes, compensation also includes alimony and separate maintenance payments.
The taking of property by a public authority. The property is condemned as the result of legal action and the owner is compensated by the public authority. The power to condemn property is known as the right of eminent domain.
A cash-basis taxpayer is taxed on income only as it is received. But if he could have received the income and chose not to do so, it is considered as having been "constructively received" by him and is taxable. For example, interest credited to a savings account is constructively received even if the taxpayer hasn't withdrawn it.
See personal interest.
Donation or gift to a qualified charitable organization, generally deductible on Schedule A.
Money placed in a retirement fund, such as an individual retirement arrangement or an employer-maintained retirement plan.
Reclassification of a traditional IRA to a Roth IRA. This process may or may not involve relocation of the funds. Any converted amounts are taxed to the extent they were not taxed previously, but are not subject to an early distribution penalty.
The amount you paid for the products you sold. Generally, it is calculated as your beginning inventory, plus your purchases during the year, minus your ending inventory. If applicable, you also need to add direct labor and overhead costs and subtract withdrawals for personal use. Sole proprietors compute their cost of goods sold in Part III of Schedule C (Form 1040).
A tax-favored savings plan through which any number of taxpayers can contribute up to $2,000 per eligible beneficiary. Contributions are nondeductible. Earnings and withdrawals are tax-free and penalty-free if used to pay for qualified higher education expenses.
See Savers credit.
Credits reduce your tax, sometimes all the way to zero if you have enough of them (these are nonrefundable credits) and sometimes beyond that to generate a refund for you (these are refundable credits). Nonrefundable credits include the child and dependent care credit, the foreign tax credit, and the Lifetime Learning Credit. Refundable credits include the Earned Income Credit and the additional child tax credit. The tax law makes credits available for various purposes to taxpayers who meet the qualifications. Some credits can be carried over to other tax years.
The parent with whom a child lives for more than half the year.
A 14-digit number assigned to your return by your intermediate e-file service provider and/or transmitter.
Items that reduce your taxable income, helping you pay less tax. The standard deduction is the most common example. In 2010, you can reduce your income by the standard deduction amount of $11,400 if you're married and filing a joint return ($5,700 for single filers and $8,400 for head-of-household filers).
Other common deductions include the home mortgage interest deduction, the real estate tax deduction, and the deduction for gifts to charity. These are all itemized deductions, and if they add up to more than the standard deduction, you can reduce your income by this larger amount.
Compensation that is taxed when received or when certain restrictions on receiving it are removed; it isn't taxed when earned. For example, contributions to a qualified retirement plan on behalf of an employee are considered deferred compensation. Such contributions will not be taxed to the employee until the funds are made available or distributed to the employee, usually when the employee retires.
Nonrecognition of realized gain at the time of a tax-deferred exchange. Deferred gain on the sale of a principal residence generally applies only to those sales made before May 7, 1997.
An employee benefit plan that provides determinable benefits not based on employer profits. The most common type of defined benefit plan is a pension plan.
An employee benefit plan that provides a separate account for each person covered and pays benefits based on account earnings. Examples include 401(k) plans and profit-sharing plans.
A person who meets 1 of these conditions:
Attends a primary or secondary school or is pursuing a degree at a college or university, or
Attends an accredited educational institution that is authorized to provide:
A program that is acceptable for full credit toward a bachelors or higher degree, or
A program of training to prepare students for gainful employment in a recognized occupation.
An individual whose personal exemption can be claimed on another person's income tax return. To be claimed as a dependent, a person must meet certain tests. Generally, a dependent must be a U.S. citizen and must not claim his or her own dependents or file a joint return. A dependent must be a qualifying child or a qualifying relative.
See child and dependent care credit.
An annual income tax deduction that reduces the cost or basis of property used in a trade or business, or for the production of income, over the useful life of the property. Depreciation is an allowance for the wear and tear, deterioration, or obsolescence of the property.
Direct transfer allows you to direct the trustee of your retirement account to move your money directly to the trustee of a new or other existing retirement account. Since you don't take control of the transfer of your money, no tax is withheld or calculated on the money moved. Unlike a rollover, you're allowed to move your money from 1 retirement account to another by direct transfer an unlimited number of times.
A person is permanently and totally disabled if both of the following apply:
The person cannot engage in any substantial gainful activity because of a physical or mental condition; and
A physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death.
A casualty sustained in an area designated as a disaster area by the president of the United States. A disaster loss can be treated as having occurred in the taxable year immediately preceding the year in which the disaster actually occurred. Thus, immediate tax benefits are provided to victims of the disaster.
The act of taking an asset out of service in a trade or business. A disposition occurs when an asset is sold, abandoned, exchanged, retired, destroyed, or converted to personal use.
Money or property a taxpayer receives from a retirement plan, such as an individual retirement arrangement or an employer-maintained retirement plan.
A partner’s share of income in a partnership, a shareholder’s share of income in an S Corporation, or the income distributed to a beneficiary of an Estate or Trust.
Generally, the money received on a regular basis from a corporation or mutual fund out of its profits. This money may stay in your brokerage account, come to you in the form of a check, or be reinvested in the company or mutual fund through the purchase of additional shares. In any of these cases, the money will be considered a taxable dividend. Taxable dividends are reported to you on Form 1099-DIV.
A corporation can also distribute stock or other property as dividends. An insurance dividend is not a true dividend but a return of the premium paid. Dividends from a savings and loan association or credit union are interest, not dividends.
A deduction that provides a tax savings against income attributable to domestic production activities. Qualified domestic production activities include manufacturing, producing, growing, and extracting tangible personal property, computer software, and sound recordings, and the construction and substantial renovation of real property, including infrastructure. The production of certain films is also a qualifying activity, as are certain engineering or architectural services.
A distribution from a qualified retirement plan or individual retirement arrangement before the plan participant has reached age 59½. Such distributions generally are subject to a 10% penalty tax.
Income generated from personal services rather than income generated from property or other sources. Earned income includes all amounts received as wages, tips, bonuses, other employee compensation, and self-employment income, whether in the form of money, services, or property.
A refundable tax credit for qualified taxpayers based on earned income, adjusted gross income, and the number of qualifying children.
A deduction that can be claimed by employees who pay tuition and go to school in order to maintain or improve their job-related skills, or to comply with their employers or legal requirements for their job.
For example, teachers in many states are required to have a master's degree. Education that is required to meet the minimum requirements of your job, or to qualify you to enter a new career or trade, doesn't qualify for the deduction Also, if you qualify for the tuition and fees deduction, the American Opportunity Credit, or the Lifetime Learning Credit, then you cannot also take the education deduction. The education deduction is a miscellaneous deduction and is subject to the 2% of adjusted gross income limitation.
See also tuition and fees deduction, American Opportunity Credit, Hope Credit, and Lifetime Learning Credit.
An adjustment to income (limited to $2,500) for interest paid during the year on qualified higher education loans.
See Coverdell Education Savings Account.
A deduction of up to $250 for classroom supplies, books, and equipment, available to eligible educators of students in kindergarten through grade 12. Expenses can be deducted from income even if deductions aren't itemized. Unless extended by Congress, this deduction is available through 2009 only.
Employer Identification Number. Also known as a Federal Tax Identification Number, an EIN is used to identify a business entity.
Any college, university, vocational school, or other post-secondary 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) post-secondary institutions.
The rest of the definition varies by benefit.
See foster child.
To claim the American Opportunity Credit, an eligible student must meet all of these requirements:
For 1 academic period beginning in the current year, the student was enrolled at least half-time in a program leading to a degree or other recognized educational credential.
The student hasn't been convicted of a felony for possessing or distributing a controlled substance.
For the Lifetime Learning Credit, an eligible student is a student who is enrolled in 1 or more courses at an eligible educational institution.
For the tuition and fees deduction, an eligible student is a student who is enrolled in 1 or more courses at an eligible educational institution and who has either a high school diploma or a General Educational Development (GED) certificate.
For more information about eligible students, see IRS Publication 970, Tax Benefits for Higher Education.
A person who is subject to the will and control of an employer, not only as it pertains to the work to be done, but also with regard to how the work is done. For income tax purposes, an employee is to be distinguished from an independent contractor. This is important because the withholding of income taxes on wages applies only to employees. Also, your status affects whether or not you qualify for some deductions and credits and the amount you can claim.
See also statutory employee.
An option given to an employee to buy stock from a company, usually at a favorable price. Stock options that are given special income tax treatment are statutory stock options, such as incentive stock options (ISOs) and employee stock purchase plans (ESPPs). Other stock options are known as nonstatutory or nonqualified stock options.
A tax professional who, by virtue of IRS experience or passing an IRS test, can represent clients at IRS audits and appeals.
Entertainment expenses are deductible by employees and self-employed taxpayers only if the expenses are directly related to or associated with a trade, business, or profession. To prevent abuses, various restrictions and documentation requirements have been imposed on the deductibility of entertainment expenses. The deduction for qualified business entertainment is limited to 50% of the cost.
A taxable entity that is established upon the death of a taxpayer. It consists of all the decedent's property and personal effects. The estate exists until the final distribution of its assets to the heirs and other beneficiaries. During the period of administration, the executor must usually file a return.
The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts, if any, of withheld tax and certain refundable credits.
The payments you make to the IRS on a quarterly basis are called estimated tax payments. Usually these are paid on April 15, June 15, September 15, and January 15. Making estimated tax payments when your withholding won't cover your tax bill will generally help you avoid an underpayment penalty.
If a taxpayer worked for more than one employer during 2010, and more than $6,622 was withheld from the taxpayers pay as Social Security tax, the excess amount is included in the Payments section of the return and treated in the same manner as withholding tax.
A transfer of property in return for other property or services. Exchanges of like-kind property are often permitted with no immediate tax consequence.
Generally, a gain realized on the sale of a principal residence. You can exclude up to $250,000 ($500,000 if married filing jointly) of gain on the sale if you owned and occupied the residence for at least 2 of the 5 years prior to the sale; may be subject to some restrictions.
An annual deduction that's permitted for each taxpayer and dependent when determining taxable income. An extra exemption is allowed for taxpayers who are blind and/or 65 years of age or older.
Expenses that reduce the sale price of a property, when paid by the seller. Examples are commissions paid to a broker or real estate agent, legal fees, and transfer taxes.
An election to deduct the cost of certain qualified property in the current year rather than depreciate the property annually. You can deduct a maximum of $250,000 for property placed in service in 2010. This is also referred to as a Section 179 deduction.
The amount at which property would change hands between a willing buyer and a willing seller, when neither is under compulsion to buy or sell and both having reasonable knowledge of the relevant facts.
The amount the owner of a property could reasonably expect to receive from a stranger for the same type of lodging; generally, the amount at which a home with its furnishings could be rented to a similar-size family in a similar location.
The amount taken out of income by the payer and submitted to the IRS as an advance payment of the taxpayer's federal income tax.
Your employer withholds federal tax based on the number of allowances you declare on Form W-4. Since you pay taxes as you earn or receive income, other payers can also withhold federal tax.
The law that provides for Social Security and Medicare benefits. Payroll taxes are imposed equally on the employer and employee. For 2010, employers are required to withhold 1.45% of each employee's gross wages for Medicare tax and 6.2% of each employees wages up to $106,800 for Social Security tax.
These are the 5 filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er).
Your filing status affects your income tax rate, the amount of your standard deduction, and the availability of many tax breaks. Two factors determine your filing status: marital status and your responsibility for yourself and others.
Financial authority can be described as "signature authority" or "other authority." A person who has "signature authority" over an account controls the disposition of money or other property by signing a document and delivering it to the bank where the account is maintained. A person who has "other authority" exercises comparable power over an account by communicating directly -- orally or by some other means -- with the bank where the account is maintained.
If you're a U.S. citizen or U.S. resident alien, you have a financial interest in an account in a foreign country if:
You're the owner of the account or you have legal title over the account. If the account is in the name of two persons jointly, you both have a financial interest in the account.
The owner of the account is a person who is acting as an agent, nominee, attorney, or in some other capacity on your behalf.
The owner of the account is a corporation in which you own more than 50% of the total value of shares of stock, either directly or indirectly.
The owner of the account is a partnership in which you own more than 50% of the profits (distributive share of income).
The owner of the account is a trust in which you have an interest in more than 50% of the assets or you receive more than 50% of the current income.
An account in which employees set aside part of their salary to pay for medical expenses or dependent care. The money set aside is pre-tax, meaning no Social Security, Medicare, state or federal tax will be calculated on it. The maximum amount an employee can set aside in a flexible spending account is $5,000. For some employers, the limit may be lower.
A credit or deduction available to U.S. citizens or resident aliens, and in limited circumstances, to U.S. nonresident aliens, who incur or pay income taxes to a country other than the United States.
A child other than the taxpayer's biological child, stepchild, or adopted child, who is placed in the home of the taxpayer by an authorized placement agency or by a court order, decree, or judgment.
Compensation or other benefits received by an employee that aren't in the form of cash. Some fringe benefits (for example, accident and health plans and group-term life insurance) may be excluded from the employee's gross income. Therefore, they wouldn't be subject to federal income tax.
An individual who is enrolled in a school for the number of hours or courses necessary to be considered a full-time student by the school. School includes elementary and secondary schools, post-secondary schools, and technical and trade schools. It doesn't include on-the-job training, correspondence schools, or night school. However, a student who takes night classes as part of a full-time course of study is considered a full-time student.
To qualify as a full-time student, your child must be, during some part of each of any 5 calendar months of the year, either:
A full-time student at a school that has a regular teaching staff, course of study, and a regularly enrolled student body at the school, or
A student taking a full-time, on-farm training course given by a school described above, or by a state, county, or local government agency
The 5 calendar months don't have to be consecutive.
Of the amount realized from a sale or exchange of property, gain is the amount that is more than the adjusted basis of the property sold or exchanged.
A partner who is personally liable for partnership debts.
A rule used to determine the taxable portion of a pension or annuity, generally replaced by the simplified method for periodic payments starting after November 18, 1996.
A sales tax imposed on the retail sale of a broad range of items at a single rate.
A transfer of property from 1 person or entity to another without consideration or compensation. For income tax purposes, the words "gift" and "donation" usually have separate meanings. "Donation" refers to donations to charitable, religious, and other organizations, and "gift" refers to transfers of money or property to private individuals, needy persons, friends, relatives, and so on. Gift recipients aren't required to include gifts in their gross income, and the maker of the gift is not entitled to deduct it (except for business gifts to customers of $25 or less per recipient per year).
A graduated federal tax paid by the giver on gifts exceeding $13,000 (for 2010) per recipient.
Income in the form of money, property, and services that isn't exempt from tax.
Gross receipts minus the cost of goods sold.
Total income from rents before expenses or the depreciation or cost recovery deduction.
A student who is enrolled in a course of study for at least half the full-time academic work load, as determined by the standards of the school where the student is enrolled.
The practice of considering property as placed in service in the middle of the year, regardless of the actual date it was placed in service. This means that a half year of depreciation is allowed for the year the property is placed in service. This convention is used if neither the mid-quarter convention nor mid-month convention applies.
A withdrawal from a Section 401(k), 403(b), or 457 plan that is permitted when the plan participant has an immediate and substantial financial need and the withdrawal is necessary to meet that need.
The filing status used by unmarried taxpayers who (1) paid more than half of the cost of maintaining a household for the year, and (2) had a "qualifying person" living with them in the home for more than half the year (except for temporary absences, such as to attend school). However, if the "qualifying person" is your dependent parent, he or she does not have to live with you.
A trust or custodial account created after 2003 exclusively for the purpose of paying the qualified medical expenses of a high-deductible health plan in which the account holder is enrolled.
A rule that limits the deductibility of expenses from a hobby to the amount of income from the hobby. Losses exceeding the hobby income are nondeductible, while losses from an activity that is engaged in for profit can be deducted against other taxable income. The IRS presumes that an activity is carried on for profit if it makes a profit during at least 3 of the last 5 years.
The period of time that property is owned for income tax purposes. The holding period determines if the gain or loss from the sale or exchange of a capital or business asset is long- or short-term.
Mortgages (and other types of loans in which the home is used to secure the loan) are divided into 2 groups. The first is debt used to buy, build, or substantially improve your home. This is acquisition debt. The other is home-equity debt, in which your home (or second home) is used to secure a loan for purposes other than substantial home improvement. For example, the loan could be used to make repairs on your home or to buy a yacht.
For military purposes, this is the place recorded as a persons home when he or she joins the military. While the person is on active duty, the home of record doesn't change. It might or might not be the same as the state of legal residence.
See also state of legal residence (SLR).
Expenses of operating the portion of a residence used for business or employment-related purposes. Several restrictions limit the deduction for home office expenses.
Now known as the American Opportunity Credit. A credit of up to $2,500 per qualified student for tuition and fees paid for the first 4 years of post-secondary education.
See also American Opportunity Credit
An individual who performs nonbusiness services for you in or around your home. Such services include child and dependent care, house cleaning, cooking, and yard work.
Income you must report as IRS-designated interest on certain loans with little or no stated interest rate. These loans are treated as though the lender is charging interest and simultaneously making a gift to the borrower of the amount needed to pay that interest. The tax consequence is that the lender has to report as taxable income the phantom interest that the loan did not produce.
This applies only to loans in excess of $10,000. For loans up to $100,000, imputed interest isn't required to be calculated if the borrower's investment income is less than $1,000. If the borrower's investment income is more than $1,000, the forgone interest to be reported by the person making the loan and deducted by the borrower is limited to the amount of the borrower's investment income.
The amount of money you received during the year for your labor or services, from the sale of goods or property, as profit from your financial investments, and from all other sources.
A taxpayer who contracts to do work according to his own methods and who is not subject to control except as to the results of such work. An employee, by contrast, is subject to the control of the employer as to the methods to be used to obtain the desired results.
A plan through which a self-employed person with no employees can contribute up to $16,500 of 2010 compensation or self-employment income (plus an additional $5,000 if you're age 50 or older) to a tax-deferred account. In addition, the plan allows you, as a self-employed person, to contribute and deduct an additional amount of up to 20% of your self-employment income. Traditional small-business retirement plans (profit-sharing plans, Keoghs, and SEPs) allow annual deductible contributions equal to 20% of your self-employment income, with a maximum dollar limit of $49,000 for 2010.
Example: You earn $80,000 from your self-employment. The maximum individual 401(k) contribution would be $32,500 [$16,500 + (20% of $80,000)]. With a traditional plan, the maximum contribution would only be $16,000 (20% of $80,000).
A personal savings plan that allows a taxpayer to accumulate money tax deferred until withdrawal, usually upon retirement. There are 2 types of IRAs: traditional IRAs and Roth IRAs.
See individual retirement account (IRA).
Property acquired through laws of descent or by distribution from a person who dies without leaving a will. Property acquired by inheritance usually takes as its basis the fair market value at the date of the decedent's death. An inheritance of property is not a taxable event, but the income produced by an inheritance is taxable.
A claim for a federal tax refund by a spouse who files a joint tax return, and all or part of the refund has been, or is expected to be, applied to past-due amounts owed by the other spouse. The other spouse is legally responsible to pay these past-due amounts (for example, federal income tax, state income tax, child or spousal support, or a federal nontax debt, such as a student loan), and the injured spouse isn't legally obligated to pay these amounts.
Rules that apply when a spouse believes that a joint federal tax liability should be paid solely by the other spouse. You might qualify for relief from tax liability on a joint return if any of these apply:
Your spouse understated the tax due by omitting income or claiming false deductions or credits.
You're divorced, separated, or no longer living with your spouse, or
Given all the facts and circumstances, it wouldn't be fair to hold you liable for the tax.
For more information, see Publication 971, Innocent Spouse Guide.
A method of reporting the sale of property that enables a taxpayer to spread the recognition of gain on the sale over the payment period. Using this method, the seller computes the percent of gross profit on the sale (that is, the gain divided by the contract price) and applies it to each payment received to arrive at the amount of the gain to be recognized.
Amounts paid to policyholders are not dividends on capital stock, but are a rebate of a portion of the premiums paid for the insurance. Such dividends reduce the cost of the insurance and aren't taxable unless they're in excess of the total premiums paid. Interest paid on insurance dividends is reported to you as interest and is taxable.
Property, other than real property, with no intrinsic value; its value lies in the rights conveyed. Examples include cash, insurance, stock, goodwill, and patents.
An amount received, usually from a bank, for the use of money that is to be repaid in full at a specified time or on demand.
The division of the U.S. Treasury Department responsible for collecting taxes.
Goods or materials held for sale to customers in the regular course of a trade or business. Generally, the cost of goods sold during the year is calculated as your beginning inventory, plus your purchases during the year, minus your ending inventory.
Generally, gross income from property held for investment. Investment income includes income from interest, ordinary dividends (except Alaska Permanent Fund dividends), annuities, capital gains, and royalties.
Investment income, for purposes of the kiddie tax rules, means all taxable income other than earned income. It includes interest, rents, capital gains, dividends, royalties, annuities, and income received as the beneficiary of a trust.
Investment income, for purposes of the Investment Interest deduction, includes only interest and ordinary dividends net of qualified dividends.
Interest paid on loans used for investment purposes, such as to buy stock on margin. You can deduct this interest on Schedule A if you itemize, up to the amount of investment income you report (not including capital gains or dividends that qualify for the new 0% or 15% rates).
Property owned primarily for its potential increased value. Examples include land, stock, works of art, and collectibles.
The receipt of money or other property as reimbursement for the loss or destruction of property through theft, casualty, or condemnation. Any gain realized on an involuntary conversion can, at the taxpayer's election, be considered nonrecognizable for federal income tax purposes if the owner reinvests the proceeds within a prescribed period of time in similar property.
See recharacterization.
Items that reduce your taxable income, helping you pay less tax. Common deductions include the home mortgage interest deduction, the real estate tax deduction, the state income tax deduction, and the deduction for gifts to charity. Other itemized deductions include medical expenses, job expenses, and investment interest expense. Some deductions are limited. If the allowed amounts add up to more than the standard deduction, you can reduce your income by this larger amount.
Individual Taxpayer Identification Number. A non-resident alien who isn't eligible to have a Social Security number (SSN) and is required to file a U.S. tax return only to claim a tax refund under the provisions of a U.S. tax treaty needs an ITIN. The IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and don't qualify for SSNs.
A self-employed retirement plan. Up to 20% of self-employment income can be paid into a Keogh plan as deductible contributions. For 2010, the contribution limit for a defined-contribution qualified Keogh plan is $49,000. Income taxes are deferred on any contribution made to a Keogh plan. Interest, dividends, and capital gains earned in the Keogh plan also grow tax-deferred. Taxes are owed on any Keogh funds withdrawn.
A method of taxing the investment income of children under 18 years of age, or age 18 at the end of the year and the child doesn't have earned income that exceeds half of his or her support, or 19-23 years of age, the child doesn't have earned income that exceeds half of his or her support and was a full-time student at the parent's tax rate. The kiddie tax is designed to make it less advantageous for parents to shift income to their children. In 2010, the kiddie tax is assessed on unearned or investment income above $1,900.
The condition in which a person has vision of less than 20/200 in the better eye with corrective lenses, or has a field of vision not more than 20 degrees. If this is your first year claiming the blindness exemption, you should attach a statement from your doctor to your tax return.
A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees paid during the year on behalf of you, your spouse, or your dependents.
An exchange of property for property of the same type when the property exchanged is property held for productive use in a trade or business or for investment (except inventory and stocks and bonds). Unless property of a different kind is received (called "boot"), the exchange is nontaxable in the current year. Any gain or loss isn't recognized until the property received in the exchange is sold or disposed of. Like-kind exchanges are reported on Form 8824.
A partner in a partnership formed under state limited partnership law. This person's personal liability for partnership debts is limited to the amount of money or other property that he or she contributed or is required to contribute to the partnership.
A type of partnership where 1 or more of the partners have limited liability. The passive loss rules apply for the limited partnership.
A type of property that can be used for personal as well as business use. Listed property can be autos, computers, cell phones, photographic, video recording equipment, and other property that is generally used for entertainment, recreation, and amusement. Restrictions apply to the depreciation of listed property with 50% or less business use.
Some retirement plans allow you to borrow against the current value in the plan. However, if you don't repay the loan within 5 years, you must treat the loan as a distribution, and you may pay a penalty. If you used the proceeds of the loan to buy your main home, though, you might qualify for an exception and not have to pay the penalty. For more information, see IRS Publication 575, Pension and Annuity Income.
A gain or loss on the sale or exchange of a capital asset that has been held for more than 12 months. A net long-term capital gain is the amount of long-term gains after long-term losses have been subtracted. A net long-term capital loss is the amount of long-term losses after long-term gains have been subtracted.
See also capital gain and capital loss.
Payment of the entire amount due at 1 time rather than in installments. Such distributions must come from qualified employer plans. The recipient of a lump-sum distribution might be eligible for special tax treatment of the distribution.
The restrictions that limit annual depreciation deductions for business automobiles.
The tax rate that applies to the last dollar of taxable income. U.S. income tax is considered a graduated income tax. A graduated income tax imposes higher tax rates on higher incomes, but the tax rate does not rise for each additional dollar earned. Instead, it rises by income brackets, and each tax rate applies only to income that falls in that bracket. The U.S. income tax brackets are 10%, 15%, 25%, 28%, 33%, and 35%.
The filing status used by a man and a woman who are married at the end of the tax year and not legally separated under a final decree of divorce or separate maintenance. The 2 spouses record their total income, exemptions, and deductions on 1 tax return.
The filing status used by people who are married and choose to report their respective incomes, exemptions, and deductions on separate individual tax returns.
A test that specifies the number of hours you spend (over 500) or your level of participation in an activity, so that your losses for the activity aren't limited by the passive loss rules.
Qualified medical expenses of an individual, spouse, and dependents are allowed as an itemized deduction to the extent that such amounts (less reimbursements) are more than 7.5% of adjusted gross income.
The Medicare tax taken out of an employees wages, or the same tax paid by a self-employed person on net self-employment income. The Medicare Part A tax rate is 1.45% of gross wages (2.9% for self-employed individuals).
The Medicare insurance premium withheld from the benefits of Social Security recipients. The standard premium for 2010 is $96.40 per month, plus an increased amount if your income is more than $85,000 per year ($170,000 if married). The maximum premium is $308.30 per month.
See Medicare Part A.
The practice of considering real property (such as buildings) as placed in service in the middle of the month regardless of the actual date during the month that the property was placed in service.
The practice of considering property as placed in service in the middle of a quarter. Generally, the half-year convention is used for all property except real property. However, if you place more than 40% of the depreciable basis of property in service during the last quarter of the year, you must use the mid-quarter convention for all property placed in service during the year. For example, if you placed property in service in October, you're only allowed 1½ months depreciation on that property.
The method of deducting automobile expenses based on business miles driven. The standard mileage rate for 2010 is 50 cents a mile for all business miles driven.
The method of depreciation used for most depreciable assets placed in service after 1986. Under MACRS, costs of qualified property are written off over predetermined periods.
Modified adjusted gross income. For purposes of computing a specific deduction or credit, MAGI begins with the taxpayers regular adjusted gross income and is then modified to account for certain types of losses, exclusions, and deductions. For example, for many tax purposes, MAGI is regular AGI, plus any excluded income from U.S. possessions, Puerto Rico, and foreign sources.
Any payment made by cash, check, credit card, or money order is considered to be made with money.
A certificate from a state or local government that enables qualified taxpayers to claim a credit for a percentage of their home mortgage interest. The certificate is received for buying, rehabilitating, or improving their main home. The itemized deduction for home mortgage interest must be reduced by the amount of the credit. The credit isn't refundable, but any portion that is unused because it exceeds the taxpayer's tax liability can be carried over to the following 3 years. The credit is figured on Form 8396. Mortgage credit certificates might be subject to a recapture rule if the home is sold within 9 years.
Mortgage interest (and other types of loans in which the home is used to secure the loan) is divided into 2 groups. The first is debt used to buy, build, or substantially improve the home. This is acquisition debt. The other is home-equity debt. This is debt that uses your home (or second home) to secure the loan, but is incurred for any other purpose. It could be used to make repairs on the home or to buy a yacht.
Expenses that are allowed as an adjustment to income for employees and self-employed individuals who move for work-related reasons, providing certain requirements are met. These expenses can be deducted from your income even if you don't itemize deductions. Form 3903 is used to figure deductible moving expenses.
An agreement between 2 or more taxpayers, who together provided more than half the support of a qualifying relative, that 1 of them will claim an exemption for that person as a dependent and the others will not. To be eligible to claim the exemption, the taxpayer must have provided more than 10% of the support of the dependent but less than 50%. The other taxpayers who provided more than 10% of the support must file written declarations that they won't claim an exemption for the individual for that taxable year. Form 2120 is used for this purpose.
A company that invests the money of its shareholders, usually in stocks of other corporations.
A company that is in the business of buying and selling stocks and sharing its income with those investing in it (sometimes called a regulated investment company).
A net loss for the year attributable to business or casualty losses. In order to mitigate the effect of the annual accounting period concept, the law allows taxpayers to use an excess loss of 1 year as a deduction for certain past or future years.
A bad debt loss that is not incurred in connection with a creditor's trade or business. A nonbusiness bad debt is deductible as a short-term capital loss and is allowed only in the year the debt becomes entirely worthless.
A parent who doesn't have custody of his or her child or who has custody for less than 6 months of the year.
The spouse of an active participant in an employer-maintained retirement plan who is not also an active participant in the plan. The nonparticipating spouse is entitled to a higher phaseout limitation of IRA contributions allowed as a deduction. For 2010, the higher phaseout limitation begins at $167,000 and ends at $177,000, at which no IRA deduction is allowed.
An obligation for which the endorser is not personally liable.
A credit that cannot be more than the taxpayer's tax liability.
A general term applied to stock dividend distributions that aren't taxable. These distributions generally take the form of return of capital, stock dividends, stock splits, and / or tax-free distributions.
An exchange on which no gain or loss is recognized in the current year.
Income that's exempt from tax by law.
An agreement to buy or sell property on or before a specified date at an established price. The sale or exchange of an option to buy or sell property results in capital gain or loss if the property is a capital asset.
Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Ordinary dividends are taxable as ordinary income unless they are qualified dividends. Both ordinary and qualified dividends are reported to you on Form 1099-DIV.
Income (or loss) that is fully includable in (or deductible from) gross income and that doesn't have the characteristics of capital gain or loss.
The amount that the stated redemption price at maturity of a debt instrument (usually a bond) is more than its issue price.
Pensions funded through employer plans to which both pre-tax money and after-tax money has been contributed.
A form of business in which 2 or more people join their money and skills in conducting the business as co-owners. Partnerships are treated as a conduit and aren't subject to taxation; instead, a partnership tax return is created, and K-1s are issued to the partners. Various items of partnership income, expenses, gains, and losses are shown on the K-1 and flow through to the individual partners. The individual partners report these items on their personal income tax returns.
Generally, the cash and assets contributed to a business, plus the partner's share of income, minus the partner's share of losses, minus cash or property distributed to the partner. For more information, see the partners instructions on Schedule K-1.
The rules pertaining to passive activities, which include trade or business activities in which you don't materially participate during the year or rental activities, even if you do materially participate in them, unless you're a real estate professional.
In general, you can deduct passive activity losses only from passive activity income. You carry any excess loss forward to the following year or years until it is used or until it is deducted in the year you dispose of your entire interest in the activity in a fully taxable transaction.
If you actively participate in a rental activity, you might be able to deduct up to $25,000 in rental losses against other income.
For purposes of the passive loss rules, income and losses must be divided into 3 categories: active, passive, and portfolio. Passive income and losses are those from business activities in which the taxpayer does not materially participate, and all rental activities (except those of a qualified real estate professional).
See also active income and losses and portfolio income and losses.
Generally, payments of a definite amount made periodically for a specified period (usually life) from an employer-maintained plan to employees who have met the stated requirements. A pension's primary purpose is to provide retirement income.
The first day of the first period for which an amount is due as a pension/annuity payment under the contract.
See early distribution.
A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment that is expected to result in death, or that has lasted or is expected to last for a continuous period of not less than 12 months.
The tax code provides a $3,650 exemption (for 2010) for each individual taxpayer and an additional $3,650 exemption for the taxpayers spouse if a joint return is filed. A taxpayer may also claim a $3,650 exemption for each dependent providing certain tests are met. Taxpayers who can be claimed as a dependent on another taxpayers return may not claim their own personal exemption. The exemption amount reduces taxable income and is partially phased out for taxpayers whose adjusted gross income exceeds certain levels.
Expenses you incur for personal reasons. Personal expenses are not deductible unless stated to be deductible under the tax code.
Interest you pay on debts such as a car loan, credit card balance, life insurance, and on any other borrowed money that is not secured by your main or second home. This loan interest isn't deductible.
Generally, all property other than real estate.
An annual tax imposed on certain personal property, such as cars or boats, and based on the value of the property.
An executor, administrator, or anyone who is in charge of the decedent's estate. Generally, an executor (or executrix) is named in the decedent's will to administer the estate and distribute property as the decedent has directed.
The property where the taxpayer lives and to which he returns after temporary absences. You can have 1 or more residences, such as a main home and a vacation house. A residence is not limited to a house. Condominiums, cooperative apartments, townhouses, mobile homes, and houseboats can all qualify as residences.
Property owned for personal well-being and enjoyment. Personal-use property is your home, vehicles, furniture, clothing, and other property.
The graduated reduction of an allowed credit or deduction when modified adjusted gross income (MAGI) is within a certain range of incomes.
The taxpayer with whom a child lives is considered to have physical custody, regardless of who has nominal legal custody.
A one-time charge that is paid for the use of money, also known as a loan origination fee. A point is equal to 1% of the total mortgage amount and is usually paid to get more favorable terms on a mortgage loan. Points can be deducted in full in a single year or amortized over the life of the loan, depending on the circumstances.
For purposes of the passive loss rules, income and losses must be divided into 3 categories: active, passive, and portfolio. Portfolio income and losses are those from such sources as dividends, interest, capital gains and losses, and royalties.
See tax preference items.
Interest paid in advance is deductible as an interest expense only as it accrues. The one exception to this rule involves the interest charged when a cash-basis taxpayer pays points to obtain financing for the purchase or improvement of a principal residence. Interest in the form of points paid to refinance a personal residence is deductible if the payment of points is an established business practice in the area and the amount involved is not excessive. The points, however, must be deducted over the life of the loan.
The place where necessary administrative or management activities (such as billing and recordkeeping) are performed, and there is no other fixed location where these tasks are performed.
Government bonds whose interest is tax free for regular purposes but taxable for purposes of the Alternative Minimum Tax (AMT). The test of whether a bond is a private activity bond has to do with whether (and how much) the bond is tied to private business. Private activity bond interest is reported on Form 1099-INT, box 9. For more information, see IRS Publication 550, Investment Income and Expenses.
Generally, the fair market value of a prize or award is taxable, with a couple of exceptions. One exception applies when the recipient of an award for a charitable, scientific, or similar achievement designates that the prize be transferred by the payer to a governmental unit or to a charitable, educational, or religious organization. Another exception is made for certain employee achievement awards, such as the traditional gold watch presented on retirement.
The legal process in which a will is reviewed to determine whether it is valid and authentic. Probate also refers to the general administering of a deceased persons will or the estate of a deceased person without a will.
The court appoints either an executor named in the will (or an administrator if there is no will) to administer the process of collecting the assets of the deceased person, paying any liabilities remaining on the persons estate, and finally distributing the assets of the estate to beneficiaries named in the will or those determined to be beneficiaries by the executor.
The sole owner of a trade or business.
A business controlled and operated by 1 person.
An entity, usually an association or nonprofit corporation, designed to provide some form of public charity or service and specifically approved by the U.S. Treasury as a recipient of deductible charitable donations.
Dividends received on shares of common stock held by the taxpayer for more than 60 days of the 121-day period beginning 60 days before the ex-dividend date, or dividends received on shares of preferred stock held more than 90 days of the 181-day period beginning 90 days before the ex-dividend date. These dividends qualify for long-term capital gain treatment and are reported on Form 1099-DIV, box 2.
Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. The definition varies by benefit.
An employer-sponsored retirement plan that meets IRS requirements. Plans meeting the requirements are qualified and are allowed important tax benefits. The participant in the plan may exclude contributions from tax and earnings are accrued tax deferred. Tax is owed upon withdrawal. Participants and beneficiaries may delay taxation by transferring funds to other tax-deferred vehicles, such as an individual retirement arrangement (IRA).
An employer-sponsored retirement plan that meets IRS requirements. Plans meeting the requirements are qualified and are allowed important tax benefits. The participant in the plan may exclude contributions from tax, and earnings accrue tax deferred. Tax is owed upon withdrawal. Participants and beneficiaries can delay taxation by transferring funds to other tax-deferred vehicles, such as individual retirement arrangements (IRAs).
See Section 529 plan.
A child who enables a taxpayer to claim certain tax benefits, such as head-of-household filing status, a dependent exemption, the child tax credit, the child and dependent care credit, and the Earned Income Credit. A uniform definition of "child" exists for all 5 tax benefits.
There are 5 tests to determine if someone is your qualifying child. They include the tests of relationship, age, residency, and support along with a special test when a child might be the qualifying child of 2 or more people. For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
Qualifying relatives must meet 4 tests to be dependents. First, they cannot be the qualifying children of you or any other taxpayer. Also, they either must live with you for the entire year or be related to you (but not a cousin). You must provide more than half of their support. Lastly, they cannot have gross income in excess of $3,650 in 2010. For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
The filing status available to a qualified taxpayer for 2 tax years following the year of the spouse's death. To qualify, the surviving spouse must have been entitled to file a joint return for the year the death occurred, remain unmarried at the end of the current tax year, and pay more than half the cost of maintaining the home that was the principal residence of the taxpayer's child for the entire tax year.
To be a real estate professional, you must meet both of following conditions:
More than half of the personal services you performed in trade or business during the tax year were performed in real property trades or businesses in which you materially participated, and
You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.
Also known as real estate. Real property is land, buildings, and their structural components.
The difference between the amount received on the sale or other disposition of property and the adjusted basis of the property.
To include in income an amount that you previously deducted or excluded from gross income or income tax liability. You might have to recapture amounts that you claimed as depreciation or credits.
When you sell property that you have depreciated, any gain on the sale is recaptured (included in income) as ordinary income up to the amount of the depreciation previously allowed or allowable for the property.
An IRA contribution switched to another type of IRA after you have made an initial contribution to the other type of IRA. For example, you make a contribution to a traditional IRA but later "recharacterize" the contribution to a Roth IRA. If you recharacterize your contribution, you must do all of the following:
Include in the transfer any net income earned on the contribution. If there was a loss, the net income you must transfer might be a negative amount.
Report the recharacterization on your tax return for the year in which the contribution was made.
Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.
Roth IRA conversions can be reversed by means of a recharacterization. However, such a recharacterization must also include earnings (or losses).
The portion of realized gain or loss that is subject to income tax.
A credit that you can receive as a refund if the amount is more than your tax liability.
See flexible spending account.
Dividends you could have received in cash but chose instead to use for purchasing additional shares in the corporation or mutual fund. Reinvested dividends are taxable in the year constructively received that is, when you could have received the cash.
Income you received for allowing another person to use your property. Rental income includes advance rental payments, late payments, and current payments. Payments received for lease cancellation and forfeited security deposits are considered rental income in the year received or forfeited. Rental income is considered passive income for purposes of the passive loss rules, except for income received by qualified real estate professionals.
Current expenditures to maintain business-use property (or to restore business-use property to an original condition) rather than to extend its useful life. Normally, the costs of repairs are deductible annually. Substantial repairs that increase the value or extend the life of the property are treated as capital improvements, and their cost must be recovered over a number of years.
See savers credit.
A return of a shareholders investment, generally made because an excess amount of capital has accumulated. Returns of capital can be received in cash or reinvested to acquire additional shares at the shareholders request. Amounts received that are less than the basis of the stock on which the return of capital is paid are not taxable. The basis of the stock on which returns of capital are paid must be reduced. Amounts received in excess of the basis of the stock on which returns of capital are paid are reported on Schedule D.
A qualified transfer of funds from 1 tax-favored account to another. Rollovers are limited to 1 per 12-month period for each IRA, and the funds are generally made payable to the retirement account holder. If you take possession of the funds, the money must be deposited in the new retirement account within 60 days to avoid being taxed on the money as a distribution. The distribution is reported on Form 1099-R and the rollover contribution is reported on Form 5498.
Contributions to a Roth IRA aren't tax deductible, but withdrawals made after age 59½ and at least 4 calendar years after the Roth IRA is opened are tax free. The maximum contribution for 2010 is $5,000, or $6,000 if age 50 or older.
A payment received for the right to exploit a taxpayer's ownership of natural resources or a taxpayer's literary, musical, or artistic creation.
An interest that entitles the holder to a specified fraction, in kind or in value, of the total production of oil or gas from a property, free of any expense of development and operation.
Most employers must withhold Social Security tax from your wages. If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax.
A qualified small business corporation that has elected special tax treatment under subchapter S of the Internal Revenue Code. Unlike most corporations, which are taxable entities themselves, S corporations pass income, losses, and deductions through to shareholders to report on their individual returns.
A credit you might be eligible to claim when you contribute up to $2,000 to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA). The amount of the savers credit you receive depends on the contribution you make, your filing status, and your credit rate. Your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income (AGI). The lower your income, the higher the credit rate. The credit isn't allowed if your AGI is more than $55,500 (if married filing jointly), $27,750 (if filing a single return), or $41,625 (if filing as head of household). To claim the credit, you cannot be another taxpayer's dependent, born after January 1, 1992, or a full-time student.
A home that is not your main home (principal residence). You can have only one main home at a time. Often a second home is a vacation home. You're allowed to deduct home mortgage interest if the debt is secured by your main home or your second home. For more information, see IRS Publication 936, Home Mortgage Interest Deduction.
See expensing.
A savings plan that allows taxpayers to accumulate money tax deferred to pay for education expenses. Qualified distributions are tax free for federal and state income tax purposes when withdrawn, if used for qualified education expenses. A Section 529 plan is also called a qualified tuition program (QTP) or referred to as a 529 plan.
All business-use property held long-term is Section 1231 property. If the property is sold at a gain, the gain is treated as a long-term capital gain, which means that it is taxed at a favorable rate. If the property is sold as a loss, the loss is treated as an ordinary loss. This means that the loss is not limited to $3,000. Section 1231 losses that were taken in earlier years will need to be added back to offset Section 1231 gains in later years. Some restrictions apply, depending on the type of business-use property.
Business property that is not real estate. Section 1245 property is property that is depreciated when it's used in a business. When Section 1245 property is sold at a gain, the portion of the gain that is due to depreciation is taxed as ordinary income (loss). The rest of the gain is treated as Section 1231 property and is taxed as a capital gain. When Section 1245 property is sold at a loss, it's treated in the same manner as Section 1231 property.
Business property that is real estate. Section 1250 property is usually depreciated over 27.5 or 40 years. When it is sold at a gain, the portion of the gain that is due to depreciation is taxed at 25%. This is referred to as an "unrecaptured Section 1250 gain." The rest of the gain is treated as a long-term capital gain. Any loss on the sale of Section 1250 property is treated in the same manner as Section 1231 property.
Taxpayers who work for themselves. Self-employed individuals decide when, how, and where to work, obtain their own jobs or make their own sales, pay their own expenses, and receive Social Security and Medicare coverage through the payment of self-employment tax.
Self-employed individuals are taxed on their net income from self-employment and are entitled to Social Security and Medicare benefits through the payment of self-employment tax.
For 2010, self-employed persons are subject to Social Security tax of 12.4% on net earnings of up to $106,800 and Medicare tax of 2.9% on all net earnings. If a self-employed individual receives wages from an employer that are subject to Social Security tax, the amount of self-employment income subject to Social Security tax may be reduced. Self-employment tax is figured on Schedule SE.
An individual or entity that owns shares of capital stock.
A sale in which the seller borrows the stock certificates or other property delivered to the buyer. At a later date, the seller either purchases similar stock or property necessary to "cover" the sale and delivers it to the lender, or delivers to the lender stock or property that he already held but didn't want to transfer at an earlier date. For income tax purposes, there is no gain or loss on the transaction until the short sale is covered by purchase or transfer. Special rules apply in determining whether the gain or loss on a short sale is a long-term or short-term capital gain or loss.
See also capital gain and capital loss.
Gains and losses on the sale or exchange of capital assets that have been held for 12 months or less. A net short-term capital gain is the excess of short-term gains over short-term losses, or vice versa for a net short-term capital loss.
See also capital gain and capital loss.
Small employers can establish a Savings Incentive Match Plan for Employees (SIMPLE) retirement plan. A SIMPLE plan can be either an IRA for each employee or a deferred compensation arrangement such as a Section 401(k) plan.
An arrangement under which an employer makes contributions to an employees individual retirement account (IRA), or a self-employed person contributes to his own plan.
The simplified method allows you to figure the tax-free part of each full monthly payment by dividing your cost by a number of months based on your age. This number will differ depending on the date your annuity started, either before November 19, 1996, or after November 18, 1996. If your annuity starting date is after 1997 and your annuity includes a survivor benefit for your spouse, this number is based on your combined ages.
The filing status used by an unmarried taxpayer who doesn't qualify for any other filing status.
The employees share of the Social Security tax that is taken out of the employees pay and submitted along with the employers share to the IRS by the employer. For 2010, the employee and the employer each pay 6.2% of the first $106,800 of the employee's gross wages in Social Security tax.
The amount of the tips reported to an employer by an employee that is subject to Social Security tax. Tips are also subject to Medicare tax.
Total wages paid to an employee that are subject to Social Security tax, not including tips. Wages are also subject to Medicare tax.
A special method used to determine the tax on a qualified lump-sum distribution from a retirement plan, for a taxpayer born before January 2, 1936, who meets other specific requirements. The tax is figured on Form 4972.
A 50% depreciation bonus for qualified personal property and computer software acquired and placed in service during 2010. A 50% or 30% depreciation bonus was originally in effect from September 10, 2001 through December 31, 2004.
For the adoption credit and / or exclusion, a child has special needs if the child is a U.S. citizen or resident, and a state determines that the child cannot or should not be returned to his or her parents home and probably will not be adopted unless assistance is provided. This can be due to a number of factors, including racial and ethnic background, age, being part of a sibling group, and whether the child has a condition that requires special care.
An IRA set up by a taxpayer for the benefit of a spouse who receives little or no compensation. The designation "spousal" is significant for tax purposes only. There is no connection between a spousal IRA and the other spouses IRA, and no IRA may be jointly owned.
A Social Security number (SSN) is a federal taxpayer identification number that is required to get a job and claim taxes or other tax benefits.
A base amount of income not subject to tax. The regular standard deduction for 2010 is $5,700 for single taxpayers and married taxpayers filing separately, $8,400 for heads of household, and $11,400 for married couples filing a joint return and qualifying widow(er)s. Taxpayers who are blind and / or 65 or older can claim larger standard deductions. Taxpayers who can be claimed as dependents on another taxpayers return might have a reduced standard deduction. For 2010, your standard deduction can also include real estate taxes you paid of up to $500 ($1000 if married filing a joint return).
An annual deduction based on a set rate per mile for the business use of your vehicle. The standard mileage rate for 2010 is 50 cents a mile for all business miles driven.
Residents of five states -- California, New Jersey, New York, Rhode Island, and Washington -- can include in their state tax deduction required contributions to state disability-benefit funds. The H&R Block software handles these entries in the interview for Form W-2.
For military purpose, the state where the military member resides permanently rather than temporarily. This is the place where the person generally intends to return after military service, though the person will likely have temporary residences in other places during military service. Establishing a state of legal residence affects things such as whether or not the person will pay state income tax and whether the persons dependents attending state colleges will pay in-state or out-of-state tuition rates. Buying a home in the state and registering to vote there, among other things, helps to establish that state as the state of legal residence.
The amounts taken out of income by the payer (usually an employer) and submitted to the state or local taxing authority as an advance payment of the taxpayer's state or local income tax.
Explanations of various types of income, deductions, and / or credits reported on a schedule or directly on Form 1040. Statements may or may not be official IRS forms.
A worker who is treated as an employee for Social Security and Medicare tax purposes and as self-employed for income tax purposes. The "statutory employee" box on such a workers Form W-2 should be marked.
Property that is inherited has as its basis the fair market value of the property on the date of death of the original owner of the property. At times an alternate date is used to determine the fair market value, known as the "alternate valuation date." Using the fair market value instead of the original owners cost for the property is known as "step up" and the property is said to have a "stepped-up basis."
Additional shares of stock distributed to shareholders at no cost. The number of shares received as dividends is a percentage of the shares owned. The basis of the original shares is generally apportioned equally to the total shares owned after the distribution.
Additional shares of stock distributed to shareholders at no cost. The number of shares received are a ratio of the shares owned. The basis of the original shares is generally apportioned equally to the total shares owned after the split.
A combination of a call and a put written at the same time on the same number of shares of a security at the same price during the same period of time. The call and put parts of a straddle are generally bought by different holders.
The most commonly used method of depreciation prior to 1981. The depreciation deduction equals the basis less salvage value or land value divided by useful life.
An adjustment to income (limited to $2,500) for interest paid during the year on qualified higher education loans. This can be deducted from your income even if you don't itemize deductions.
Supplemental unemployment benefits. These benefits are generally received from a company-financed fund and are fully taxable as wages.
The total amount provided on behalf of an individual. Support includes food, lodging, and other necessities as well as recreation and other nonessential expenditures. Support is not limited to necessities and can be as lavish as the taxpayer can afford.
Property, other than real property, which physically exists and has an intrinsic value. Examples are livestock, machinery, equipment, and vehicles.
The rate at which income at a particular level is taxed. The tax rates are 10%, 15%, 25%, 28%, 33%, and 35%.
A credit for eligible taxpayers 65 years old and older, and those under age 65 who have retired on a permanent and total disability. The amount of the credit, if any, is figured on Schedule R.
Income that by law is not subject to income tax.
Interest on bonds used to finance state, municipal, and other government operations. It is shown on Form 1099-INT, box 8. Report this interest on your income tax return even though it is tax-free for federal income tax purposes. Sometimes this income is used to calculate modified adjusted gross income (MAGI) for other tax benefits and the calculation of other taxable income.
Transfers of property specifically exempt from federal income tax consequences in the current year. Examples are a transfer of property to a controlled corporation and a like-kind exchange.
The business location, post, or station of the taxpayer. If an employee is temporarily reassigned to a new post for a period of 1 year or less, the taxpayer's tax home is his personal residence and the travel expenses are deductible.
The total tax due the IRS after any credits and before taking into account any advance payments (withholding, estimated payments, and so on) made by the taxpayer.
Certain deductions that are allowed in calculating your regular tax but are disallowed for Alternative Minimum Tax purposes. Examples are the deduction of state and local income taxes paid and certain types of mortgage interest.
A schedule that shows how much regular tax is owed for various amounts of taxable income. Tax rate schedules can be used by taxpayers in any income bracket, but if your taxable income exceeds $100,000, you're required to use them to figure your tax. Each filing status has its own schedule.
A table published by the IRS showing how much regular tax is owed for various amounts of taxable income. The table is for use by taxpayers with taxable incomes of less than $100,000. Separate columns are provided for single taxpayers, married taxpayers filing jointly or qualifying widow(er)s, heads of household, and married taxpayers filing separately.
See accounting period.
Adjusted gross income minus itemized deductions or the standard deduction, minus allowable personal and dependent exemption amounts. This term is also used to refer to income that isn't exempt from taxation. For example, wages are taxable income, but gifts are not.
See accounting period.
A special method used to determine the tax on a qualified lump-sum distribution from a retirement plan for a taxpayer born before January 2, 1936, who meets other specific requirements. The tax is figured on Form 4972.
Gratuities received by the taxpayer for services rendered. Tips totaling $20 or more from any one job during a calendar month must be reported to the taxpayer's employer.
Actual date on which a capital asset is bought or sold.
Deductions from gross income that are attributable to your business or profession.
An individual retirement arrangement (IRA) in which earnings grow tax-deferred and distributions are fully taxable unless the taxpayer's IRA contains nondeductible contributions. Contributions may be tax deductible depending on the taxpayer's adjusted gross income and whether the taxpayer is covered under an employer-sponsored retirement plan.
A movement of funds in a tax-favored plan from one trustee directly to another, either at the taxpayer's request or the trustee's request.
The cost of transportation (taxi fares, auto expenses, and so on) incurred by an employee or self-employed person in the course of business or employment when the taxpayer isn't away from home on a business- or employment-related trip.
Travel expenses include meals and lodging and transportation expenses while away from home in the pursuit of a trade or business, either as an employee or a self-employed person.
A tax entity created by a trust agreement. This entity distributes all or part of its income to beneficiaries as instructed by the trust agreement and is required to pay taxes on undistributed income.
A deduction of up to $4,000 per tax return for qualified tuition and course-related expenses. These expenses can be deducted from your income even if you don't itemize deductions. To take advantage of this deduction, you need to file Form 8917.
See also college credits.
See also college credits.
The basis of property for purposes of figuring depreciation under ACRS or MACRS. The unadjusted basis is the original cost or other basis.
The penalty imposed if a taxpayer didn't pay enough tax on a timely basis during the year. The penalty, if any, is computed on Form 2210.
Taxable income that isn't for services performed (earned income). Unearned income includes money received from investments, such as interest, dividends, and royalties. It also includes pensions, alimony, unemployment compensation, and other income that isn't earned.
See also earned income.
Gain from the sale of Section 1250 property that is attributable to depreciation equivalent to the amount that would have been claimed under the straight-line method. This gain is subject to a maximum tax rate of 25%.
Interest that must be calculated and the sale price reduced by this amount when interest is not stated in an installment agreement or the interest rate used is less than the applicable rate.
The tax code places restrictions on taxpayers who rent their residences or vacation homes to others for part of the tax year. The restrictions may result in a reduction of expense deductions for such taxpayers.
Pension benefits belonging to an employee independent of future employment. An employee usually becomes vested after 5 years of employment with the same company, although there are many exceptions requiring shorter or longer employment.
You may choose to have income tax voluntarily withheld from Social Security benefits or equivalent Tier 1 railroad retirement benefits. You must complete Form W-4V and give it to the payer. You can choose to have 7%, 10%, 15%, or 25% withheld from each payment. Other income, such as pensions, sick pay, certain gambling winnings, unemployment compensation, and certain other federal payments, might not require withholding; however, you can request voluntary withholding by completing an IRS withholding form.
The maximum wage that is subject to Social Security tax for the year. For 2010, the wage base limit is $106,800. The Social Security tax rate is 6.2% for employees and a matching 6.2% for employers. Self-employed individuals pay 12.4%.
The purchase of substantially similar stock or other securities within 30 days before or after the sale of the similar stock or security at a loss. A taxpayer cannot claim a wash sale loss. Instead, the loss is added to the basis of the most recently purchased substantially similar securities.
A tax credit for employers who hire workers off welfare rolls. The credit is claimed on Form 8861.
A woman (man) who has not remarried following the death of her husband (his wife).
Income tax that your employer deducts from your paycheck and sends to the IRS on your behalf. The amount withheld depends on your income and the number of withholding allowances you claim on your Form W-4.
See also voluntary withholding.
A credit available to employers who hire employees from specific disadvantaged groups. The credit is claimed on Form 5884.
A record of compiled information that is generally not sent to the IRS with a tax return.
Securities that becomes worthless during the year. A loss is allowed for worthless securities and is deemed to have occurred on the last day of the year. Special rules apply to the securities of affiliated companies and small business stock.
Bonds where no interest is received until maturity.