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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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C

Term Definition
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.