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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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Glossary of Terms

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A

Term Definition
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 It has been superseded by the modified accelerated cost recovery system (MACRS) for assets placed in service after 1986.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.