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Useful Tax Glossary and Definitions

As a courtesy to our clients, we have compiled a comprehensive list of common tax terms and definitions for quick reference.

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Term Definition
401(k) Plan

A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

403(b) Plan

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. Individual accounts in a 403(b) plan can be any of the following types:

  • An annuity contract, which is provided through an insurance company.
  • A custodial account, which is invested in mutual funds.
  • A retirement income account set up for church employees.

Generally, retirement income accounts can invest in either annuities or mutual funds.

408(k) Plan

A plan set up by an employer to help employees fund their retirement. The 408(k) plan is a simplified version of the popular 401(k) plan but is intended for smaller companies (those with fewer than 25 employees). It is also available to self-employed individuals. Under the plan, employees can contribute pretax dollars to the account and thus reduce their net incomes for the year. This results in a tax savings for the contributor.

457 Plan

A non-qualified, deferred compensation plan established by state and local governments and tax-exempt governments and tax-exempt employers. Eligible employees are allowed to make salary deferral contributions to the 457 plan. Earnings grow on a tax-deferred basis and contributions are not taxed until the assets are distributed from the plan.

501(c)

A subsection under the United States Internal Revenue Code. The subsection relates to non-profit organizations and tax law and identifies which nonprofit organizations are exempt from paying federal income tax

529 Plan

A plan that allows for the prepayment of qualified higher education expenses at eligible educational institutions.

Also known as a "qualified tuition program", or more fully as a "section 529 plan".

90-Day Letter

An IRS notice sent after an audit stating that there was a discrepancy or error within an individuals taxes and they will be assessed unless petitioned.

Accelerated Cost Recovery System (ACRS)

A statutory method of depreciation allowing accelerated rates for most types of property used in business and income-producing activities during the years 1981 through 1986. It has been superseded by the modified accelerated cost recovery system (MACRS) for assets placed in service after 1986.

Accelerated depreciation

Depreciation methods that allow faster write-offs than straight-line rates in the earlier periods of the useful life of an asset. For example, in the first few years of recovery, MACRS allows a 200% double declining balance write-off, twice the straight-line rate.

Accountable reimbursement plan

An employer reimbursement or allowance arrangement that requires you to adequately substantiate business expenses to your employer, and to return any excess reimbursement.

Accrual method of accounting

A business method of accounting requiring income to be reported when earned and expenses to be deducted when incurred. However, deductions generally may not be claimed until economic performance has occurred.

Acquisition debt

Debt used to buy, build, or construct a principal residence or second home and that generally qualifies for a full interest expense deduction.

Active participation

Test for determining deductibility of IRA deductions. Active participants in employer retirement plans are subject to IRA deduction phase-out rules if adjusted gross income exceeds certain thresholds.

Additional Child Tax Credit

A refundable credit that can be claimed by taxpayers who are ineligible to claim the full non-refundable child tax credit, because it exceeds their total tax liability. The additional child tax credit was created to reimburse taxpayers for the non-refundable portion of their child tax credit.

Adjusted basis

A statutory term describing the cost used to determine your profit or loss from a sale or exchange of property. It is generally your original cost, increased by capital improvements, and decreased by depreciation, depletion, and other capital write-offs.

Adjusted gross income (AGI)

Gross income less allowable adjustments, such as IRA, alimony, and Keogh deductions. AGI determines whether various tax benefits are phased out, such as personal exemptions, itemized deductions, and the rental loss allowance; see 12.1 and modified adjusted gross income (MAGI).

Alimony

Payments made to a separated or divorced spouse as required by a decree or agreement. Qualifying payments are deductible by the payor and taxable to the payee.

Alternative minimum tax (AMT)

A tax triggered if certain tax benefits reduce your regular income tax below the tax computed on Form 6251 for AMT purposes.

Amended return

On Form 1040X, you may file an amended return within a three-year period to claim a refund or correct a mistake made on an original or previously amended return.

Amortizable bond premium

The additional amount paid over the face amount of an obligation that may be deducted.

Amortization of intangibles

Writing off an investment in intangible assets over the projected life of the assets.

Amount realized

A statutory term used to figure your profit or loss on a sale or exchange. Generally, it is sales proceeds plus mortgages assumed or taken subject to, less transaction expenses, such as commissions and legal costs.

Amount recognized

The amount of gain reportable and subject to tax. On certain tax-free exchanges of property, gain is not recognized in the year it is realized.

Annualized rate

A rate for a period of less than a year computed as though for a full year.

Annuity

An annual payment of money by a company or individual to a person called the annuitant. Payment is for a fixed period or the life of the annuitant. Tax consequences depend on the type of contract and funding.

Applicable federal rate

Interest rate fixed by the Treasury for determining imputed interest.

Appreciation in value

Increase in value of property due to market conditions. When you sell appreciated property, you pay tax on the appreciation since the date of purchase. When you donate appreciated property held long term, you may generally deduct the appreciated value.

Archer Medical Savings Account (MSA)

A type of medical plan combining high deductible medical insurance protection with an IRA-type savings account fund to pay unreimbursed medical expenses.

Assessment

The IRS action of fixing tax liability that sets in motion collection procedures, such as charging interest, imposing penalties, and, if necessary, seizing property.

Asset

Any item of economic value owned by an individual or corporation. Current assets can typically be converted to cash quickly, but also includes cash. Current assets are recorded on the balance sheet and can include checking accounts, savings accounts, accounts receivable, prepayments and deposits.

Assignment

The legal transfer of property, rights, or interest to another person called an assignee. You cannot avoid tax on income by assigning the income to another person.

At-risk rules

Rules limiting loss deductions to cash investments and personal liability notes. An exception for real estate treats certain nonrecourse commercial loans as amounts "at risk."

Audit

An IRS examination of your tax return, generally limited to a three-year period after you file.

Away from home

A tax requirement for deducting travel expenses on a business trip. Sleeping arrangements are required for at least one night before returning home.

Balloon

A final payment on a loan in one lump sum

Basis

Generally, the amount paid for property. You need to know your basis to figure gain or loss on a sale.

Boot

Generally, the receipt of cash or its equivalent accompanying an exchange of property. In a tax-free exchange, boot is subject to immediate tax.

Cancellation of debt

Release of a debt without consideration by a creditor. Cancellations of debt are generally taxable.

Capital

The excess of assets over liabilities.

Capital asset

Property subject to capital gain or loss treatment. Almost all assets you own are considered capital assets except for certain business assets or works you created.

Capital expenses

Costs that are not currently deductible and that are added to the basis of property. A capital expense generally increases the value of property. When added to depreciable property, the cost is deductible over the life of the asset.

Capital gain distribution

A mutual-fund distribution allocated to gains realized on the sale of fund portfolio assets. You report the distribution as long-term capital gain even if you held the fund shares short term.

Capital gain or loss

The difference between amount realized and adjusted basis on the sale or exchange of capital assets. Long-term capital gains are taxed favorably. Capital losses are deducted first against capital gains, and then again up to $3,000 of other income.

Capital loss carryover

A capital loss that is not deductible because it exceeds the annual $3,000 capital loss ceiling. A carryover loss may be deducted from capital gains of later years plus up to $3,000 of ordinary income.

Capitalization

Adding a cost or expense to the basis of the property.

Carryback

A tax technique for receiving a refund of back taxes by applying a deduction or credit from a current tax year to a prior tax year. For example, a business net operating loss may be carried back for two years.

Carryforward

A tax technique of applying a loss or credit from a current year to a later year. For example, a business net operating loss may be carried forward 20 years instead of being carried back.

Cash method of accounting

Reporting income when actually or constructively received and deducting expenses when paid. Certain businesses may not use the cash method.

Casualty loss

Loss from an unforeseen and sudden event that is deductible, subject to a 10% income floor and $100 reduction for personal losses.

Catch-up contribution

A type of retirement savings contribution that allows people over 50 to make additional contributions to their 401(k) and/or individual retirement accounts. The catch-up contribution provision was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), so that older individuals would be able to set aside enough savings for retirement.

Child and dependent care credit

A credit of up to 30% based on certain care expenses incurred to allow you to work.

Collectible

An item that is worth far more than it appears because of its rarity and/or demand. Common categories of collectibles include antiques, toys, coins, comic books and stamps. Items that have been mass-produced, and thus are not rare, are often marketed as collectibles to drive consumer demand.

Community income

Income earned by persons domiciled in community property states and treated as belonging equally to husband and wife.

Condemnation

The seizure of property by a public authority for a public purpose. Tax on gain realized on many conversions may be deferred.

Constructive receipt

A tax rule that taxes income that is not received by you but that you may draw upon.

Consumer interest

Interest incurred on personal debt and consumer credit. Consumer interest is not deductible.

Convention

Rule for determining MACRS depreciation in the year property is placed in service. Either a half-year convention or mid-quarter convention applies.

Coverdell Education Savings Account

A special account set up to fund education expenses of a student.

Credit

A tax credit directly reduces tax liability, as opposed to a deduction that reduces income subject to tax.

Declining balance method

A rapid depreciation method determined by a constant percentage based on useful life and applied to the adjusted basis of the property.

Deductions

Items directly reducing income. Personal deductions such as for mortgage interest, state and local taxes, and charitable contributions are allowed only if deductions are itemized on Schedule A, but deductions such as for alimony, capital losses, moving expenses to a new job location, business losses, student loan interest, and IRA and Keogh deductions are deducted from gross income even if itemized deductions are not claimed.

Deferred compensation

A portion of earnings withheld by an employer or put into a retirement plan for distribution to the employee at a later date. If certain legal requirements are met, the deferred amount is not taxable until actually paid, for example, after retirement.

Deficiency

The excess of the tax assessed by the IRS over the amount reported on your return.

Defined benefit plan

A retirement plan that pays fixed benefits based on actuarial projections.

Defined contribution plan

A retirement plan that pays benefits based on contributions to individual accounts, plus accumulated earnings. Contributions are generally based on a percentage of salary or earned income.

Dependent

A relative or household member for whom an exemption may be claimed.

Depletion

Deduction claimed for the use of mineral resources.

Depreciable property

A business or income-producing asset with a useful life exceeding one year.

Depreciation

Writing off the cost of depreciable property over a period of years, usually its class life or recovery period specified in the tax law.

Depreciation recapture

An amount of gain on the sale of certain depreciable property that is treated as ordinary income in the case of personal property. Recapture is computed on Form 4797.

Disaster losses

Casualty losses such as from a storm, in areas declared by the President to warrant federal assistance. An election may be made to deduct the loss in the year before the loss or the year of the loss.

Dividend

A distribution made by a corporation to its shareholders generally of company earnings or surplus. Most dividends are taxable taxable but there are exceptions.

Earned income

Compensation for performing personal services. You must have earned income for a deductible IRA or to claim the earned income credit.

Earned income credit (EIC)

A credit allowed to taxpayers with earned income or adjusted gross income (AGI) below certain thresholds.

Earnings Before Interest, Taxes, Depreci

EBITDA is essentially Net Income with interest, taxes, depreciation, and amortization added back to it. EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.

Education IRA

See Coverdell Education Savings Account.

Electronic Federal Tax Payment System (E

An online and phone tax payment system available 24 hours a day. For enrollment information, go to www.eftps.gov.

Equity

Refers to the total interest of ownership in the company or corporation. It also refers to total assets minus total liabilities. Equity is recorded on the balance sheet and can include stock, retained earnings, and profit or loss from the current year.

Estimated tax

Advance payment of current tax liability based either on wage withholdings or installment payments of your estimated tax liability. To avoid penalties, you generally must pay to the IRS either 90% of your final tax liability, or either 100% or 110% of the prior year's tax liability, depending on your adjusted gross income.

Exemption

A fixed deduction allowed to every taxpayer, except those who may be claimed as a dependent by another person. Extra exemption deductions are allowed for a spouse on a joint return and for each qualifying dependent. A deduction of $3,400 is allowed for each exemption claimed on 2007 returns, but the deduction is phased out for certain high income individuals.

Fair market value

What a willing buyer would pay to a willing seller when neither is under any compulsion to buy or sell.

Fiduciary

A person or corporation such as a trustee, executor, or guardian who manages property for another person.

Financial Statements

Records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements.

First-year expensing (or Section 179 ded

A deduction of the cost of business equipment in the year placed in service.

Fiscal year

A 12-month period ending on the last day of any month other than December. Partnerships, S corporations, and personal service corporations are limited in their choice of fiscal years and face special restrictions.

Fixed asset

A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year. An asset is recorded on the balance sheet and can include vehicles, equipment, furniture, and real estate.

Flexible spending arrangement

A salary reduction plan that allows employees to pay for enhanced medical coverage or dependent care expenses on a tax-free basis.

Foreign earned income exclusion

In 2007, up to $85,700 of foreign earned income is exempt from tax if a foreign residence or physical presence test is met.

Foreign tax credit

A credit for income taxes paid to a foreign country or U.S. possession. 401(k) plan. A deferred pay plan, authorized by Section 401(k) of the Internal Revenue Code, under which a percentage of an employee's salary is withheld and placed in a savings account or the company's profit-sharing plan. Income accumulates on the deferred amount until withdrawn by the employee at age 59½ or when the employee retires or leaves the company.

Form 1040

The standard Internal Revenue Service (IRS) form that individuals use to file their annual income tax returns. The form contains sections that require taxpayers to disclose their financial income status for the year in order to ascertain whether additional taxes are owed or whether the taxpayer is due for a tax refund. 1040 forms need to be filed with the IRS by April 15.

Form 945

Form to report income tax withheld from non-payroll payments including; pensions, annuities, IRA's, military retirement, gambling winnings, voluntary withholding on certain government payments, and backup withholding.

Generally Accepted Accounting Principles

The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

Gift

Property, money or assets that one person transfers to another while receiving nothing or less than fair market value in return. Under certain circumstances, the IRS collects a tax on gifts. Transfers of money or property that are given freely or exchanged for less than market value may be subject to the gift tax if the donor has exceeded the annual or lifetime gift exemption.

Gift Splitting

A taxation rule that allows a married couple to split a gift's total value as if each contributed half of the amount. Gift splitting allows a couple to increase their total gift tax exemption amount by combining individual allowances.

Gift tax

A federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, but may pay an amount less than its full value. It is the giver of the gift who is required to pay the gift tax. The receiver of the gift may pay the gift tax, or a percentage of it, on the giver's behalf in the event that the giver has exceeded his/her annual personal gift tax deduction limit.

Grantor trust rules

Tax rules that tax the grantor of a trust on the trust income.

Gross income

The total amount of income received from all sources before exclusions and deductions.

Gross receipts

Total business receipts reported on Schedule C or Schedule C-EZ before deducting adjustments for returns and allowances and cost of goods sold.

Group-term life insurance

Employees are not taxed on up to $50,000 of group-term coverage.

Head of household

Generally, an unmarried person who maintains a household for dependents and is allowed to compute his or her tax based on head of household rates, which are more favorable than single person rates.

Health reimbursement arrangement (HRA)

Employer established account that provides tax-free reimbursements to employees for deductibles and other expenses that could be taken as itemized deductions.

Health savings account (HSA)

For calendar year 2007, taxpayers covered by an HDHP may contribute up to the lesser of the annual deductible or $2,850 ($5,650 for family coverage).

High deductible health plan (HDHP)

For 2008, a high deductible health plan is a health plan with an annual deductible that is not less than $1,100 for self-only coverage or $2,200 for family coverage, and with annual out-of-pocket expenses that do not exceed $5,600 or $11,200, respectively.

Hobby loss

A non-deductible loss incurred as a result of doing an activity for personal pleasure instead of for profit. A taxpayer cannot deduct the hobby loss as a business loss. A "hobby loss rule" is used to determine whether an activity is a hobby or a business.

Holding period

The length of time that an asset is owned and that generally determines long- or short-term capital gain treatment.

Home equity debt

Debt secured by a principal residence or second home to the extent of the excess of fair market value over acquisition debt. An interest deduction is generally allowed for home equity debt up to $100,000 ($50,000 if married filing separately).

Imputed interest

Interest deemed earned on seller-financed sales or low-interest loans, where the parties' stated interest rate is below the applicable IRS federal rate.

Incentive stock option

Option meeting tax law tests that defers tax on the option transaction until the obtained stock is sold.

Inclusion amount for leased cars

Based on an IRS table, an amount that reduces a business deduction taken for payments on an auto leased for a minimum of 30 days.

Income in respect of a decedent

Income earned by a person before death but taxable to an estate or heir who receives it.

Independent contractor

One who controls his or her own work and reports as a self-employed person.

Individual retirement account (IRA)

A retirement account to which up to $5,000 (or $5,500 if you are 50 or over) may be contributed for 2008, but deductions for the contribution are restricted if you are covered by a company retirement plan. Earnings accumulate tax free.

Installment sale

A sale of property that allows for tax deferment if at least one payment is received after the end of the tax year in which the sale occurs. The installment method does not apply to year-end sales of publicly traded securities. Dealers may not use the installment method. Investors with very large installment balances could face a special tax.

Intangible asset

Assets that have value but that cannot be physically touched, such as a brand, franchise, trademark, or patent.

Inter vivos or lifetime trust

A trust created during the lifetime of the person who created the trust. If irrevocable, income on the trust principal is generally shifted to the trust beneficiaries.

Investment in the contract

The total cost investment in an annuity. When annuity payments are made, the portion allocable to the cost investment is tax free.

Investment interest

Interest on debt used to carry investments, but not including interest expense from a passive activity. Deductions are limited to net investment income.

Involuntary conversion

Forced disposition of property due to condemnation, theft, or casualty. Tax on gain from involuntary conversions may be deferred if replacement property is purchased.

Itemized deductions

Items, such as interest, state and local income and sales taxes, charitable contributions, and medical deductions, claimed on Schedule A of Form 1040. Itemized deductions are subtracted from adjusted gross income to arrive at taxable income. The amount of itemized deductions is also subject to a reduction when adjusted gross income exceeds certain limits.

Joint return

A return filed by a married couple reporting their combined income and deductions. Joint return status provides tax savings to many couples.

Joint tenants

Ownership of property by two persons. When one dies, the decedent's interest passes to the survivor.

Keogh plan

Retirement plan set up by a self-employed person, providing tax-deductible contributions, tax-free income accumulations until withdrawal, and favorable averaging for qualifying lump-sum distributions.

Kiddie tax

The tax on the investment income in excess of $950 of a child under age 18, based on the parents' marginal tax rate and computed on Form 8615.

Legally separated

A husband and wife who are required to live apart from each other by the terms of a decree of separate maintenance. Payments under the decree are deductible by the payor and taxable to the payee as alimony.

Liability

A liability is a financial obligation, debt, or claim. Liabilities are recorded on the balance sheet and can include accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

Like-kind exchange

An exchange of similar assets used in a business or held for investment on which gain may be deferred.

Lump-sum distribution

Payments within one tax year of the entire amount due to a participant in a qualified retirement plan. Qualifying lump sums may be directly rolled over tax free, or, in some cases, are eligible for current tax under a favorable averaging method.

Marital deduction

An estate tax and gift tax deduction for assets passing to a spouse. It allows estate and gift transfers completely free of tax.

Market discount

The difference between face value of a bond and lower market price, attributable to rising interest rates. On a sale, gain on the bond is generally taxed as ordinary income to the extent of the discount.

Married Filing Jointly

A married couple may file a joint return together. If your spouse died during the year, you may still file a joint return with that spouse for the year of death.

This information provided by the Internal Revenue Service: http://www.irs.gov/newsroom/article/0,,id=105098,00.html

Married Filing Separately

A married couple may elect to file their returns separately.

This information provided by the Internal Revenue Service: http://www.irs.gov/newsroom/article/0,,id=105098,00.html

Material participation tests

Rules for determining whether a person is active in a business activity for passive activity rule purposes. Unless the tests are met, passive loss limits apply.

Miscellaneous itemized deductions

Generally, itemized deductions for job and investment expenses subject to a 2% of adjusted gross income floor.

Modified ACRS (MACRS)

Depreciation methods applied to assets placed in service after 1986.

Modified adjusted gross income (MAGI)

This is generally adjusted gross income increased by certain items such as tax-free foreign earned income. MAGI usually is used to determine phaseouts of certain deductions and credits.

Mortgage interest

Fully deductible interest on up to two residences if acquisition debt secured by a home is $1 million or less, and home equity debt is $100,000 or less.

Net operating loss (NOL)

A business loss that exceeds current income may be carried back against income of prior years and carried forward as a deduction from future income until eliminated.

Non-Resident

A non-resident is an individual who temporarily resided and/or worked in a state at any time during the tax year, although that state was NOT their state of residence.

Nonperiodic distributions

A 20% withholding rule applies to nonperiodic distributions, such as lump-sum distributions, paid directly to employees from an employer plan.

Nonrecourse financing

Debt on which a person is not personally liable. In case of nonpayment, the creditor must foreclose on property securing the debt. At-risk rules generally bar losses where there is nonrecourse financing, but an exception applies to certain nonrecourse financing for real estate.

Ordinary and necessary

A statutory requirement for the deductibility of a business expense.

Ordinary income

Income other than capital gains.

Ordinary loss

A loss other than a capital loss.

Original issue discount (OID)

The difference between the face value of a bond and its original issue price. OID is reported on an annual basis as interest income.

Part Year Resident

A part year resident is an individual who was a resident of a particular state for only part of the tax year. This includes anyone who moved into a state with the intention of making their home there, or a resident of a state who moved out of their original state with the intention of making their home elsewhere any time during the income tax year.

Partnership

An unincorporated business or income-producing entity organized by two or more persons. A partnership is not subject to tax but passes through to the partners all income, deductions, and credits, according to the terms of the partnership agreement.

Passive activity loss rules

Rules that limit the deduction of losses from passive activities to income from other passive activities. Passive activities include investment rental operations or businesses in which you do not materially participate.

Patronage dividend

A taxable distribution made by a cooperative to its members or patrons.

Percentage depletion

A deduction method that applies a fixed percentage to the gross income generated by mineral property.

Personal interest

Tax term for interest on personal loans and consumer purchases. Such interest is not deductible.

Placed in service

The time when a depreciable asset is ready to be used. The date fixes the beginning of the depreciation period.

Points

Charges to the homeowner at the time of the loan. A point is equal to 1 percent. Depending on the type of loan, points may be currently deductible or amortized over the life of the loan.

Premature distributions

Withdrawals before age 59½ from qualified retirement plans are subject to penalties unless specific exceptions are met.

Principal residence

On a sale of a principal residence, you may avoid tax under the rules.

Private letter ruling

A written determination issued to a taxpayer by the IRS that interprets and applies the tax laws to the taxpayer's specific set of facts. A letter ruling advises the taxpayer regarding the tax treatment that can be expected from the IRS in the circumstances specified by the ruling. It may not be used or cited as precedent by another taxpayer.

Probate estate

Property held in a decedent's name passing by will.

Profit-sharing plan

A defined contribution plan under which the amount contributed to the employees' accounts is based on a percentage of the employer's profits.

Provisional income

If your provisional income exceeds a base amount, part of your Social Security benefits may be subject to tax.

Qualified charitable organization

A nonprofit philanthropic organization that is approved by the U.S. Treasury to receive charitable contribution deductions.

Qualified dividends

Dividends received after 2002 and before January 1, 2011, that are taxed at the long-term capital gain rate.

Qualified domestic relations order (QDRO)

A specialized domestic relations court order that conforms to IRS regulations and provides instructions to pension plan administrators and IRA custodians as to how to pay benefits to a divorced spouse.

Qualified plan

A retirement plan that meets tax law tests and allows for tax deferment and tax-free accumulation of income until benefits are withdrawn. Pension, profit-sharing, stock bonus, employee stock ownership, and Keogh plans and IRAs may be qualified plans.

Qualified tuition program (QTP)

A state-sponsored college savings plan or prepayment plan, or a prepayment plan established by a private college.

Qualifying widow or widower

A filing status entitling the taxpayer with dependents to use joint tax rates for up to two tax years after the death of a spouse.

Real estate investment trust (REIT)

An entity that invests primarily in real estate and mortgages and passes through income to investors.

Real estate professional

An individual who, because of his or her real estate activity, qualifies to deduct rental losses from nonpassive income.

Real property

Land and the buildings on land. Buildings are depreciable.

Recognized gain or loss

The amount of gain or loss to be reported on a tax return. Gain may not be recognized on certain exchanges of property.

Recovery property

Tangible depreciable property placed in service after 1980 and before 1987 and depreciable under ACRS.

Refundable tax credit

A credit that entitles you to a refund even if you owe no tax for the year.

Required Minimum Distributions (RMDs)

Distributions that must be taken annually to avoid a 50% IRS penalty by a traditional IRA account holder starting with the year age 70½ is reached. For qualified plan participants the starting date may be delayed for employees working beyond age 70½. Minimum distribution rules also apply to beneficiaries of qualified plans, traditional IRAs, and Roth IRAs.

Residence interest

Term for deductible mortgage interest on a principal residence and a second home.

Residential rental property

Real property in which 80% or more of the gross income is from dwelling units. Under MACRS, depreciation is claimed over 27.5 years under the straight-line method.

Retirement savers credit

Eligible taxpayers may claim a tax credit for 10%, 20%, or 50% of up to $2,000 of retirement plan contributions.

Return of capital

A distribution of your investment that is not subject to tax unless the distribution exceeds your investment.

Revenue ruling

A revenue ruling is the Commissioner's "official interpretation of the interpretation of the law" and generally is binding on revenue agents and other IRS officials. Taxpayers generally may rely on published revenue rulings in determining the tax treatment of their own transactions that arise out of similar facts and circumstances.

Revocable trust

A trust that may be changed or terminated by its creator or another person. Such trusts do not provide an income tax savings to the creator.

Rollover

A tax-free reinvestment of a distribution from a qualified retirement plan into an IRA or other qualified plan within 60 days.

Roth IRA

A nondeductible contributory IRA that allows for tax-free accumulation of income. Qualifying distributions are completely tax free.

Rule of 72

The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.

For example, the rule of 72 states that $1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into $2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2).

S corporation

A corporation that elects S status in order to receive tax treatment similar to that of a partnership.

Salvage value

The estimated value of an asset at the end of its useful life. Salvage value is ignored by ACRS and MACRS rules.

Schedule A

A U.S. income tax form used by taxpayers to report itemized deductions, which can help reduce an individual's federal tax liability. Expenses that can be itemized and claimed on the form include medical and dental expenses, amounts paid for particular taxes and interest expenses as well as specific losses due to theft.

Schedule D

A U.S. income tax form used by taxpayers to report their realized capital gains or losses. Investors are required to report their capital gains (and losses) from the sales of assets, which result in different cash values being received for them than what was originally paid, in order to affix some amount of taxation to the income and wealth that is generated through investment activities.

Section 1031

A section of the U.S. Internal Revenue Service Code that allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes. Taxes on capital gains are not charged on the sale of a property if the money is being used to purchase another property - the payment of tax is deferred until property is sold with no re-investment.

Section 1041

A section of the Internal Revenue Code that mandates that any transfer of property from one spouse to another is income tax-free. No deductible loss or taxable gain can be declared. This section applies to transfers during marriage as well as in the divorce process. Section 1041 was enacted in order to simplify the consolidation of marital assets.

Section 1231 property

Depreciable property used in a trade or business and held for more than a year. All Section 1231 gains and losses are netted; a net gain is treated as capital gain, a net loss as an ordinary loss.

Section 179 deduction (or First-year exp

A deduction allowed for investments in depreciable business equipment in the year the property is placed in service.

Section 457 plan

Deferred compensation plan set up by a state or local government, or tax-exempt organization, which allows tax-free deferrals of salary.

Self-employed person

An individual who operates a business or profession as a proprietor or independent contractor and reports self-employment income on Schedule C.

Self-employment tax

Tax paid by self-employed persons to finance Social Security & Medicare coverage.

In 2010, there are two rates. A 12.4% rate applies to a taxable earnings base of $106,800 or less and a 2.9% rate applies to all net earnings.

2011: 10.4% on $106,800 Social Security limit. 2.9% Medicare unlimited.

2012: 10.4% on $110,100 Social Security limit. 2.9% Medicare unlimited.

Separate return

Return filed by a married person who does not file a joint return. Filing separately may save taxes where each spouse has separate deductions, but cost one tax payer if one taxpayer itemizes deduction because the other must then also itemize. Certain tax benefits require a joint return.

Shareholders' Equity

A firm's total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity represents the amount by which a company is financed through common and preferred shares.

Short sale

Sale of borrowed securities made to freeze a paper profit or to gain from a declining market.

Short tax year

A tax year of less than 12 months. May occur with the startup of a business or change in accounting method.

Short-term capital gain or loss

Gain or loss on the sale or exchange of a capital asset held one year or less.

Simplified employee plan (SEP)

IRA-type plan set up by an employer, rather than the employee. Salary-reduction contributions may be allowed to plans of small employers set up before 1997.

Single

Generally applies to anyone who is unmarried, divorced or legally separated according to your state law.

Standard deduction

A base amount of income that is not subject to tax and that can be used to reduce a taxpayer's adjusted gross income (AGI). A standard deduction can only be used if the taxpayer does not choose the itemized deduction method of calculating taxable income. The amount of the standard deduction is based on a taxpayer's filing status, age and whether he or she is disabled or claimed as a dependent on someone else's tax return.

Standard mileage rate

A fixed rate allowed by the IRS for business auto expenses in place of deducting actual expenses.
Business Mileage
2009 = .555 per mile.
2010 = .50 per mile.
2011 = .51/.555 per mile
2012 - .555 per mile

Medical Mileage
2009 = .24 per mile.
2010 = .165 per mile
2011 = .19/.23 per mile
2012 = .23 per mile

Charity Mileage
2009 = .14 per mile.
2010 = .14 per mile.
2011 = .14 per mile
2012 = .14 per mile

Statutory employees

Certain employees, such as full-time life insurance salespersons, who may report income and deductions on Schedule C, rather than on Schedule A as miscellaneous itemized deductions.

Stock dividend

A distribution of additional shares of a corporation's stock to its shareholders.

Stock option

A right to buy stock at a fixed price.

Straddle

Taking an offsetting investment position to reduce the risk of loss in a similar investment.

Straight-line method

A method of depreciating the cost of a depreciable asset on a pro rata basis over its cost recovery period.

Tangible asset

Assets having a physical existence, such as cash, equipment, and real estate; accounts receivable are also usually considered tangible assets for accounting purposes.

Tax attributes

When debts are canceled in bankruptcy cases, the canceled amount is excluded from gross income. Tax attributes are certain losses, credits, and property basis that must be reduced to the extent of the exclusion.

Tax deferral

Shifting income to a later year, such as where you defer taxable interest to the following year by purchasing a T-bill or savings certificate maturing after the end of the current year. Investments in qualified retirement plans provide tax deferral.

Tax home

An individual's primary place of work or residence. This is used when determining tax for travel or transportation expenses.

Tax identification number (TIN)

For an individual, his or her Social Security number; for businesses, fiduciaries, and other non-individual taxpayers, the employer identification number.

Tax preference items

Items that may subject a taxpayer to the alternative minimum tax (AMT).

Tax year

A period (generally 12 months) for reporting income and expenses.

Tax-sheltered annuity

A type of retirement annuity offered to employees of charitable organizations and educational systems, generally funded by employee salary-reduction contributions.

Taxable income

Net income after claiming all deductions from gross income and adjusted gross income, such as IRA deductions, itemized deductions, or the standard deduction, and personal exemptions.

Tenancy by the entireties

A joint tenancy in real property in the name of both husband and wife. On the death of one tenant, the survivor receives entire interest.

Tenants in common

Two or more persons who have undivided ownership rights in property. Upon death of a tenant, his or her share passes to his or her estate, rather than to the surviving tenants.

Testamentary trust

A trust established under a will.

Trial Balance

A trial balance is a list and total of all the debit and credit accounts for an entity for a given period – usually by month or year. The format of the trial balance is a two-column schedule with all the debit balances listed in one column and all the credit balances listed in the other. The trial balance is prepared after all the transactions for the period have been entered and posted to the General Ledger.

Trust

An arrangement under which one person transfers legal ownership of assets to another person or corporation (the trustee) for the benefit of one or more third persons (beneficiaries).

Unrecaptured Section 1250 gain

Long-term gain realized on the sale of depreciable realty attributed to depreciation deductions and subject to a 25% capital gain rate.

Useful life

The number of years, as set by the IRS, that depreciable business equipment or property is expected to be in use.

W-2 Form

The form that an employer must send to an employee and the IRS at the end of the year. The W-2 form reports an employee's annual wages and the amount of taxes withheld from his or her paycheck.

W-3 Form

The form that an employer must send to the IRS at the end of the year. The W-3 form reports the total annual wages and the total taxes withheld from all employees’ paychecks during the year.

W-4 Form

The form completed by an employee to indicate his or her tax situation (exemptions, status, etc.) to the employer. The W-4 form tells the employer the correct amount of tax to withhold from an employee's paycheck.

Wash sales

Sales on which losses are disallowed because you recover your market position within a 61-day period.

Withholding

An amount taken from income as a prepayment of an individual's tax liability for the year. In the case of wages, the employer withholds part of every wage payment. Backup withholding from dividend or interest income is required if you do not provide the payer with a correct taxpayer identification number. Withholding on pensions and IRAs is automatic unless you elect to waive withholding.