2013 Itc Tb Glossary

8/11/2019 2013 Itc Tb Glossary

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Glossary

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401(k) PlanDeferred compensation plan available through a widerange of employers. Contributions to a 401(k) plan aretax deferred to the employee (income tax is notcharged on the amount of the contribution at the timeit is made). Distributions from the plan are taxed asordinary income to the recipient when received.

403(b) Plan

Deferred compensation plan available to employees ofmany public educational institutions and non-profitorganizations.

457 Plan

Deferred compensation plan available to employees ofmany government entities.

Accelerated Cost Recovery System (ACRS)

The system of depreciation in effect from 1981through 1986. The Tax Reform Act of 1986 containedseveral changes to the rules for property placed inservice after 1986. See alsoModified Accelerated Cost

Recovery System (MACRS).

Accelerated Depreciation

Various methods of depreciation that yield largerdeductions in the earlier years of the life of an asset

than does the straight-line method. The double (or200%) declining balance method is an example of anaccelerated depreciation method.

Accountable Plan

A plan for reimbursing employees for expenses suchas meals, entertainment, travel, and transportationincurred for business purposes on behalf of theemployer. A plan is an accountable plan if the employ-er requires the employee to account for all businessexpenses and to return any excess reimbursements.For employees under an accountable plan, reimburse-ments are not entered on the tax return as income,

and the expenses are not deductible.

Accounting Method

The method under which income and expenses aredetermined for tax purposes. Major accounting meth-ods are the cash method and the accrual method, bothof which are defined elsewhere in this glossary.

Accounting Period

The 12-month period which a taxpayer uses to deter-mine federal income tax liability. Unless a taxpayermakes a specific choice to the contrary, his accountingperiod is the calendar year.

Accrual Method of AccountingOne of the two most common methods of accountingthe other being the cash method defined elsewhere inthis glossary. Under the accrual method of accountingincome is reported in the tax year earned, whether ornot received, and deductions are claimed in the taxyear incurred, whether or not paid.

Accrued Interest

Interest that has been earned but not yet paid or cred-ited; for example, interest earned on a bond since thelast interest payment was made.

Acquisition DebtDebt incurred to acquire, construct, or improve thetaxpayers principal or secondary residence.

Active Income and Losses

For purposes of the passive loss rules, income andlosses must be divided into three categories: activepassive, and portfolio. Active income and losses arethose for which the taxpayer performs servicesExamples are wages, salaries, tips, bonuses, andincome and losses from business and partnershipactivities in which the taxpayer materially participates. See also Passive Income and Losses and

Portfolio Income and Losses.

Active Participant

A taxpayer who is covered by a qualified employermaintained retirement plan, or a qualified self-employed retirement plan, if even for only one dayduring the year.

Actual Expenses (Regular Method)

The method of deducting automobile expenses basedon actual costs incurred.

Additional Child Tax Credit

A refundable credit available to taxpayers withearned income exceeding $3,000 or with three or morequalifying children and whose regular child tax cred-it exceeds tax liabilities minus other nonrefundablecredits. The additional child tax credit is computed onForm 8812. See also Child Tax Credit.

Adjusted Basis

The cost or other original basis of property reduced byadjustments such as depreciation allowed or allowable and increased by capital improvements and otheradjustments.


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G.2 H&R Block Income Tax Course (2013)

Adjusted Gross Income (AGI)

Adjusted gross income equals gross income less reduc-tions that are allowable, regardless of whether per-sonal deductions are itemized.

Adjustment to IncomeAn expense which may be deducted even if the tax-

payer does not itemize deductions. Adjustments toincome are subtracted from gross income to arrive atadjusted gross income.

Adoption CreditA nonrefundable credit for qualified adoption expens-es incurred for each eligible child. The credit cannotexceed $12,650 per child (for 2012). The limit is a per-child limit, not an annual limit, and can be carried for-ward for up to five years or until used.

Advance Earned Income CreditPayment by an employer based on an employeesclaim to entitlement to the earned income credit.

Advance earned income credit payments are treatedas additional taxes on the tax return.

Alimony Payments

Payments made by one spouse to the other spouse orformer spouse under a written separation or divorceinstrument. Qualified alimony and separate mainte-nance payments are includable in the gross income ofthe recipient and are deductible by the payer. Childsupport payments and property settlements are nottreated as alimony.

Alternate (Straight-Line) Method

Under this method, the MACRS (or ACRS) deductionis computed using a straight-line percent and, in somecases, an optional longer recovery period.

Alternative Minimum Tax (AMT)The alternative minimum tax was designed to pre-

vent higher-income taxpayers from escaping taxationthrough excessive use of certain tax breaks. A taxpay-er may be subject to this tax if he has certain mini-mum tax adjustments or tax preference items and hisalternative minimum taxable income exceeds theexemption allowed for his filing status and incomelevel. The alternative minimum tax is computed onForm 6251.

Alternative Straight-Line Depreciation SystemA MACRS system of depreciation using the straight-line method over an alternative (usually longer) recov-ery period.

Amended ReturnA tax return filed on Form 1040X after the originalreturn has been filed. An amended return is used tocorrect an error or to claim a more advantageous wayof filing the original return. An amended return canalso be used to carry back an unused credit or netoperating loss.

American Opportunity Credit (AOC)

Credit for qualifying education expenses available fortax years 2009 through 2017. The AOC may be par-tially refundable.

Amortization

The deduction of certain capital expenses over a fixed

period of time. Amortization is claimed on Form 4562.Amortizable expenses include business start-upexpenses, qualified forestation or reforestation costs,goodwill, going-concern value, covenants not to com-pete, franchises, trademarks, trade names, and 197costs.

Amount Realized

The amount received by a taxpayer on the sale orexchange of property. The amount received is the sumof the cash and the fair market value of any propertyor services plus any of the sellers liabilities assumedby the purchaser. Determining the amount realized is

the starting point for arriving at realized gain or loss.

Annuitant

A person who receives a pension or an annuity.

Annuity

A fixed sum payable to a person at specified intervalsfor a specific period of time or for life. Payments rep-resent a partial return of capital and a return on thecapital investment.

Annuity Starting Date

The first day of the first period for which an amountis due as an annuity payment under an annuity con-

tract.

Anti-Churning Rules

Regulations designed to prevent taxpayers from usinga more advantageous depreciation system whendepreciating property converted from personal use tobusiness use.

Appointee

Another person authorized by the taxpayer toexchange information with the IRS for the benefit ofthe taxpayer.

Archer Medical Savings Account (MSA)

A trust or custodial account created before 2004 exclu-sively for the purpose of paying the qualified medicalexpenses of a high deductible health plan of theaccount holder. For 2004 and later years, ArcherMSAs are replaced by Health savings accounts(HSAs). See alsoHealth Savings Account (HSA).

Asset

An item of useful or valuable property.

At-Risk Rules

Special rules limiting the taxpayers deductible busi-ness, partnership, S corporation, or real estate loss to


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Glossary G.3

cash invested plus debt he is legally obligated to payand the adjusted basis of any property contributed.

AuditAn IRS examination and verification of a taxpayersreturn or other transactions with tax consequences. Anoffice audit is an audit by the IRS which is conducted

in the agents office. A field audit is conducted by theIRS on the business premises of the taxpayer or in theoffice of the tax practitioner representing the taxpayer.

Away From Home Overnight

For purposes of deducting travel expenses, a trip awayfrom ones tax home for a period longer than an ordi-nary workday, during which time one is released fromduty to obtain rest.

Bad DebtsBusiness accounts receivable that have been includedin income in a prior year that are uncollectible, legal-ly binding debts owed to the taxpayer that are totallyworthless and uncollectible, and debts the taxpayermust pay that he guaranteed in connection with hisbusiness or for a profit may be deductible as baddebts.

BasisThe amount assigned to an asset from which gain orloss is determined for income tax purposes. For assetsacquired by purchase, basis is cost. Special rules gov-ern the basis of property received by virtue of anoth-ers death or by gift, the basis of stock received on atransfer of property to a controlled corporation, thebasis of the property transferred to the corporation,

and the basis of property received upon the liquida-tion of a corporation.

Basis of StockIf purchased, the amount paid for the stock. If thestock is received as a gift, basis is generally the basisof the previous owner or the fair market value whenreceived. The basis of inherited stock is usually its fairmarket value on the date of the decedents death.

BeneficiaryThe owner or recipient of funds in an account, such asan IRA, or from an insurance policy or will.

BequestA gift by will of personal property. A bequest is notincludable in the income of the recipient. Basis is usu-ally the value of the property at the date of death ofthe decedent. If a bequest of money is to be paid atintervals, then to the extent that it is paid out ofincome from property, it is taxable income to the re-cipient.

BondA note obliging a corporation or governmental unit torepay, on a specified date, money loaned to it by thebondholder. The holder receives interest for the life of

the bond. If a bond is backed by collateral, it is calleda mortgage bond. If it is backed only by the good faithand credit rating of the issuing company, it is called adebenture.

Boot

Cash or property of a type not included in the defini-

tion of a nontaxable exchange. The receipt of boot willcause an otherwise tax-free transfer to become taxable to the extent of the lesser of the fair market valueof the boot received or the realized gain on the trans-fer. Examples of nontaxable exchanges that could bepartially or completely taxable due to the receipt ofboot include transfers to controlled corporations andlike-kind exchanges.

Business Assets

Assets used in a trade or business or used to producerental or royalty income.

Business GiftsThe cost of qualified business gifts is deductible to amaximum of $25, per year per client or customer. The$25 limit does not apply to promotional items costing$4 or less on which the taxpayers name is clearlyimprinted.

Business-Use Property

Property used for the production of income. Examplesinclude rental houses, machinery, factories, officebuildings, and similar items.

Cafeteria Plan

A plan wherein an employer offers a choice of nontax

able fringe benefits from which participating employ-ees may select. The plan may be funded with employ-er contributions, employee contributions (usuallythrough salary reduction agreements) or a combination of both. It is also often called a 125 plan or a flexible spending account (FSA).

Calendar Year

A year that begins on January 1 and ends onDecember 31.

Call

An option to purchase stock at a fixed price within aspecified period of time.

Callable

A bond issue, all or part of which may be redeemedbefore maturity by the issuing corporation under specific conditions. The term also applies to preferredshares of stock, which may be redeemed by the issuing corporation.

Capital Asset

Broadly speaking, all assets are capital assets exceptthose specifically excluded by the Tax Code. Major categories of noncapital assets include property held forresale in the normal course of business (inventory)


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trade accounts and notes receivable, depreciable prop-erty, and real estate used in a trade or business.

Capital ExpenditureAn expenditure made for assets with useful lives ofmore than one year. Usually capital expenditures maynot be deducted in the year they are paid, even if they

are paid in connection with a trade or business. Inother words, they are capitalized and generally maybe depreciated or amortized.

Capital GainThe gain from the sale or exchange of a capital asset.

Capital Gain DistributionsAmounts paid by mutual funds, regulated investmentcompanies, and real estate investment trusts. Theseamounts represent the shareholders portion of gainfrom the sale of capital assets owned by these invest-ment companies. Capital gain distributions are taxedin the year constructively received and are alwaysconsidered to be held long term.

Capital Gain or Loss Holding PeriodThe length of time a capital asset is owned by the tax-payer. Assets owned 12 months or less are held shortterm; those owned more than 12 months are held longterm.

Capital ImprovementAn improvement made to extend the useful life of aproperty or add to its value. Major repairs, such as thereplacement of a roof, are considered to be capitalimprovements. The costs of capital improvements to

business property must be capitalized and may bedepreciated.

CapitalizeTo treat the cost of additions and improvements toproperty as a capital improvement.

Capital LossThe loss from the sale or exchange of a capital asset.Up to $3,000 ($1,500 MFS) of net capital loss isdeductible annually with the excess carried forward tofuture years. Losses on personal-use assets are notdeductible.

Capital StockShares of stock which represent ownership of a por-tion of the corporation.

Carryback/CarryoverProvisions in the Tax Code that allow certain losses orcredits to be used in a tax year other than the tax yearincurred. A carryover is to a future year. A carrybackis to a prior year.

Cash Method of AccountingOne of the two most common methods of accounting,the other being the accrual method defined elsewherein this glossary. Under the cash method of accounting,

income is reported in the tax year actually or con-structively received and expenses are deducted in thetax year paid.

Casualty Loss

A casualty is the complete or partial destruction ofproperty resulting from an identifiable event of a sud-den, unexpected, or unusual nature. Examples arefloods, storms, fires, earthquakes, auto accidents, andterrorist attacks. Individuals may deduct a casualtyloss only if the loss is incurred in a trade or business,in a transaction entered into for profit, or is a person-al loss arising from a disaster such as those men-tioned above. Individuals deduct personal casualtylosses as itemized deductions on Schedule A, subjectto a $100 nondeductible amount and a reduction ofthe loss by 10% of the taxpayers AGI. Use of Form4684 is required.

Certificate

The actual piece of paper that is evidence of owner-ship of stock in a corporation.

Charitable Contributions

Money or property donated to a qualified charitableorganization. Such donations are deductible onSchedule A as an itemized deduction.

Child and Dependent Care Credit

A nonrefundable tax credit of 2035% of employment-related child and dependent care expenses foramounts of up to $6,000, available to individuals whoare employed and have a qualifying child or disabled

spouse or dependent. The credit is computed on Form2441 for Form 1040 and 1040A filers.

Child Support Payments

Payments pursuant to a court order, divorce decree, orother legal obligation. Payments for child support donot constitute alimony and are not includable in grossincome by the recipient or deductible as alimony bythe payer.

Child Tax Credit

A nonrefundable credit of up to $1,000 per dependentchild under age 17 at the end of the tax year.

Circular 230Regulations governing the practice of attorneys, certi-fied public accountants, enrolled agents, enrolled actu-aries, and appraisers before the IRS.

CLADR

See Class Life Asset Depreciation Range.

Claim of Right

A term used in the Tax Code in connection withmoney or other property received as income which therecipient holds, but which he is required to restore tothe payer in whole or in part in a later year because it


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Glossary G.5

develops that he did not have an unrestricted right tothe income.

Class Life Asset Depreciation Range (CLADR)

This system of depreciation was used for assets placedin service prior to January 1, 1981, and must continueto be used for assets whose depreciation was set upunder that system. The CLADR system providedguidelines for depreciation lives for the assets listed ineach guideline class.

Closed Year

A tax year for which the statute of limitations hasexpired. The taxpayer cannot claim a refund and theIRS cannot collect additional taxes (with certainuncommon exceptions).

Collectibles

A group of capital assets which include works of art,rugs, antiques, precious metals, gems, stamps, coins,

and alcoholic beverages, the net gains from which aretaxed at a maximum rate of 28%.

Commission

(1) The brokers fee for purchasing or selling securitiesor property for a client. (2) An allowance paid to asalesperson or agent for services rendered.

Commodity Futures

Contracts to buy or sell some fixed amount of a com-modity (wheat or soybeans, for example) for a fixedprice at a future date.

Common-Law Marriage

A marriage established in a state that legally recog-nizes nonceremonial marriages. The parties musthave the legal capacity and the intent to marry, andthey must live together and present themselves pub-licly as husband and wife.

Common Stock

Shares in the ownership of a corporation that are enti-tled to residual dividends, after bonds and preferredstock have first received interest and dividends. Acommon stockholder usually has a vote in decidingcompany affairs, including the election of a corpora-tions board of directors.

Community Income

Income of a married couple, living in a communityproperty state, that is considered to belong equally toeach spouse, regardless of which spouse receives theincome.

Community Property

Property considered to belong in equal shares to ahusband and wife. This concept of ownership for prop-erty acquired after marriage is followed in Arizona,California, Idaho, Louisiana, New Mexico, Nevada,Texas, Washington, and Wisconsin.

Commuting

Traveling from ones residence to ones regular placeof business and back to the residence.

Compensation

Wages, commissions, tips, professional fees, and netself-employment income from services rendered; thatis, earned income. For IRA purposes, compensationalso includes alimony and separate maintenance pay-ments.

Condemnation

The taking of property by a public authority. The property is condemned as the result of legal action, and theowner is compensated by the public authority. Thepower to condemn property is known as the right ofeminent domain.

Conduit IRA

An IRA used to hold temporarily a distribution from a

qualified employer-maintained retirement plan, untisuch time as it can be rolled into another qualifiedemployer-maintained retirement plan.

Controlled Group

This refers to a controlled group of corporations thatis one or more chains of corporations connectedthrough stock ownership with a common parent cor-poration.

Constructive Receipt

A cash-basis taxpayer is taxed on income only as it isreceived. But if the income was unreservedly subjectto his demand and he could have received it but chosenot to do so, it is regarded as having been constructively received by him and is taxable. For exampleinterest credited to a savings account is constructively received even if the taxpayer has not withdrawn it

Contract Price

An amount payable to the seller and equal to the grossselling price when no mortgages are involved. If amortgage is assumed, the contract price is the grossselling price minus the amount of the mortgage plusthe excess (if any) of the mortgage over the sellersbasis and expenses of sale.

Contribution(1) Gift to a qualified charitable organizations, generally deductible on Schedule A. (2) Money placed in aretirement fund such as an individual retirementarrangement or an employer-maintained retirementplan.

Conversion (IRA)

Reclassification of a traditional IRA to a Roth IRAThis process may or may not involve relocation of thefunds. Any converted amounts are taxed to the extentthey were not taxed previously, but are not subject toan early distribution penalty.


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Convertible

A bond or preferred stock that may, under specifiedconditions, be exchanged for common stock or anothersecurity, usually of the same corporation.

Copyright

The exclusive legal right to sell, reproduce, or publisha literary, musical, or artistic work.

Cost

(1) Cash and/or the value of property given to acquirethe property received. (2) The purchase price paid forproperty, or the value at which property is taken intoincome (as in services paid for with property). Cost isthe amount that is most often applied against theamount realized from sale of property in determiningthe gain or loss. It is also the figure most often used indetermining the depreciation or cost recovery deduc-tion.

Cost DepletionA method for recovering the taxpayers investment innatural resources or timber. The cost is recovered rat-ably as the resource is extracted or the timber har-

vested. Total cost depletion cannot be claimed inexcess of basis. Percentage depletion, the othermethod for computing depletion of natural resources,is defined elsewhere in this glossary.

Cost Method of Inventory Valuation

Valuing inventory purchased during the year at cost;that is, the invoice price less any discounts plus trans-portation or other costs incurred in acquiring the mer-chandise.

Cost of Goods Sold

Beginning inventory plus direct purchases, directlabor costs, and overhead costs less withdrawals forpersonal use and ending inventory. Sole proprietorscompute their cost of goods sold in Part III of ScheduleC (Form 1040).

Cost of Maintaining a Home

Expenses necessary to maintain a taxpayers resi-dence. These costs include mortgage interest and realestate taxes (or rent), fire and casualty insurance on

the dwelling, upkeep and repairs, utilities, paiddomestic help, and food consumed in the home.

Cost Recovery

The writing off of the capital cost of qualified assetsover a specified time period. See alsoAccelerated Cost

Recovery System (ACRS) and Modified AcceleratedCost Recovery System (MACRS).

Coupon Bond

A bond with interest coupons attached. The couponsare clipped as they come due and are presented by thebond holder for payment of accrued interest.

Coverdell Education Savings Account (ESA)

A tax-favored savings plan under which any numberof taxpayers may contribute up to a total of $2,000 pereligible beneficiary. Contributions are non-deductible.Earnings and withdrawals are tax free and penaltyfree if used to pay for qualified higher education

expenses.Credits

Reductions of tax liability allowed for various purpos-es to taxpayers who meet the qualifications. Somecredits are refundable; that is, the IRS will send thetaxpayer a refund for any amount in excess of the taxliability. Some credits are nonrefundable; that is, theycan only reduce tax liability to zero. Some credits maybe carried to other tax years.

Custodial Parent

The parent with whom a child lived for the greaternumber of nights during the year.

Dealer

A person or firm that regularly buys and sells proper-ty. A person is classified as a dealer if at the time ofthe sale, he held the property primarily for sale to cus-tomers in the ordinary course of business. Gains fromthe sale of such property are ordinary gains, not capi-tal gains.

Declaration Control Number (DCN)

A unique 14-digit number assigned by the ElectronicReturn Originator (ERO) (or Transmitter, in the caseof Online Filing), to each electronically filed tax

return.Declining Balance Method of Depreciation

An accelerated method of depreciation. The percent isdetermined by the type of property. The depreciablebasis for the next year is reduced by the depreciationdeduction taken in the current year.

Deductions

Amounts that may be subtracted from income that isotherwise taxable.

Deferred Compensation

Compensation that will be taxed when received or

upon the removal of certain restrictions on receipt andnot when earned. For example, contributions to aqualified retirement plan on behalf of an employee areconsidered deferred compensation. Such contributionswill not be taxed to the employee until the funds aremade available or distributed to the employee, usual-ly upon retirement.

Deferred Gain

Nonrecognition of realized gain at the time of a tax-deferred exchange. Deferred gain on the sale of a prin-cipal residence generally applies only to those salesmade before May 7, 1997.


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Earned Income

Income from personal services as distinguished fromincome generated by property or other sources.Earned income includes all amounts received aswages, tips, bonuses, other employee compensation,and self-employment income, whether in the form of

money, services, or property.Earned Income Credit (EIC or EITC)

A refundable tax credit for qualified taxpayers basedon earned income, adjusted gross income, and thenumber of qualifying children.

Easement

A right held by an individual to use property owned bysomeone else for a limited purpose, usually to gainaccess. For example, an easement may give Person Athe right to use a path through Person Bs property toget to his own.

Education Expense DeductionEmployees may deduct education expenses as anitemized deduction if the expenses are incurred eitherto maintain or improve existing job-related skills or tomeet the express requirements of the employer orlegal requirements to retain current employment sta-tus. Such expenses are not deductible as an itemizeddeduction if the education is required to meet the min-imum educational requirements for the taxpayers jobor if the education qualifies the taxpayer for a newtrade or business. Education expenses may also qual-ify the taxpayer for a tuition and fees deduction, a

American Opportunity Credit, or a lifetime learning

credit. All of these are defined elsewhere in this glos-sary.

Educator Expenses Deduction

An above-the-line deduction of up to $250 for class-room supplies, books, and equipment, and available toeligible educators of students in kindergarten through12th grade.

Electronic Funds Withdrawal

A payment method which allows the taxpayer toauthorize the U.S. Treasury to electronically withdrawfunds from their checking or savings account.

Electronic Return Originator (ERO)An Authorized IRSe-file Provider that originates theelectronic submission of returns to the IRS.

Eligible Educator

Any educator who works at least 900 hours during aschool year as a teacher, instructor, counselor, princi-pal or aide in a public or private elementary or second-ary school.

Eligible Foster Child

A child, other than the taxpayers biological child,stepchild, or adopted child, who was placed with the

taxpayer by an authorized placement agency or by acourt order, decree, or judgement.

Eminent Domain

The right of a government authority to take privateproperty for public use upon paying fair compensationto the owner.

Employee

For income tax purposes, an employee is to be distin-guished from an independent contractor. This isimportant, because the withholding of income taxeson wages applies only to employees. Also, employeestatus will affect the manner and extent of somedeductions and credits. The regulations state that anemployee is one who is subject to the will and controlof the employer not only as to what shall be done butalso as to how it shall be done. See also Statutory

Employee.

Employee Stock OptionAn option granted to an employee to purchase theemployers stock. Employee stock options to whichspecial income tax treatment is accorded are knownas statutory options.

Employer-Maintained Retirement Plan

A qualified retirement plan funded in full or in part byemployer contributions on behalf of employees.

Employment Expenses

Ordinary and necessary expenses required to performthe duties for which the taxpayer was hired.

Enrolled ActuaryAn enrolled actuary is any individual who has satis-fied the qualifications set forth in the regulations ofthe Joint Board for the Enrollment of Actuaries andwho has been approved by the Joint Board to performactuarial services under the Employee RetirementIncome Security Act (ERISA) of 1974.

Enrolled Agent (EA)

An enrolled agent is a person who has earned theprivilege of practicing, that is, representing taxpayers,before the Internal Revenue Service. Enrolled agents,like attorneys and certified public accountants

(CPAs), are unrestricted as to which taxpayers theycan represent, what types of tax matters they canhandle, and which IRS offices they can practice before.

Entertainment Expenses

Such expenses are deductible by employees and self-employed taxpayers only if the expenses are directlyrelated to or associated with a trade, business, or pro-fession. To prevent abuses, various restrictions anddocumentation requirements have been imposed onthe deductibility of entertainment expenses. Thededuction for qualified business entertainment is lim-ited to 50% of cost.


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Estate

A taxable entity that is established upon the death ofa taxpayer. It consists of all the decedents propertyand personal effects. The estate exists until the finaldistribution of its assets to the heirs and other benefi-ciaries. During the period of administration, the

executor must usually file a return.Estimated Tax

The amount of tax a taxpayer expects to owe for theyear after subtracting expected amounts withheldand certain refundable credits.

Estimated Tax Voucher

A statement by an individual of (1) the amount ofincome tax he estimates he will incur during the cur-rent taxable year on income that is not subject towithholding, (2) the excess amount over that withheldon income which is subject to withholding, and (3) hisestimated self-employment tax. Advance payment oftax may be required (on as many as four paymentdates) unless estimated tax due after withholding andcredits is less than $1,000.

Estimated (Useful) Life

The period of time over which a depreciable asset willbe used by a particular taxpayer. The estimated use-ful life is used to determine the annual tax deductionfor pre-1981 depreciation.

Excess Social Security Tax Withheld

If a taxpayer worked for more than one employer dur-ing 2012, and more than $4,624.20 was withheld for

social security tax, the excess over the maximum isincluded in the Payments section of the return. Theexcess amount has the same character as withholdingtax.

Exchange

A transfer of property for other property or services.Exchanges of like-kind property are often permittedwith no immediate tax consequence.

Excludable Amount of Pension

The portion of pension distributions that are not tax-able.

Excluded GainGenerally applies to gains realized on the sale of aprincipal residence. A taxpayer may exclude up to$250,000 ($500,000 MFJ) of gain on the sale if heowned and occupied the residence for at least two ofthe five years prior to the sale.

Exclusion

An amount of income that is not included in grossincome because the Tax Code excludes it.

Exclusion Percentage

Used to compute the excludable amount of a pensionunder the general rule. This percentage is determined

by dividing the taxpayers total contribution by theexpected return.

Ex-Dividend Date

The date before which a stockholder must purchasestock to qualify to receive the next dividend payment

ExemptionAn amount ($3,800 for 2012) allowed by law as a reduction of income that would otherwise be taxed. SeealsoPersonal and Dependency Exemptions.

Exemption From Withholding

Status claimed on Form W-4 directing the employernot to withhold federal income taxes from the employ-ee. An employee who had no tax liability and receiveda full refund of any federal income tax withheld in thepreceding tax year, and who expects the same condi-tions to apply in the current tax year, may claimexemption from withholding.

Expected ReturnThe total amount an annuitant expects to receiveunder a pension or annuity contract. This is generallydetermined by multiplying the annual payment bythe annuitants expected life multiple from govern-ment actuarial tables.

Expenses

For federal income tax purposes, expenses are dividedinto four categories: (1) trade or business expenses, (2expenses in connection with production of income, inconnection with management, conservation, or maintenance of property held for production of income, (3)

expenses in connection with the determination, collection, or refund of any tax, and (4) personal, family, orliving expenses. Expenses in the first three categoriesare generally deductible in determining taxableincome. Expenses in the fourth category are notdeductible, except in a few cases (medical expensescharitable contributions, etc.) in which they are specif-ically allowed by law. Expenses are to be distinguishedfrom capital expenditures, defined elsewhere in thisglossary.

Expenses of Sale

When paid by the seller, these expenses reduce the

sale price of property. Examples are commissions to abroker or real estate agent, legal fees, and transfertaxes.

Expensing

A term used to refer to the 179 expense deductiondefined elsewhere in this glossary.

Fair Market Value (FMV)

The amount at which property would change handsbetween a willing buyer and a willing seller, neitherbeing under compulsion to buy or sell and both havingreasonable knowledge of the relevant facts.


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Fair Rental Value

The amount the owner of property could reasonablyexpect to receive from a stranger for the same type oflodging; generally, the amount at which a home withits furnishings could be rented to a similar size fami-ly in a similar location.

Federal Income Tax WithheldThe amount taken out of income by the payer andsubmitted to the IRS as an advance payment of thetaxpayers federal income tax.

FICA (Federal Insurance Contributions Act)

The law that provides for social security and medicarebenefits. This program is financed by payroll taxesimposed equally on the employer and employee. For2012, the employer is required to withhold 1.45% fromeach employees gross wages for medicare tax and4.2% of each employees wages up to $106,800 forsocial security tax.

Fiduciary

One who acts for an estate or trust to manage theproperty of the estate or trust.

Finance Charges

Amounts paid for the privilege of making purchaseson a deferred-payment basis.

First In, First Out (FIFO)

An accounting method for determining the cost ofinventories. Under this method, the first items pur-chased are treated as being the first items sold.Ending inventory is valued using the cost of later pur-

chases, or the lower of cost or market.

Fiscal Year

An accounting year ending on the last day of anymonth except December.

Flexible Spending Account (FSA)

See Cafeteria Plan.

Foreign Tax Credit or Deduction

A credit or deduction available to a U. S. citizen or res-ident alien, and in limited circumstances to a U. S.nonresident alien, who incurs or pays income taxes toa country other than the United States.

Foster Child

A child, other than the taxpayers biological child,stepchild, or adopted child, who lived with the taxpay-er. See alsoEligible Foster Child.

Fringe Benefits

Compensation or other benefits received by anemployee that are not in the form of cash. Some fringebenefits (for example, accident and health plans, andgroup-term life insurance) may be excluded from theemployees gross income and, therefore, are not sub-

ject to federal income tax.

Full Retirement AgeThe age at which a worker qualifies to receive fullsocial security benefits; increasing incrementally fromage 65 for those born before 1938 to age 67 for thoseborn after 1959.

Full-Time Student

An individual who is enrolled in a school for the num-ber of hours or courses considered by the school to befull time. School includes elementary and secondaryschools, post-secondary colleges, and technical andtrade schools. It does not include on-the-job training,correspondence schools, or night school. However, astudent will not be disqualified by night classes thatare part of a full-time course of study.

Fully Taxable PensionsPensions for which taxpayers contributed none of thecost or have recovered their cost in previous years.

GainThe excess of the amount realized from a sale orexchange over the adjusted basis of the property soldor exchanged.

General Depreciation SystemThe most commonly used MACRS system. Personalproperty is depreciated using the declining-balancemethod (double or 150%, depending on the recoveryclass) switching to straight line when that methodresults in the larger deduction. Residential rentalproperty is depreciated using the straight-line methodover 27.5 years, and nonresidential real property isdepreciated using the straight-line method over 39

years (31.5 years for property placed in service beforeMay 13, 1993).

General RuleUsed to determine the taxable portion of a pension orannuity, generally replaced by the simplified methodfor periodic payments starting after November 18,1996.

General Sales TaxA general sales tax is a sales tax imposed on retailsales of a broad range of items at a single rate.

General Straight-Line Depreciation System

A MACRS system of depreciation using the straight-line method over the normal MACRS recovery periodfor the asset.

GiftA transfer of property from one person or entity toanother without consideration or compensation. Forincome tax purposes, the words gift and contribu-tion usually have separate meanings, the latter wordbeing used in connection with contributions to chari-table, religious, etc., organizations, whereas the wordgift refers to transfers of money or property to pri-

vate individuals, needy persons, friends, relatives, etc.


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Glossary G.11

The recipient of a gift is not required to include it inhis gross income, and the maker of the gift is not enti-tled to deduct it (except for business gifts to customersof $25 or less per donee per year).

Gift Tax

A graduated federal tax paid by donors on gifts ex-ceeding $13,000 (for 2012) per donee.

Golden Parachute

An agreement entered into by a corporation with itstop executives to make substantial payments to theexecutives in the event of a change in corporate con-trol. Such payments are treated as compensation.

Goodwill

The ability of a business to generate income in excessof a normal rate on assets due to superior managerialskills, market position, new product technology, etc. In

the purchase of a business, goodwill represents thedifference between the purchase price and the value ofthe net assets. Goodwill must be amortized over a 15-year period and is subject to recapture when the busi-ness is sold. Amortization is computed on Form 4562.

Government Bonds Issued at a Discount

Certain U.S. Government bonds are issued at a dis-count and do not pay interest during the life of thebond. Instead, the bonds are redeemable at increasingfixed amounts. Thus, the difference between the pur-chase price and the amount received upon redemptionrepresents interest income to the holder. A cash-basis

taxpayer may defer recognition of taxable incomeuntil such bonds are redeemed or until the year offinal maturity, whichever is earlier. Alternatively, thetaxpayer may elect to include the annual increase inthe value of the bond in gross income on an annualbasis.

Gross Income

Total worldwide income received in the form of money,property, or services that is subject to tax.

Gross Profit

Gross receipts less the cost of goods sold.

Gross Rents

Total income from rents before expenses or the depre-ciation or cost recovery deduction.

Group Term Life Insurance

Life insurance coverage purchased by an employer fora group of employees. Such insurance is renewable ona year-to-year basis and does not accumulate in value;that is, no cash surrender value is built up. The pre-miums paid by the employer on such insurance areusually not taxed to an employee unless coverageexceeds $50,000.

Guaranteed Return

A specific amount to be paid by an annuity. This maybe a certain payment for a given number of years or agiven amount to be paid regardless of death.

Hardship Withdrawal

A withdrawal from a 401(k), 403(b), or 457 plan tha

is permitted when the plan participant has an imme-diate and heavy financial need and the withdrawal isnecessary to meet that need.

Head of Household

The filing status used by an unmarried taxpayer whopays more than half of the cost of maintaining ahousehold for a qualifying child who is a dependentfor more than six months or for his or her mother orfather for the entire year and may claim either on hisor her tax return.

Health Savings Account (HSA)

A trust or custodial account created after 2003 exclusively for the purpose of paying the qualified medicaexpenses of a high deductible health plan of theaccount holder.

Hobby Loss

A nondeductible loss arising from a personal hobby ascontrasted with a loss arising from an activity en-gaged in for profit.

Holding Period

The period of time property has been owned forincome tax purposes. The holding period determines igain or loss from the sale or exchange of a capital

asset is long or short term.

Home-Office Expenses

Expenses of operating a portion of a residence used forbusiness or employment-related purposes. Severalrestrictions limit the deduction for home-officeexpenses.

Hope Credit

A nonrefundable credit of up to $1,800 per qualifiedstudent for tuition and fees paid for the first two yearsof post-secondary education. If a Midwestern disasterarea student, see Form 8863. Note: For years 2009through 2017, the Hope credit is replaced by the

American Opportunity Credit (the Hope credit mayapply to Midwestern disaster students for 2009).

Household Employee

An individual who performs nonbusiness services forthe taxpayer in or around the taxpayers home. Suchservices include child and dependent care, house clean-ing, cooking, and yard work.

Household Expenses

A portion of total support; the value of lodging plusfood consumed in the home, utilities paid, and repairsmade. The total is divided equally among all family


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members. Each members share of household expens-es is part of his total support.

Husband and Wife

A status that, among other things, entitles a couple tofile a joint federal income tax return. For the purposeof joint returns, common-law marriages are recog-

nized only if the state in which the two persons residerecognizes such marriages or if the state in which themarriage began recognizes common-law marriages.The status as husband and wife on the last day of thetax year governs the right to file a joint return. SeealsoMarriage.

Hybrid Method of Accounting

A combination of accounting methods, usually of thecash and accrual methods.

Identifying Numbers

All taxpayers and dependents must have identifying

numbers. Individuals generally use their social se-curity numbers (SSN). Certain resident and nonresi-dent aliens use individual taxpayer identificationnumbers (ITIN). Certain children in the process ofbeing adopted may receive adoption taxpayer identi-fication numbers (ATIN). Businesses, estates, trusts,partnerships, and payers of dividends and interest,use employer identification numbers (EIN).

Imputed Interest

In the case of certain long-term sales of property, theIRS has the authority to convert some of the gain fromthe sale into interest income if the contract does not

provide for a minimum rate of interest to be paid bythe purchaser. Such converted interest is calledimputed interest.

Income

The word income, in its broad sense, is the gain de-rived from capital, labor, or a combination of the two.It is distinguishable from the capital itself. Ordinarily,for income tax purposes, the word income is not usedalone. Rather it is used within such descriptive termsas gross income, taxable income, and adjusted grossincome, all of which are defined elsewhere in this glos-sary.

Independent ContractorA taxpayer who contracts to do work according to hisown methods and who is not subject to control exceptas to the results of such work. An employee, by con-trast, is subject to the control of the employer as to themethods to be used to obtain the desired results.

Individual Retirement Arrangement (IRA)

A personal savings plan that allows a taxpayer toaccumulate money tax deferred until withdrawal,usually upon retirement. There are two types of IRAs:traditional IRAs and Roth IRAs, both of which aredefined elsewhere in this glossary.

Inheritance

As distinguished from a bequest, property acquiredthrough laws of descent and distribution from a per-son who dies intestate (without leaving a will). Prop-erty so acquired usually takes as its basis the fairmarket value at the date of the decedents death. An

inheritance of property is not a taxable event, but theincome produced by an inheritance is taxable.

Installment Method

A method of accounting enabling a taxpayer to spreadthe recognition of gain on the sale of property over thepayment period. Under this procedure, the seller com-putes the gross profit percent from the sale (that is,the gain divided by the contract price) and applies itto each payment received to arrive at the amount ofthe gain to be recognized.

Insurance Dividends

Amounts paid to policy holders are not dividends oncapital stock, but are a rebate of a portion of the pre-miums paid for the insurance. Such dividends reducethe cost of the insurance and are not taxable unless inexcess of the total premiums paid. Interest paid whenthe dividends are left with the insurance company isreported to the taxpayer as interest and is taxable.

Intangible Personal Property

Property, other than real property, with no intrinsicvalue; its value lies in the rights conveyed. Examplesinclude cash, insurance, stock, goodwill, and patents.

Interest Received

An amount received for the use of money that is to berepaid in full at a specified time or on demand.

Interlocutory Decree

SeeDivorce Decree (Interlocutory).

Internal Revenue Service (IRS)

The division of the U.S. Treasury Department responsi-ble for collecting taxes.

Inventory

A list of articles of property. For income tax purposes,inventory refers only to a list of articles comprising

stock in tradearticles held for sale to customers inthe regular course of a trade or business. The cost ofgoods sold during the year is determined by adding tothe inventory at the beginning of the year the pur-chases during the year, and subtracting from this sumthe inventory at the close of the year.

Investment Income

This term generally includes interest, dividends, capi-tal gains, and other types of distributions. The subjectcan be fully explored in IRS Publication 550,

Investment Income and Expenses (Including Capital

Gains and Losses).


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Glossary G.13

Investment Interest

Interest paid on loans acquired to purchase or holdinvestment property. Investment interest is de -ductible as an itemized deduction to the extent of netinvestment income.

Investment Property

Property owned primarily for its potential increasedvalue. Examples include land, stock, works of art, andcollectibles.

Involuntary Conversion

The receipt of money or other property as reimburse-ment for the loss or destruction of property throughtheft, casualty, or condemnation. Any gain realized onan involuntary conversion can, at the taxpayers elec-tion, be considered nonrecognizable for federal incometax purposes if the owner reinvests the proceeds with-in a prescribed period of time in similar property.

Itemized DeductionsCertain personal expenditures allowed by the TaxCode as deductions from adjusted gross income. Ex-amples are certain medical expenses, qualified inter-est on home mortgages, and charitable contributions.Itemized deductions are reported on Form 1040,Schedule A. A taxpayer who itemizes deductions maynot claim the standard deduction.

Jointly Owned Property

Property held in the name of more than one person.

Joint Return

A return combining the income, exemptions, credits,and deductions of a husband and wife.

Joint Tenancy (with Right of Survivorship)

A form of joint ownership. Each tenant has an undi-vided interest in the entire property. On death of oneof the owners, the survivor becomes the owner of thewhole. A joint tenancy may involve more than two per-sons.

Joint Venture

An enterprise participated in by associates actingtogether, with a community of interests, each associ-

ate having the right to participate in its management.For income tax purposes, a joint venture is treated asa partnership, not taxable in its own capacity, butregarded as a taxpayer for the purpose of computingits taxable income, which is distributable among theassociates in the proportions agreed upon. Such dis-tributive shares are reported by the associates ontheir individual income tax returns.

Land Value

The value of the land in a sale where the total saleprice includes land as well as any improvements tothe land.

Last In, First Out (LIFO)An accounting method for valuing inventories for taxpurposes. Under this method, the last items pur-chased are treated as being the first items soldEnding inventory is valued using the cost of the itemswith the earlier purchase dates.

Legally BlindAble to see no better than 20/200 in the better eyewith corrective lenses, or having a field of vision notmore than 20 degrees.

Legally SeparatedSeparated under a decree of separate maintenancethat requires the spouses to live apart.

LesseeOne who rents property from another. In the case oreal estate, the lessee is also known as the tenant.

Lessor

One who rents property to another. In the case of realestate, the lessor is also known as the landlord.

Lifetime Learning CreditA nonrefundable credit equal to 20% of the first$10,000 of qualified higher education tuition and feespaid during the year on behalf of the taxpayer, hisspouse, or his dependents.

Like-Kind ExchangeAn exchange of property held for productive use in atrade or business or for investment (except inventoryand stocks and bonds) for property of the same typeUnless different property is received (called boot), the

exchange is nontaxable in the current year. Any gainor loss is not recognized until the property received inthe exchange is sold or disposed of. Like-kindexchanges are reported on Form 8824.

Lineal AncestorA direct, in-line family predecessor of the taxpayere.g., parent, grandparent, great-grandparent, etc.

Lineal DescendantA direct, in-line offspring of the taxpayer; e.g., childgrandchild, great-grandchild, etc.

Liquidation

(1) The process of converting securities or other property into cash. (2) The dissolution of a corporationwith cash (remaining after sale of its assets and pay-ment of all indebtedness) being distributed to theshareholders.

Liquidation DistributionsA return of capital received because of a partial orcomplete liquidation (going out of business) of a corporation. The basis of the stock on which liquidation dis-tributions are paid is reduced by the amount of thedistributions. Any amount received in excess of basisin the stock is taxable. In a liquidation that results in


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cancellation of the stock, a loss can be claimed theyear the final distribution is received if total distribu-tions are less than the taxpayers basis. Report liqui-dation distributions on Schedule D, Form 1040.

Listed Property

Listed property includes passenger autos and other

property used for transportation, property generallyused for purposes of entertainment, recreation, oramusement, computers not used exclusively at a reg-ular business establishment, and other property to bespecified by the IRS. Restrictions apply to the depreci-ation of listed property.

Lodging

A portion of total support. Lodging includes the fairrental value of a room, apartment, or house in whichthe dependent lives, a reasonable allowance for theuse of furniture and appliances, and all utilities.

Long-Term Capital Gains and LossesGains and losses on the sale or exchange of capitalassets that have been held for more than 12 months. Anet long-term capital gain is the excess of long-termgains over long-term losses, or vice versa for a net long-term capital loss.

Lower of Cost or Market Method of Inventory

Valuation

Inventory valuation considering the actual cost or thereplacement cost of merchandise on the inventorydate. The lower value is used, creating a reduced grossprofit for the period in which the decline occurred andan approximately normal gross profit is realized dur-ing the period in which the item is sold.

Lump-Sum Distribution

Payment of the entire amount due at one time ratherthan in installments. Such distributions must comefrom qualified employer plans. The recipient of alump-sum distribution may be eligible for special taxtreatment of the distribution.

Main Home

SeePrincipal Place of Abode.

Margin

A percentage of the full price of a security that mustbe paid as a down payment by an investor buying oncredit. The required margin fluctuates, subject to fed-eral regulations.

Marriage

A legal union between one man and one woman ashusband and wife.

Married Filing Jointly (MFJ)

The filing status used by a man and a woman who aremarried at the end of the tax year and not legally sep-arated under a final decree of divorce or separatemaintenance and who record total income, exemp-

tions, and deductions of both spouses on one taxreturn.

Married Filing Separately (MFS)

The filing status used by a married couple who choos-es to record their respective incomes, exemptions, anddeductions on separate individual tax returns.

Material Participation Income

Active income, as distinguished from passive income,from employment as well as business and other for-profit activities in which the taxpayer takes a signifi-cant and active role.

Medical Expenses

Qualified medical expenses of an individual, spouse,and dependents are allowed as an itemized deductionto the extent that such amounts (less reimburse-ments) exceed 7.5% of adjusted gross income.

Medicare Part A

The medicare tax taken out of an employees wages, orthe same tax paid by a self-employed person on netself-employment income. The medicare A tax rate is1.45% of gross wages (2.9% for self-employed individ-uals).

Medicare Part B

The medicare insurance premium withheld from thebenefits of social security recipients. The basic premi-um for 2012 is $99.90 per month ($1,198.90 for theentire year). The premium will be higher if the annu-al income is more than $85,000 ($170,000 if MFJ).

Medicare Part DThe medicare insurance premium withheld from thebenefits of social security recipients who choose to payfor prescriptions through medicare.

Medicare Tax Withheld

SeeMedicare Part A.

Mileage Rate (Optional Method)

The method of deducting automobile expenses basedon business miles driven. The standard mileage ratefor 2012 is 55.5 per mile.

Modified Accelerated Cost Recovery System

(MACRS)The method of depreciation used for most depreciableassets placed in service after 1986. Under MACRS,costs of qualified property are written off over prede-termined periods.

Modified AGI (MAGI)

Modified adjusted gross income. For purposes of com-puting a specific deduction or credit, MAGI beginswith the taxpayers regular adjusted gross incomewhich is then modified to account for certain types oflosses, exclusions, and deductions. For example, formany tax purposes, MAGI is regular AGI plus any


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Glossary G.15

excluded foreign, U.S. possession, and Puerto Ricanincome.

Mortgage Credit Certificate

Qualified taxpayers who receive a mortgage creditcertificate from a state or local government to buy,rehabilitate, or improve their main homes may claim

a credit for a percentage of their home mortgage inter-est. The itemized deduction for home mortgage inter-est must be reduced by the amount of the credit. Thecredit is not refundable, but any portion that isunused because it exceeds tax liability may be carriedover to the following three years where it can beadded to any credit for the current year. The credit iscomputed on Form 8396. Mortgage credit certificatesmay be subject to a recapture rule if the home is soldwithin nine years.

Moving Expenses

An adjustment to income permitted to employees and

self-employed individuals who move for work-relatedreasons, providing certain requirements are met.Form 3903 is used to compute deductible moving ex-penses.

Multiple Support Agreement

If two or more persons who would otherwise be enti-tled to an exemption for a qualifying relative, togeth-er furnish more than half the dependents support(but no one individual provides more than half), anyone of them who furnishes more than 10% of the sup-port is entitled to the exemption if all the others whofurnished more than 10% of the support file written

declarations that they will not claim an exemption forthe individual for that taxable year. Form 2120 is usedfor this purpose.

Mutual Fund

(1) An open-ended investment company that investsmoney of its shareholders in a usually diversifiedgroup of securities of other corporations. (2) A compa-ny that is in the business of buying and selling stocksand sharing its income with those investing in it(sometimes called a regulated investment company).

Necessary (Expenses)

An expense that is appropriate and helpful in further-ing the taxpayers business or income-producing activ-ity. See also Ordinary Expenses.

Net Operating Loss (NOL)

A net loss for the year attributable to business orcasualty losses. In order to mitigate the effect of theannual accounting period concept, the law allows tax-payers to use an excess loss of one year as a deductionfor certain past or future years.

Nonbusiness Bad Debts

A bad debt loss not incurred in connection with a cred-itors trade or business. A nonbusiness bad debt is

deductible as a short-term capital loss and is allowedonly in the year the debt becomes entirely worthless.

Noncompliance

Failure or refusal to comply with the Tax Code.

Noncustodial Parent

The parent who is not the custodial parent of thechild.

Nonparticipating Spouse

The spouse of an active participant in an employer-maintained retirement plan who is not also an activeparticipant in such a plan.

Nonrecourse Debt

An obligation for which the endorser is not personallyliable.

Nonrecovery Property

Property which does not qualify for a cost recovery

deduction under ACRS or MACRS or property thetaxpayer elects to exclude from ACRS or MACRS bychoosing a depreciation method not based on a number of years.

Nonrefundable Credit

A credit which cannot exceed the taxpayers tax liability.

Nonresident Alien

A person who is not a U.S. citizen and does not live inthe United States, or lives in the United States undera nonresident visa, or does not meet the substantiapresence test. See IRS Publication 519.

Nontaxable Distributions

A general term applied to stock dividend distributionsthat are not taxable. These distributions generallytake the form of return of capital, stock dividendsstock splits, and/or tax-free distributions.

Nontaxable Exchange

An exchange on which no gain or loss is recognized inthe current year.

Nontaxable Income

Income that is by law exempt from tax.

Open Year

A taxable year for which the statute of limitations hasnot yet expired.

Option

An agreement to buy or sell property on or before aspecified date at an established price. The sale orexchange of an option to buy or sell property results incapital gain or loss if the property is a capital asset.

Ordinary Dividends

Ordinary dividends are the most common type of dis-tribution from a corporation. They are paid out of theearnings and profits of the corporation. Ordinary div-


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idends are taxable as ordinary income unless they arequalified dividends.

Ordinary (Expenses)Common and accepted in the general industry or typeof activity in which the taxpayer is engaged. It is oneof the tests for the deductibility of expenses incurred

or paid in connection with a trade or business; for theproduction of income; for the management, conserva-tion, or maintenance of property held for the produc-tion of income; or in connection with the de-termination, collection, or refund of any tax.

Ordinary Income (Loss)Income (loss) that is fully includable in (deductiblefrom) gross income and that does not have the charac-teristics of capital gain or loss.

Over the CounterThe market for securities issued by companies usual-ly not listed on any stock exchange. Over the counter(OTC) trading is the principal market for U.S. govern-ment and municipal bonds.

Partly Taxable Pensions

Pensions funded through employer plans to whichboth pre-tax money and after-tax money has been con-tributed.

PartnershipA form of business in which two or more persons jointheir money and skills in conducting the business asco-owners. Partnerships are treated as a conduit andare not subject to taxation. Various items of partner-

ship income, expenses, gains, and losses flow throughto the individual partners and are reported on theirpersonal income tax returns.

Passive Income and LossesFor purposes of the passive loss rules, income andlosses must be divided into three categories: active,passive, and portfolio. Passive income and losses arethose from business activities in which the taxpayerdoes not materially participate, and all rental activi-ties (except those of qualified real estate profession-als). See alsoActive Income and Losses andPortfolio

Income and Losses.

PatentThe exclusive right of an inventor to make, use, or sellhis invention for a period of years. A patent is anintangible asset that may be depreciated over itsremaining life. The sale of a patent usually results inlong-term capital gain treatment.

PensionPayments made periodically of (generally) a definiteamount for a specified period (usually life) from anemployer-maintained plan to workers who have metthe stated requirements. Its primary purpose is toprovide retirement income.

Pension/Annuity Starting Date

The first day of the first period for which an amountis due as a pension/annuity payment under the con-tract.

Percentage Depletion

There are two methods of computing depletion of nat-ural resources. One is cost depletion, defined else-where in this glossary. The other method is percentagedepletion, which is a specified percentage of the grossincome from the property. In each year, the methodwhich results in the greater deduction is used.Percentage depletion is allowed for nearly all naturalresources, except timber.

Permanent and Total Disability

A disability that prevents an individual from engag-ing in any substantial gainful activity because of amedically determined physical or mental impairment

that is expected to result in death, or that has lastedor is expected to last for a continuous period of not lessthan 12 months.

Personal and Dependency Exemptions

The Tax Code provides a $3,800 exemption (for 2012)for each individual taxpayer and an additional $3,800exemption for his spouse if a joint return is filed. Anindividual may also claim a $3,800 exemption for eachdependent providing certain tests are met. Taxpayerswho may be claimed as a dependent on another tax-payers return may not claim their own personalexemptions.

Personal ExpensesExpenses of an individual for personal reasons are notdeductible unless stated to be deductible under TaxCode.

Personal Property

Generally, all property other than real estate.

Personal Property Tax

An annual tax imposed on certain personal property,such as cars or boats, and based on the value of theproperty.

Personal ResidenceThe property in which the taxpayer lives and to whichhe returns after temporary absences. A taxpayer mayhave one or more residences such as a main home anda vacation house. A residence is not limited to a house.Condominiums, cooperative apartments, townhouses,mobile homes, and houseboats can all qualify as resi-dences.

Personal-Use Property

Property owned for personal well-being and enjoy-ment. It includes a taxpayers home, vehicles, furni-ture, clothing, and other property.


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Glossary G.17

Physical Custody

The taxpayer with whom a child lives is considered tohave physical custody, regardless of who has nominallegal custody.

Points

A loan-origination fee (one-time charge paid for theuse of money) that a buyer generally may deduct asinterest; fully in the year paid if for the purchase orimprovement of a principal residence or, if not, thenover the term of the loan.

Portfolio Income and Losses

For purposes of the passive loss rules, income andlosses must be divided into three categories: active,passive, and portfolio. Portfolio income and losses arethose from such sources as dividends, interest, capitalgains and losses, and royalties. See alsoActive Incomeand Losses andPassive Income and Losses.

Prepaid ExpensesCash-basis as well as accrual-basis taxpayers usuallyare required to capitalize prepayments for rent, insur-ance, etc. that cover more than one year. Deductionsare taken for the period during which the benefits arereceived.

Prepaid Interest

Interest paid in advance is deductible as an interestexpense only as it accrues. The one exception to thisrule involves the interest element when a cash-basistaxpayer pays points to obtain financing for the pur-chase or improvement of a principal residence if the

payment of points is an established business practicein the area in which the indebtedness is incurred andthe amount involved is not excessive. Points paid torefinance a principal residence, however, must bededucted over the life of the loan.

Principal Payment

That portion of a loan payment applied to the pur-chase price (contract price), as opposed to an interestpayment.

Principal Place of Abode (Principal Residence)

The place that an individual considers to be his per-manent home. A persons abode does not change whenhe is temporarily absent due to illness, school, mili-tary service, etc., as long as his living area is main-tained and he can reasonably be expected to returnhome after the temporary absence.

Principal Place of Business

The main place where work is performed or businessis transacted, or the only fixed location at which a tax-payer performs administrative and managerial tasksnecessary for business.

Principal Residence

SeePrincipal Place of Abode.

PrivilegeProtection from being required to disclose confidentiacommunications between two parties, such as attor-ney and client.

Prizes and AwardsThe fair market value of a prize or award generally is

includable in gross income. An exception applies whena qualified recipient of an award for charitable andthe like achievements designates that the prize is tobe transferred by the payer to a governmental unit orto certain charitable, educational, or religious organi-zations. Another exception is made for certain employee achievement awards such as the traditional goldwatch presented upon retirement.

ProprietorThe sole owner of a trade or business.

ProprietorshipA business controlled and operated by one person.

Puts and CallsThese are option contracts. A put gives its holder theoption to sell a particular stock at a fixed price withina specified period of time. A call gives its holder theright to buy stock under the same conditions. Put andcall contracts can last up to several months and usually specify a price close to the market value of thestock at the time they are drawn. Puts are purchasedby investors who think the price of the stock will fallcalls are purchased by investors who think the pricewill rise.

Qualified Charitable OrganizationAn entity, usually an association or nonprofit corporation, designed to provide some form of public charityor service and specifically approved by the U.STreasury as a recipient of deductible charitable con-tributions.

Qualified Dividends

Dividends received on shares of common stock held bythe taxpayer for more than 60 days of the 121-dayperiod beginning 60 days before the ex-dividend date(more than 90 days of the 181-day period beginning 90days before the ex-dividend date for preferred stock)

These dividends qualify for long-term capital gaintreatment.

Qualified Pension or Profit-Sharing PlanAn employer-sponsored plan that meets the requirements of IRS Code 401. If these requirements aremet, none of the employers contributions to the planare taxed to the employee until distributed to himThe employer is allowed a deduction in the year thecontributions are made.

Qualified Tuition PlanA personal savings plan, defined under 529 of theInternal Revenue Code, which allows a taxpayer to


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19/24

Glossary G.19

mutual funds, some of which are listed on stock ex-changes, are readily transferable on the open marketand are bought and sold like other shares. Open-endfunds sell their own new shares to investors, standready to buy back their old shares, and are not listed.

Regulations

The IRS Commissioner publishes his interpretation ofthe Tax Code in the form of regulations. They do nothave the force and effect of law except in those casesin which the law on a particular subject calls for ruleson that subject to be expounded through regulations.

Reinvested DividendsEarnings of investment companies (mutual funds)that the shareholder has accepted as additionalshares of the companys stock rather than as cash.They are taxable in the year constructively received.

Rental IncomeIncome received by the taxpayer for allowing anotherpersons use of the taxpayers property. Rental incomeincludes advance rental payments, late payments, andcurrent payments. Payments received for lease cancel-lation and forfeited security deposits are rental in-come the year received or forfeited. Rental income isconsidered passive income for purposes of the passiveloss rules, except for qualified real estate profession-als.

RepairsCurrent expenditures to restore business-use proper-ty to an original condition or maintain the propertythrough minor alterations rather than to extend its

useful life. The cost of repairs normally is deductibleannually. Substantial repairs that increase the valueor extend the life of the property are treated as capi-tal improvements and must have their cost recoveredover a number of years.

Replacement PeriodThe time during which a taxpayer must purchaseappropriate replacement property in order to post-pone tax on the gain from the property disposed of.

RepossessionTaking possession of property that was earlier sold on

an installment contract because the buyer defaults onpayment of the debt.

Resident Alien

A citizen of another country who lives in the UnitedStates and/or has resident status by law or visa, orpasses the substantial presence test. See IRS Publica-tion 519.

Returns of Capital (Nontaxable Distributions)A return of a shareholders investment generallymade because an excess amount of capital has beenaccumulated. Returns of capital may be received incash or reinvested to acquire additional shares at the

shareholders request. Amounts received that are notin excess of the basis of the stock on which paid arenot taxable. The basis of the stock on which returns ofcapital are paid must be reduced. Amounts received inexcess of the basis of the stock on which returns ofcapital are paid are reported on Schedule D, in Part I

if stock has been owned short term, or in Part II ifstock has been owned long term.

Right

The opportunity a corporation gives a shareholder tobuy additional shares at a special price for a limitedtime. Shareholders who do not use their rights can selthem to other investors.

Rollover

A qualified transfer of funds from one tax-favoredaccount to another, usually of the same type. Arollover must take place within 60 days of receivingthe funds.

Roth IRA

A type of individual retirement arrangement in whichcontributions are not tax deductible, earnings growtax deferred, and qualified withdrawals are tax free.

Royalty

(1) A payment received for the right to exploit a taxpayers ownership of natural resources or a taxpayersliterary, musical, or artistic creation. (2) An interest inthe oil and gas in place that entitles the holder to aspecified fraction, in kind or in value, of the total production from the property, free of any expense of

development and operation.

Royalty Interest

An interest in the oil and gas in place that entitles theholder to a specified fraction, in kind or in value, of thetotal production from the property, free of any expenseof development and operation.

RRTA (Railroad Retirement Tax Act)

The law that provides for railroad retirement benefits

Safe Harbor

Tax regulations that allow a (usually) simpler methodof determining a tax consequence than is available fol-

lowing the precise language of the Code.

Salvage Value

The estimated value that will be realized upon thesale or other disposition of an asset at the end of itsuseful life. Salvage value must be taken into accountwhen determining the depreciable amount under pre-1981 depreciation, but not under ACRS or MACRS.

Savers Credit

A nonrefundable credit based on up to $2,000 in contributions to qualified retirement plans and tradition-al and Roth IRAs. The credit is allowed in addition to


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any deduction available for the contributions. Thecredit is completed on Form 8880.

SchedulesOfficial IRS forms used to report various types ofincome, deductions, and/or credits.

Scholarships and FellowshipsFinancial aid grants awarded to students for the pur-pose of attending a college or performing research.

S CorporationA qualified small business corporation that has elect-ed special tax treatment under subchapter S of theInternal Revenue Code. Unlike most corporations,which are taxable entities themselves, S corporationspass income, losses, and deductions through to share-holders to report on their individual returns.

Section (followed by a number)The section of the Tax Code in which particular laws

are given.

Section 125 PlanSee Cafeteria Plan.

Section 179 Expense DeductionAn election to treat the cost of certain qualified prop-erty as a currently deductible expense rather than asa capital expenditure. Generally a maximum totaldeduction of $500,000 may be claimed for qualifiedassets placed in service in 2012. This is also referredto as expensing.

Section 529 Plan

See Qualified Tuition Plan.Section 1231 Gains and Losses

If the combined gains and losses from the taxable dis-positions of 1231 assets is a gain, such gains aretreated as long-term capital gains. In arriving at1231 gains, however, the depreciation recapture pro-

visions (for example, 1245 and 1250) are first appliedto produce ordinary income. If the net result of thecombination is a loss, such gains and losses for 1231assets are treated as ordinary.

Section 1245Section 1245 assets are depreciable business use per-

sonal property and certain nonresidential real proper-ty. If the sale of these assets results in a gain, 1245 ofthe Code requires the gain to be treated as ordinaryincome to the extent of depreciation allowed or allow-able. That is, the depreciation must be recaptured.

Any gain in excess of the amount required to be recap-tured is 1231 gain, potentially taxable as long-termcapital gain.

Section 1250The section that requires that gain on disposition ofreal property be treated as ordinary income to theextent of the depreciation claimed in excess of straight

line. Depreciation equivalent to the straight-line por-tion is called unrecaptured 1250 gain. Any remaininggain is 1231 gain, which is treated as capital gain.

Self-Employed Individuals

Taxpayers who work for themselves. They decidewhen, how, and where to work, obtain their own jobs

or sales, pay their own expenses, and receive socialsecurity and medicare coverage through payment ofself-employment tax.

Self-Employment Income

Self-employed individuals are taxed on their netincome from self-employment and are entitled tosocial security and medicare benefits through the pay-ment of self-employment tax.

Self-Employment Tax

For 2012, self-employed persons are subject to socialsecurity tax of 10.4% on net earnings of up to

$106,800 and medicare tax of 2.9% on all net earn-ings. If a self-employed individual receives wages froman employer that are subject to social security tax, theamount of self-employment income subject to socialsecurity tax may be reduced. Self-employment tax iscomputed on Schedule SE.

Separate Maintenance Payments

Amounts paid to one spouse by the other spouseunder a court order or agreement while they liveapart.

Service Business

A business in which income is produced chiefly by per-

sonal services rendered.

Shareholder

An individual or entity that owns shares of capitalstock.

Short Sale

A sale in which the seller borrows the stock certifi-cates or other property delivered to the buyer. At alater date, the seller either purchases similar stock orproperty necessary to cover the sale, and delivers itto the lender or delivers to the lender stock or proper-ty that he already held but did not wish to transfer atan earlier date. For income tax purposes, there is nogain or loss on the transaction until the short sale iscovered by purchase and transfer. Special rules applyin determining whether the gain or loss on a shortsale is a long-term or short-term capital gain or loss.

Short-Term Gain

Gain on the sale or exchange of a capital asset held 12months or less.

SIMPLE Retirement Plan

Small employers may establish a savings incentivematch plan for employees retirement plan. A SIMPLEplan can be either an IRA for each employee or a


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Straight-Line Depreciation Method

The most commonly used method of depreciation priorto 1981. Basis less salvage value or land value divid-ed by useful life equals depreciation deduction.

Student Loan Interest Deduction

An adjustment to income (limited to $2,500) for inter-est paid during the year on qualified higher-educationloans.

SUB Pay

Supplemental unemployment benefits. These benefitsare generally received from a company-financed fundand are fully taxable as wages.

Support

The total amount provided on behalf of an individual.Support includes food, lodging, and other necessitiesas well as recreation and other nonessential expendi-tures. Support is not limited to necessities and can beas lavish as the taxpayer can afford.

Tangible Personal Property

Property, other than real property, that has a physicalexistence and an intrinsic value. Examples are live-stock, machinery, equipment, and vehicles.

Tax Bracket

The rate at which income at a particular level istaxed.

Tax Credit for the Elderly or the Disabled

Eligible taxpayers 65 years old and older, and those

under 65 retired on a permanent and total disability,may claim the credit. The amount of the credit, if any,is computed on Schedule R, for Forms 1040 and1040A.

Tax-Exempt Income

Income that by law is not subject to income tax.

Tax-Free Exchanges

Transfers of property specifically exempt from federalincome tax consequences in the current year.Examples are a transfer of property to a controlledcorporation and a like-kind exchange.

Tax Home

The business location, post, or station of the taxpayer.If an employee is temporarily reassigned to a new postfor a period of one year or less, the taxpayers taxhome is his personal residence and the travel expens-es are deductible.

Tax Liability

The amount of total tax due the IRS after any creditsand before taking into account any advance payments(withholding, estimated payments, etc.) made by thetaxpayer.

Tax Preference Items

Tax items that may result in the imposition of thealternative minimum tax.

Tax Rate Schedules

Tax Rate Schedules, which appear in the appendix,

are used by certain taxpayers. Separate rate sched-ules are provided for married individuals filing jointlyor qualifying widow(er)s, unmarried heads of house-hold, single taxpayers, and married individuals filingseparate returns.

Tax Table

The Tax Table, appearing in the appendix, is providedfor taxpayers with taxable incomes of less than$100,000. Separate columns are provided for singletaxpayers, married taxpayers filing jointly or qualify-ing widow(er)s, heads of household, and married tax-payers filing separately.

Taxable IncomeAdjusted gross income less itemized deductions or thestandard deduction, less allowable personal and de-pendent exemption amounts. This term is also used torefer to income that is not exempt or excluded fromtaxation. For example, Wages are taxable income, butgifts are not.

Taxable Year

The calendar year or fiscal year for which the taxableincome is computed.

Temporary Assignment

A work assignment away from the taxpayers taxhome, generally for a period of one year or less. De-duction of temporary assignment expenses is allowedto provide relief to those who have extra expensesbecause of their work. To have any deductible expens-es, the taxpayer must own or be renting or buyinglodging in the general area of the regular place ofemployment and intend to return to that lodging atthe end of the temporary assignment.

Tenancy by the Entirety

A tenancy in which parties jointly own property. Afterthe death of one, the survivor takes the whole estate.

Tenancy by the entirety can be terminated duringtheir lifetime only by joint action of the parties.

Tenancy in Common

Two or more individuals jointly owning property. Eachowns an undivided share of the whole. The sharesremain separate even if one party dies.

Tip Income

Gratuities received by the taxpayer for services ren-dered. Tips of $20 or more from any one job during acalendar month must be reported to the taxpayersemployer.


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Worthless SecuritiesA loss is allowed for a security that becomes worthlessduring the year. The loss is deemed to have occurredon the last day of the year. Special rules apply to secu-rities of affiliated companies and small businessstock.

2013 Itc Tb Glossary

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