If it seems people are speaking a different language when they talk about taxes, it is because they are. You need to be familiar with the unique terms used to explain tax laws. We have compiled a list of common tax terms and their meanings, using plain English. Once you start understanding these terms, you will be amazed how quickly they can become a part of your vocabulary!

A qualified retirement investment plan offered by your employer that allows you to contribute a percentage of earned wages into a tax-deferred investment account selected by the employer. The amount put into the 401(k) plan is not currently taxed, but is taxed when you withdraw funds upon retirement.
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Instead of depreciating an asset uniformly over its useful life (as is the case with the straight-line depreciation method), ACRS uses fixed percentages and a predetermined number of years (depending on the asset's class life) to calculate a depreciation deduction. This method allows for a greater depreciation deduction in the earlier years and generally applies to tangible property placed into service after 1980 and before 1987.
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Any method of depreciation that results in greater depreciation deductions for an asset in the earlier years of its life, rather than uniform depreciation over its entire useful life (i.e. the straight-line depreciation method).
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A plan in which all three of the following rules are satisfied: (1) your expenses (such as for travel, transportation, meals, and entertainment) must have been paid or incurred while performing services as an employee of the employer who manages the plan; (2) you must adequately account to the employer for these expenses; and (3) you must return any excess reimbursement or allowance. When an employer reimburses you, the reimbursement will not be considered income on your tax return and the expenses will not be allowed as a deduction on your tax return.
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The method used to account for income and expenses for tax purposes. Most taxpayers use either the cash method or an accrual method. Your accounting method is chosen when you file your first income tax return. Generally, approval is required from the Internal Revenue Service to change accounting methods after then.
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The 12-month period you use as your tax year when filing a tax return. Most individual tax returns cover a calendar year. If a calendar year is not used, the accounting period is a fiscal year. The accounting period (tax year) is chosen when you file your first income tax return. The period cannot be longer than 12 months.
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The accounting method in which, generally, you report income when earned, rather than when received. Additionally, you usually deduct expenses when incurred, rather than when paid.
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A mortgage taken out after October 13, 1987 to buy, build, or improve your home. The interest on this mortgage is fully deductible if this mortgage, plus any grandfathered debt (mortgage taken out on or before October 13, 1987), totaled $1 million or less for the year ($500,000 or less if married filing separately).
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A method used to calculate the deductible costs of operating your car (including a van, pickup, or panel truck) for business, charitable, medical, or moving purposes based on the actual costs incurred. For business purposes, this includes gas, oil, repairs, tires, depreciation, insurance, lease payments, registration fees, garage rent, and licenses. For charitable, medical, and moving purposes, this includes unreimbursed out-of-pocket expenses such as the cost of gas and oil. Expenses for general repairs and maintenance, depreciation, registration fees, or the costs of tires or insurance cannot be deducted.
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The Additional Child Tax Credit is a refundable credit for certain individuals who get less than the full amount of the Child Tax Credit. The Additional Child Tax Credit may give you a refund even if you do not owe any tax.
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The basis of property after certain adjustments (increases such as capital improvements and decreases such as prior-year depreciation) are made to determine the basis to be used for determining gain or loss on a sale, exchange, or other disposition of the property or calculating allowable depreciation, depletion, or amortization.
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Gross, or total, income minus any allowed deductions (other than the standard deduction/itemized deductions or deduction for exemptions), or adjustments to income.
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A deduction that is allowed even if you do not itemize deductions. Adjustments to income are subtracted from total income to determine adjusted gross income (AGI). Examples of adjustments include deductions for Individual Retirement Arrangement (IRA) contributions, student loan interest, Archer MSAs, moving expenses, one-half of self-employment tax, self-employed health insurance, educator expenses, tuition and fees, and alimony paid.
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Your regular income is modified by either positive or negative adjustments to arrive at your alternative minimum taxable income. The adjustment affects the current tax year and may have implications in subsequent tax years. Some of these adjustments include personal exemptions, standard or itemized deductions, installment sale adjustments, gain or loss adjustments on the disposition of business property, incentive stock options, and passive activity loss limitation.
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Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument. Alimony is deductible by the payer and must be included in the spouse's or former spouse's income.
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An additional tax that you may have to pay if you benefit from tax laws that give special treatment to some kinds of income and allow special deductions and credits for some kinds of expenses. AMT ensures that you pay at least a minimum amount of tax.
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A return used to correct a return that has already been filed. A return should be corrected if, after it has been filed, it is determined that (1) some of your income was not reported, (2) deductions or credits were claimed that you should not have claimed, (3) deductions or credits were not claimed that you could have claimed, or (4) you should have claimed a different filing status.
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Amortization is similar to recovering expenditures through straight-line depreciation. Using amortization, your cost or basis in certain property can be recovered proportionately over a specific number of years or months. Examples of costs that can be amortized are the costs of starting a business, reforestation, and purchasing certified pollution control facilities.
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The total value of everything you received from a sale or trade of property. This includes the money you received plus the fair market value of any property or services received.
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A series of contractual payments made at regular intervals over a period of more than one year. Part of the payment represents a return of capital and is not taxable. The rest of the payment is taxable as it represents a return on investment. Annuity contracts are generally established by tax-exempt organizations for the benefit of their employees.
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An item of value or usefulness. For tax purposes, an asset is classified either as capital or noncapital.
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A process through which the Internal Revenue Service (IRS) verifies the amounts reported on your tax return or reconciles amounts not reported on the return but reported to the IRS. You should have documentation supporting income, expenses, and itemized deductions. An audit is also known as an examination.
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Expenses that may be deductible if you use your car (including a van, pickup, or panel truck) for business, charitable, medical, or moving purposes. Generally, one of the two following methods can be used to calculate deductible expenses: actual expenses or the standard mileage rate. Parking fees and tolls are expenses that can be deducted regardless of which method you use to calculate deductible expenses.
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For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for a business, profession, or job. You are traveling away from home if: (1) your duties require you to be away from your tax home substantially longer than an ordinary day's work, and (2) you need sleep or rest to meet the demands of work while away from home.
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Occurs when someone owes you money that you cannot collect. The amount owed may be deductible when calculating your tax for the year the debt becomes worthless. A debt must be genuine to be deductible as a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. There are two kinds of bad debts: business bad debts and nonbusiness bad debts.
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Basis is the amount of your investment in a property for tax purposes. Basis of property you buy is usually its cost; however, basis in some assets cannot be determined by cost. If you did not acquire property through purchase (such as through gift, inheritance, trade, or exchange), basis may be determined as the fair market value or as adjusted basis. The basis of property is used to calculate your gain or loss on the sale, exchange, or other disposition of your property. It is also used to calculate your deductions for depreciation, amortization, depletion, and casualty losses. If your property is used for both business and personal purposes, the basis must be allocated based on the use.
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A below-market-rate loan is a loan on which you charge no interest or on which you charge interest at a rate below the applicable federal rate. You may have to include in income the interest that the Internal Revenue Service determines you should have charged.
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If you are blind on the last day of the year and not itemizing deductions, you are entitled to a higher standard deduction. To qualify for this benefit, you must be totally or partly blind. If you are partly blind, you must obtain a certified statement from an eye doctor or registered optometrist stating that you: (1) cannot see better than 20/200 in the better eye with glasses or contact lenses, or (2) have a field of vision that is not more than 20 degrees.
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A certificate of debt representing an obligation by a corporation or government guaranteeing to pay back money borrowed from the bondholder on a determined date, together with any accrued interest.
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An additional amount (30% or 50%) that taxpayers may deduct in the first-year of depreciation for certain depreciable property. The additional 30% allowance is for qualified property placed in service after September 10, 2001. You may be able to claim the 50% depreciation allowance for property acquired after May 5, 2003. This depreciation allowance is in addition to the amount of depreciation otherwise allowable in the first year.
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The responsibility of proving a disputed item or allegation. If you take an Internal Revenue Service (IRS) case to court, the IRS will have the burden of proving certain facts as long as you kept adequate records showing your tax liability, cooperated with the IRS, and meet certain other conditions. Otherwise, you have the burden of proving your tax return is accurate.
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A business bad debt is generally an unpaid obligation that comes from operating your trade or business and that is deductible as a business loss. A business bad debt is a loss from the worthlessness of a debt that was either: (1) created or acquired in your trade or business, or (2) closely related to your trade or business when it became partly or totally worthless.
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Business expenses are costs you do not have to capitalize or include in the cost of goods sold. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. Examples of business expenses are depreciation, vehicle expenses, interest, insurance, real estate taxes, and advertising.
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Property (such as an office, rental house, or automobile) that is used in your trade or business or for the production of income.
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A calendar year covers a 12-month period that begins January 1 and ends December 31.
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Any asset that is not specifically identified as a noncapital asset. Almost everything you own and use for personal purposes or investment is a capital asset. For example, stocks and bonds, a home owned and occupied by you and your family, timber grown on your home property or investment property even if you make casual sales of the timber, household furnishings, your car used for pleasure or commuting, coin or stamp collections, gems and jewelry, gold, silver, and other metals.
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Expenses for major improvements or additions to property used in a business or trade that cannot be immediately deducted on the tax return. These expenses must be added to the basis of the property and depreciated or amortized over time.
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Generally, a sale or trade of a capital asset results in a capital gain or capital loss. If the sales price is greater than the basis, there is a gain. If you sell an item that you owned for personal use (such as a car, refrigerator, furniture, stereo, jewelry, or silverware), any gain is taxable as a capital gain. You cannot deduct a loss for personal-use property. However, if you sell an item that was held for investment (such as stocks, gold or silver bullion, coins, or gems), any gain is taxable as a capital gain and any loss is deductible as a capital loss.
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Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by regulated investment companies (commonly called mutual funds) and real estate investment trusts (REITs). Report capital gain distributions as long-term capital gains regardless of how long you owned the shares in the mutual fund or REIT.
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Generally, a sale or trade of a capital asset results in a capital gain or capital loss. If the sales price is less than the basis, there is a loss. If you sell an item that you owned for personal use (such as a car, refrigerator, furniture, stereo, jewelry, or silverware), any gain is taxable as a capital gain. You cannot deduct a loss for personal-use property. However, if you sell an item that was held for investment (such as stocks, gold or silver bullion, coins, or gems), any gain is taxable as a capital gain and any loss is deductible as a capital loss.
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The amount of the capital loss carryover is the amount of the total net loss that is more than the lesser of: (1) your allowable capital loss deduction for the year, or (2) your taxable income increased by the allowable capital loss deduction for the year and the deduction for personal exemptions. If the deductions are more than your gross income for the tax year, use the negative taxable income when calculating the amount in item (2). If you have a total net capital loss, you can carry the unused part over to the next year. If part of the loss is still unused in the following year, you can carry it over to later years until it is completely used up.
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Applying a loss, deduction, or credit to a prior year.
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Applying a loss, deduction, or credit to a future year.
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The accounting method in which all items of income are reported in the year you actually or constructively receive them and you deduct all expenses in the year you actually pay them. Most individual taxpayers use this method.
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The damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. A sudden event is one that is swift, not gradual or progressive. An unexpected event is one that is ordinarily unanticipated and unintended. An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. A casualty occurs when property is damaged as a result of a disaster such as a storm, fire, car accident, or similar event.
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The act of losing property or experiencing a decrease in the value of property as a result of a casualty. Deductible casualty losses can result from certain car accidents, earthquakes, certain fires, floods, government-ordered demolition or relocation of a home that is unsafe to use because of a disaster, mine cave-ins, shipwrecks, sonic booms, storms (including hurricanes and tornadoes), terrorist attacks, vandalism, and volcanic eruptions.
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A donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value in return. A charitable contribution can be either cash or noncash. Noncash contributions may be items such as household goods, furniture, or artwork.
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A nonrefundable credit that you may be able to claim for paying for care of your dependent who is under age 13 or for your spouse or dependent who is not able to care for themselves. To qualify, these expenses must be paid so you can work or look for work.
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Payments made by one parent to the other who has custody of their child(ren) when the parents are separated. A payment that is specifically designated as child support under a divorce or separation instrument is not alimony. Child support payments are neither deductible by the payer nor taxable to the recipient.
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A nonrefundable credit that reduces your tax by as much as $1,000 (for tax-year 2003) for each qualifying child. To take the credit, your modified adjusted gross income must be below a certain amount based on your filing status. If you are unable to claim the full amount of the Child Tax Credit, you may be able to take the Additional Child Tax Credit.
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A number of years that establishes the property class and recovery period for most types of property under the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).
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Pay received by members of the U.S. Armed Forces and support personnel in combat zones, including peace-keeping efforts. Combat pay received by enlisted personnel, warrant officers, and commissioned warrant officers is exempt from federal income tax. Combat pay received by commissioned officers (other than commissioned warrant officers) is exempt up to the highest rate of enlisted pay (plus imminent danger/hostile fire pay).
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Any area the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order.
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A fee a broker or agent charges you for facilitating a transaction, such as the buying or selling of securities or real estate.
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A marriage in which a man and woman who have lived together for a certain period of time and who hold themselves to be husband and wife are considered to be married even without a license or a formal ceremony. Only certain states recognize common law marriages. When determining your filing status, you are considered married for the whole year if on the last day of your tax year you and your spouse are living together in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began.
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Generally, income from: (1) community property; (2) salaries, wages, or pay for services of you, your spouse, or both during your marriage; and (3) real estate that is treated as community property under the laws of the state where the property is located for married taxpayers who are domiciled in one of the following community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.
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Property: (1) that you, your spouse, or both acquire during your marriage while you are domiciled in a community property state; (2) that you and your spouse agreed to convert from separate to community property; and (3) that cannot be identified as separate property. If you are married and your permanent home is in a community property state, half of any income described by state law as community income may be considered yours.
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Transporting yourself between your home and your main or regular place of work. You cannot deduct commuting expenses regardless of how far your home is from your regular place of work. You cannot deduct commuting expenses even if you work during the commuting trip.
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Pay received for your services. Employee compensation can include wages, salaries, tips, and fringe benefits.
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You constructively receive income when it is credited to your account or set apart in any way that makes it available to you. You do not need to have physical possession of it. For example, interest credited to your bank account on December 31 is taxable income to you in the year it was credited if you could have withdrawn it in that year (even if the amount is not entered in your passbook or withdrawn until the next year).
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A method established under the Modified Accelerated Cost Recovery System (MACRS) to determine the portion of the year to depreciate property. This method is used both in the year the property is placed in service and in the year of disposition.
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The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for sales tax, freight, installation and testing, excise taxes, legal and accounting fees (when they must be capitalized), revenue stamps, recording fees, and real estate taxes (if assumed for the seller). In addition, the basis of real estate and business assets may include other items.
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If your business manufactures products or purchases them for resale, some of your expenses are for the products you sell. You use these expenses to calculate the cost of the goods you sold during the year, as follows: inventory at the beginning of the year plus purchases (reduced by cost of items withdrawn for personal use) plus cost of labor (not including amounts paid to yourself) plus materials and supplies plus other costs, then subtract inventory at the end of the year.
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Expenses incurred to maintain your household. When determining whether you paid more than half of the cost of keeping up a home for Head of Household filing status, include expenses such as rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home. Do not include expenses such as clothing, education, medical treatment, vacations, life insurance, or transportation. Also, do not include the rental value of a home you own or the value of your services or those of a member of your household.
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A trust or custodial account created or organized in the United States for the sole purpose of paying the qualified education expenses of the designated beneficiary of the account (formerly called Education IRA). Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax-free until withdrawn. If, for a year, withdrawals from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not be taxed on the withdrawals.
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When parents are separated or divorced, the parent who has custody of the child for the greater part of the year. The custodial parent is generally treated as the parent who provides more than half of the child's support. It does not matter whether the custodial parent actually provided more than half of the support.
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A deceased person. The personal representative of the decedent's estate (the person who is in charge of the decedent's property) must file the final income tax return (Form 1040, U.S. Individual Income Tax Return) of the decedent for the year of death and any returns not filed for preceding years. A surviving spouse, under certain circumstances, may have to file the returns for the decedent.
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An accelerated depreciation method. For property placed in service before 1987, the declining balance method allowed you to recover a larger amount of the cost of the property in the early years of your use of the property by allowing a declining balance rate of up to twice the straight-line rate. When using a declining balance method under MACRS, you apply the same depreciation rate each year to the adjusted basis of your property. You must use the applicable convention and you must switch to the straight-line method in the first year for which it will give an equal or greater deduction. You calculate your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period.
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The part of your income that you choose to have withheld by your employer and put into a retirement plan for distribution to you at a later date, typically upon retirement. Generally, this compensation is not taxed until you receive it.
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Any retirement savings plan that is not a defined contribution plan. The employer primarily funds this type of plan. Types of defined benefit plans include pension plans and annuity plans. If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. This rule applies even if you: (1) declined to participate in the plan, (2) did not make a required contribution, or (3) did not perform the minimum service required to accrue a benefit for the year.
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A retirement savings plan that provides for a separate account for each person covered by the plan. Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year.
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A person for whom you can claim a dependent exemption. There are five dependency tests that must be met to claim the exemption for a dependent.
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A yearly deduction taken to recover your investment in minerals or standing timber. To take the deduction, you must have the right to income from the mineral extraction or the cutting of the timber.
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A ratable deduction allowed over a number of years to recover your basis in property that is used for more than one year for business or income-producing purposes.
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Instead of getting a paper check, you may be able to have your refund deposited directly into your account at a bank or other financial institution. If the Direct Deposit cannot be done, the Internal Revenue Service will send a check instead.
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For tax purposes, you are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. A physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death.
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Distributions given to a corporation's shareholders out of the company's current or retained earnings. Certain distributions commonly called dividends are actually interest income. You must report as interest so-called "dividends" on deposits or on share accounts in cooperative banks, credit unions, domestic building and loan associations, domestic savings and loan associations, federal savings and loan associations, and mutual savings banks.
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Someone who is both a nonresident alien and a resident alien during the same tax year. This usually occurs in the year of arrival in or departure from the United States.
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Generally means wages, salaries, tips, other taxable employee compensation, net earnings from self-employment, and gross income received as a statutory employee.
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A refundable tax credit for certain people who work and have earned income under a certain amount. EIC may reduce the amount of tax you owe and may also give you a refund.
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Ordinary and necessary expenses paid in connection with books, supplies, equipment, and other materials used in the classroom by an eligible educator. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. You may deduct up to $250 ($500 if both the taxpayer and spouse are qualified educators and you file jointly) of qualified educator expenses from your income.
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IRS e-file^® uses automation to replace most of the manual steps needed to process paper returns. As a result, the processing of e-file returns is faster and more accurate than the processing of paper returns. As with a paper return, you are responsible for making sure your return contains accurate information and is filed on time.
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The amount contributed under a salary reduction arrangement. A salary reduction arrangement is an arrangement under which you can elect to have your employer contribute part of your pay to your section 403(b) (tax-sheltered annuity) plan. Only the remaining portion of your pay is currently taxable. The tax on the contribution is deferred.
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Business-related expenses you incur as an employee. You may be able to deduct unreimbursed ordinary and necessary business-related expenses you have for travel, entertainment, gifts, or transportation. An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
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An option granted to you by your employer to purchase the employer's stock. If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you will usually have income either when you receive the option or when you exercise the option (use it to buy or sell the stock or other property). However, if your option is a statutory stock option, you usually will not have any income until you sell or exchange your stock. Your employer can tell you which kind of option you hold.
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If you are an employee or self-employed, you may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Examples include entertaining guests at nightclubs, theaters, sporting events, or on fishing trips. You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following two tests: (1) directly-related test or (2) associated test. To meet the directly-related test, the entertainment must have taken place in a clear business setting, or the main purpose of entertainment was the active conduct of business. For the associated test the entertainment must be associated with your trade or business, and the entertainment must directly precede or follow a substantial business discussion. You generally can deduct only 50% of your unreimbursed entertainment expenses.
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The tax on the assets of a decedent, reduced by any deductions or credits allowed. Income that a decedent had a right to receive is included in the decedent's gross estate and is subject to estate tax. This income in respect of a decedent is also taxed when received by the recipient (estate or beneficiary). However, an income tax deduction is allowed to the recipient for the estate tax paid on the income.
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The method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is low compared to your tax liability.
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Receiving property for property given or services rendered.
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An amount that reduces the income that is subject to tax. You are generally allowed one exemption for yourself and, if you are married, one exemption for your spouse (personal exemptions). You are also allowed one exemption for each person you claim as a dependent (dependent exemptions).
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Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.
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Taxes withheld from your pay by your employer that the employer sends to the Internal Revenue Service. The amount taken out per pay period is based on the Form W-4, Employee's Withholding Allowance Certificate, that you submitted to your employer. The total amount for the year is shown in Form W-2, Wage and Tax Statement, Box 2.
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The federal law that requires your employer to withhold Social Security and Medicare taxes from your wages.
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You must determine your filing status before you can determine your filing requirements, standard deduction, and correct tax. You also use your filing status when determining whether you are eligible to claim certain deductions and credits. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child. If more than one filing status applies to you, choose the one that will give you the lowest tax.
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A regular fiscal year is a 12-month period that ends on the last day of any month except December. A 52-53 week fiscal year varies from 52 to 53 weeks and always ends on the same day of the week.
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If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
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The U.S. Individual Income Tax Return that must be filed when you do not qualify to use Form 1040EZ or Form 1040A. Form 1040 can be used to report all types of income, deductions, and credits.
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The U.S. Individual Income Tax Return that you may be able to use if you do not qualify to use Form 1040EZ. You can use this form if, among other requirements, your taxable income is less than $50,000 and you do not itemize deductions. You are only allowed to claim certain adjustments to income and credits.
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The Income Tax Return for Single and Joint Filers With No Dependents is the simplest individual income tax return to use. You can use this form if, among other requirements, you do not claim any dependents, adjustments to income, or itemized deductions; your taxable income is less than $50,000; you did not receive any Advance Earned Income Credit payments; and you do not claim any credits other than the Earned Income Credit.
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The Amended U.S. Individual Income Tax Return is used to correct a return that has already been filed. An amended tax return cannot be filed electronically using IRS e-file.
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The Wage and Tax Statement is a statement from your employer of wages and other compensation paid to you and taxes withheld from your pay. Form W-2 shows total compensation and the income tax (federal, state, and local), Social Security tax, and Medicare tax that were withheld during the year. Other information, such as allocated tips and dependent care benefits, is also shown on the Form W-2.
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The Employee's Withholding Allowance Certificate is used to determine the correct amount of federal income tax an employer needs to withhold from your pay. A Form W-4 must be completed for every employer for whom you work. Form W-4 includes three types of information that an employer will use to calculate federal withholding: (1) whether to withhold at the single rate or at the lower married rate, (2) how many withholding allowances you claimed (each allowance reduces the amount withheld), and (3) whether you want an additional amount withheld.
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Noncash compensation or other benefits you receive from your employer.
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A tax on the transfer of property by one individual to another while receiving nothing or something with a less than equal value in return. The tax applies whether the donor intends the transfer to be a gift or not.
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This includes all income you receive in the form of money, goods, property, and services that is not exempt from tax. It also includes income from sources outside the United States (even if you may exclude all or part of it).
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The filing status you may be able to use if you meet all of the following requirements: (1) you are unmarried or considered unmarried on the last day of the year; (2) you paid more than half the cost of keeping up a home for the year; and (3) a qualifying person lived with you in the home for more than half the year (except for temporary absences, such as school). However, your dependent parent does not have to live with you. A foster child must live with you all year.
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A loss from a not-for-profit activity. Losses from a hobby are not deductible from other income.
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The length of time investment property has been held. If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.
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If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: (1) as your principal place of business for any trade or business; (2) as a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business; or (3) in the case of a separate structure not attached to your home, in connection with your trade or business.
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A nonrefundable education credit of up to $1,500 per eligible student that is available only until the first two years of postsecondary education are completed and only for two years per eligible student. Student must be pursuing an undergraduate degree or other recognized educational credential and must be enrolled at least half time for at least one academic period beginning during the year.
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An assignment that is realistically expected to last for more than one year, whether or not it actually lasts for more than one year, or an assignment that is realistically expected to last for one year or less but actually lasts longer. If your assignment or job away from your main place of work is indefinite, your tax home changes and you cannot deduct your travel expenses. You must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. However, you may be able to deduct the cost of relocating to your new tax home as a moving expense.
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Generally, a person is considered to be an independent contractor if the employer has the right to control or direct the result of the work but not the means and methods of accomplishing the result. People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case.
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When a joint return is filed and only one spouse owes a past-due amount, the other spouse can be considered an injured spouse. An injured spouse can get a refund for their share of the overpayment that would otherwise be used to pay the past-due amount.
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By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse did something wrong on your tax return. The tax, interest, and penalties that qualify for relief can only be collected from your spouse. However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The Internal Revenue Service can collect these amounts from either you or your spouse.
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Sales made under arrangements that provide for part or all of the selling price to be paid in a later year. If you finance the buyer's purchase of your rental property yourself instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale.
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In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. (It does not have to be entered in your passbook.)
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Goods or property held for sale in the course of business or trade. You will generally have inventory if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C, Profit or Loss From Business. However, to determine these costs, you must value your inventory at the beginning and end of each tax year. If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales.
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Interest paid on loans for which the proceeds are used for investment purposes, such as to buy stock on margin. You can deduct this interest up to the amount of investment income (not including capital gains) you report.
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The receipt of money or other property as reimbursement for the forced disposition of property as a result of theft, casualty or condemnation. If you receive property as a result of an involuntary conversion, you can calculate the basis of the replacement property using the basis of the converted property.
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Personal expenses allowed to be claimed on your tax return as deductions from your adjusted gross income. Examples are medical expenses, mortgage interest, real estate taxes, and charitable contributions. Taxpayers who itemize deductions may not claim the standard deduction.
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A qualified retirement savings plan that is available to self-employed taxpayers. Contributions are deductible within specific limits.
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A nonrefundable education credit of up to $2,000 per return, available for an unlimited number of years for all years of postsecondary education or for courses taken to improve job skills. The student does not need to be pursuing a degree or other recognized educational credential.
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The nontaxable exchange of property for the same kind of property.
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Listed property includes any property of a type generally used for entertainment, recreation, and amusement (including photographic, phonographic, communication, and video recording equipment). Listed property also includes computers and related equipment (unless they are used in a qualifying office in your home), cellular phones, and passenger automobiles.
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Profit or loss on the sale or exchange of assets or properties that have been held for more than 12 months.
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The payment within a single tax year of the entire balance of your interests in all of an employer's pension or profit-sharing plans. To qualify as a lump-sum distribution (and for favorable ten-year averaging), other requirements must be met.
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Usually, the home you live in most of the time is your main home; your home can be a house, houseboat, mobile home, cooperative apartment, or condominium.
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The filing status you can choose if you are married and both you and your spouse agree to file a joint return. On a joint return, you report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions.
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The filing status you can choose if you are married and do not want to file jointly with your spouse. This method may benefit you if you want to be responsible only for your own tax or if this method results in less tax than a joint return. If you and your spouse do not agree to file a joint return, you may have to use this filing status.
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Generally, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Material participation is strictly defined in the Internal Revenue Code and is one of several tests used to determine that a trade or business is not a passive activity.
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Tax paid for Medicare. This amount is 1.45% of wages for employees and 2.9% of net profit for self-employed taxpayers.
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A federal program that pays for certain health care expenses for people age 65 or older.
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MACRS provides a uniform method for all taxpayers to use to calculate the depreciation for each asset. Using the basis, class life, and the MACRS tables, you can calculate the deduction for each asset in the year it is placed in service and each subsequent year of its class life.
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Adjusted gross income is sometimes modified for specific purposes (such as for the education credits, the Adoption Credit, the Child Tax Credit, and determining taxable Social Security benefits). For each purpose, the modification may be different, so you need to read the instructions carefully.
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When trying to determine who can take an exemption for a dependent, sometimes no one person provides more than half of the dependent's support. Instead, two or more persons, each of whom would be able to take the exemption but for the Support Test, together provide more than half of the person's support. When this happens, you can agree that any one of you who individually provides more than 10% of the person's support, but only one, can claim an exemption for that person. Each of the others must sign a statement agreeing not to claim the exemption for that year. A multiple support declaration identifying each of the others who agreed not to claim the exemption must be attached to the return of the person claiming the exemption.
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A failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records. You will not have to pay a negligence penalty if you have a reasonable basis for a position you took.
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If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). You can use an NOL by deducting it from your income in another year or years.
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If someone owes you money that you cannot collect, you have a bad debt. A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor- creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Bad debts that you did not get in the course of operating your trade or business are nonbusiness bad debts. To be deductible, nonbusiness bad debts must be totally worthless and you must have a basis in it (that is, you must have already included the amount in your income or loaned out your cash). You cannot deduct a partly worthless nonbusiness debt.
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Any asset that is not specifically identified as a capital asset. Usually, noncapital assets are those used in a trade or business, or for the production of rental or royalty income. Examples of noncapital assets are: property held mainly for sale to customers, depreciable property used in your trade or business, real property used in your trade or business, accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property, and supplies of a type you regularly use or consume in the ordinary course of your trade or business.
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The noncustodial parent is the parent who has custody of the child for the shorter part of the year or who does not have custody at all.
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A credit that cannot be more than your tax liability. For example, a nonrefundable credit is the Child Tax Credit or the Child and Dependent Care Credit.
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If you are an alien (not a U.S. citizen), you are generally considered a nonresident alien unless you meet the Green Card Test or Substantial Presence Test.
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A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred.
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- A form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. Examples of investments that report OID are zero coupon bonds and bonds with no stated interest.
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Generally, passive activities include trade or business activities in which you did not materially participate for the tax year, as well as rental activities (regardless of your participation). Losses from passive activities may be limited.
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Personal interest is not deductible. Examples of personal interest include credit card and installment interest incurred for personal expenses and interest on a loan to purchase an automobile for personal use. But you may be able to deduct interest you pay on a qualified student loan.
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Allows taxpayers to "sign" their tax returns electronically. The PIN, a five-digit self-selected number, ensures that electronically submitted tax returns are authentic. Most taxpayers can qualify to use a PIN.
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Certain charges paid to obtain a home mortgage. Points may be deductible as home mortgage interest if you itemize deductions. If you can deduct all of the interest on your mortgages, you may be able to deduct all of the points paid on the mortgage. If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property.
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Withdrawals from an employer retirement plan or an IRA that are subject to a 10% additional tax if you are under a certain age (unless certain exceptions are met).
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Prepaid income, such as prepaid rent or interest or advances for services to be performed at a later time, is generally included in gross income in the year you receive it.
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A category for property under the Modified Accelerated Cost Recovery System (MACRS). It generally determines the depreciation method, recovery period, and convention.
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A dividend is any distribution made by a corporation to its shareholders. Dividends paid to you in tax-year 2003 will be classified by the payer as qualified if the amounts meet certain criteria. Qualified dividends are generally paid by a domestic corporation and are taxed at the same lower rates that apply to a net capital gain. The amount of your qualified dividends is shown in Form 1099-DIV, Dividends and Distributions, Box 1b. You should receive this form from the mutual fund or corporation with whom you invested.
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The filing status you may be eligible to use for two years following the year of death of your spouse. For example, if your spouse died in 2001 and you have not remarried, you may be able to use this filing status for 2002 and 2003. This filing status entitles you to use joint return tax rates and the highest standard deduction amount (if you do not itemize deductions). This status does not entitle you to file a joint return.
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Also known as real estate. Real property includes land and generally anything built on, growing on, or attached to land.
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A period of years during which the cost of business assets is depreciated.
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A credit for which you can get a refund, even if it exceeds your tax liability. An example of a refundable credit is the Earned Income Credit and the Additional Child Tax Credit.
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Rental income is any payment you receive for the use or occupation of property. In addition to money you receive as rent payments, there are other amounts that may be rental income, such as the fair market value of property or services received in lieu of rent. You generally must include in your gross income all amounts you receive as rent.
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You are a resident alien of the United States for tax purposes if you meet either the Green Card Test or the Substantial Presence Test for the calendar year (January 1 - December 31).
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Under section 179 of the Internal Revenue Code, you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.
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Self-employment tax is the Social Security tax and Medicare tax for people who work for themselves. Your payments to self-employment tax contribute to your coverage under the Social Security system. Social Security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. By not reporting all of your self-employment income, you could cause your Social Security benefits to be lower when you retire.
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Profit or loss on the sale or exchange of assets or properties held 12 months or less.
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A retirement program for which the administrative costs are lower than for some other nonsimplified (complicated) plans. A business of any size or a self- employed individual may create an SEP.
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The filing status you use if, on the last day of the year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree, and you do not qualify for another filing status.
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Tax sent to the Social Security Administration on your behalf. This amount is 6.2% of wages for employees and 12.4% of net profit for self-employed taxpayers.
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An amount (based on filing status, age and blindness) that can be subtracted from adjusted gross income to calculate taxable income. You use the standard deduction in lieu of itemizing deductions.
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A method used to calculate the deductible costs of operating a vehicle (including a car, van, pickup, or panel truck under 6,000 pounds) for business purposes based on a fixed number of cents per mile for business, charitable, medical, or moving miles. The standard mileage rate varies depending on the activity for which the vehicle was used: charitable, medical, or in connection with job-related moving expenses. The standard mileage rate is also known as the optional method and is used instead of a deduction for actual vehicle expenses.
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A method of depreciation where the deduction is taken in equal amounts each year for the useful life of an asset.
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Tangible personal property is any property that can be seen or touched that is not real property. For example, it includes machinery, equipment, and property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, and office equipment.
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A required contribution used for the support of a government. Most taxpayers use either the Tax Table or the Tax Rate Schedules to calculate their income tax. However, there are special methods if your income includes any capital gains, lump-sum distributions, farm income, or investment income over $1,500 for children under age 14.
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The Internal Revenue Service allows you to deduct certain amounts from your gross income before you calculate the tax. These deductions include any allowable exemptions or adjustments, and the standard deduction (or itemized deductions if you can itemize). The remainder is your taxable income.
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The period of time covered by your tax return. Most individual tax returns cover a calendar year (the 12-month period from January 1 through December 31). You may use a fiscal year as your taxable year if necessary. A regular fiscal year is a 12-month period that ends on the last day of any month except December.
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You must include a recovery (such as a reimbursement or rebate) in your income in the year you receive it if the recovered item reduced your tax in the earlier year.
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Your income is not all taxed at one rate. It is partially taxed in each of the tax brackets up to the highest bracket in which your taxable income falls. The applicable income ranges for these tax brackets differ depending on your filing status, but the percentages are the same.
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An amount the Internal Revenue Service allows you to deduct directly from the tax calculated on your taxable income. It is a dollar for dollar reduction of your taxes. Some of the credits include the Earned Income Credit, Child and Dependent Care Credit, Child Tax Credit, education credits, and Credit for the Elderly or Disabled. Credits can be nonrefundable (cannot reduce your tax liability below zero), or refundable (can reduce your liability below zero, entitling you to money back from the government).
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Items subtracted from your income to arrive at your taxable income. Examples are educator expenses, IRA contributions, moving expenses, and the standard deduction or itemized deductions
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Any income the Internal Revenue Service specifies is not subject to tax and is therefore excluded from your gross income. You might still need to report it on your tax return, but it will not be taken into account when calculating your tax liability. Tax-exempt income includes certain Social Security benefits, welfare benefits, nontaxable life insurance proceeds, Armed Forces family allotments, nontaxable pensions, and tax-exempt interest.
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If you must file a tax return, you are required to show any tax-exempt interest you received on your return. This is an information-reporting requirement only. It does not change tax-exempt interest to taxable interest. Interest may be exempt for federal income tax purposes, but may be taxable for state income tax purposes (for example municipal bond interest).
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Generally, your regular place of business or post of duty, regardless of where you maintain your family home. If you have more than one regular place of business, your tax home is your main place of business. If you do not have a regular or a main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you do not have a regular place of business or post of duty and there is no place where you regularly live, you are considered a transient and your tax home is wherever you work. As a transient, you cannot claim a travel expense deduction because you are never considered to be traveling away from home.
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The amount of tax that must be paid based on your taxable income. You meet (or pay) your federal income tax liability through withholding, estimated tax payments, and payments made with the tax forms you file with the Internal Revenue Service.
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Items that are excluded from regular taxable income but that are added back to determine your alternative minimum taxable income. Examples of tax preference items include tax-exempt interest from certain private activity bonds, depletion, intangible drilling costs, accelerated depreciation on leased personal or real property placed in service before 1987, amortization of certain pollution control costs or facilities placed in service before 1987, and certain leased property subject to accelerated cost recovery.
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Charts that list income ranges and applicable tax rates you must use to calculate your tax liability if your taxable income is over $100,000. There are different schedules depending on your filing status.
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If your taxable income is less than $100,000, you generally must use the Tax Tables to determine your tax liability. The Tax Tables are simple to use because no calculations are necessary. To determine your tax rate, find the range in which your taxable income falls and look up the corresponding tax under the appropriate column for your filing status.
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You may regularly work at your tax home and another location. It may not be practical to return home from this other location at the end of each workday. If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered to be away from home for the whole period you are away from your main place of work. You can deduct your travel expenses, if they otherwise qualify for deduction. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less.
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The ten-year tax option that uses a special formula to calculate a separate tax on the ordinary income part of a lump-sum distribution. You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. You can elect this treatment only once for any plan participant and only if the plan participant was born before 1936.
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A form of property ownership where two or more people own the property jointly. The survivors are entitled to the decedent's share of the property upon death.
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A form of property ownership where two or more people own the property separately. The survivors are not automatically entitled to the decedent's share of the property upon death.
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All tips you receive are income and are subject to federal income tax. Tips are payments that go beyond the stated amount of the bill and are given voluntarily. You must include in gross income all tips you receive directly from customers, tips from charge customers that are paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement. The value of noncash tips, such as tickets, passes, or other items of value, are also income and subject to tax.
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The date you contract to buy, sell, or exchange an asset is called the trade date. Do not confuse the trade date with the settlement date, which is the date by which the asset must be delivered and payment must be made.
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When you purchase a property and offer another property as partial payment, this reduces the amount of cash you need to pay the seller to satisfy the purchase agreement. The amount of cash reduced by this exchange is the trade-in allowance. For example, you trade-in your old car when purchasing a new one to reduce the amount of cash you must give to the dealer. Note that a dealer's offer for your car as a trade-in on a new car does not necessarily reflect a measure of its true value.
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Transfer taxes (or stamp taxes) and similar taxes and charges on the sale of a personal home are not deductible. If they are paid by the seller, they are expenses of the sale and reduce the amount realized on the sale. If paid by the buyer, they are included in the cost basis of the property.
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The cost of transportation when you are not traveling away from home. Transportation can be by air, rail, bus, taxi, etc., or the cost of driving and maintaining your car. Transportation expenses include the ordinary and necessary costs of getting from one workplace to another in the course of your business or profession when you are traveling within your tax home, visiting clients or customers, going to a business meeting away from your regular workplace, or getting from your home to a temporary workplace when you have one or more regular places of work.
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To be deductible for tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. These include transportation, meals, and lodging.
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A trust is a legal entity created under state or common law, whereby a trustee holds property for the benefit of some other person called a beneficiary. A trust may be created during an individual's life or under a will upon their death. A trust (except for a grantor-type trust) is a separate legal entity for federal tax purposes. A trust calculates its income tax liability the same way that an individual does and is allowed most of the credits and deductions that an individual is allowed. Amounts distributed to the beneficiary are reported on the beneficiary's individual tax returns.
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Your unadjusted basis is your depreciable basis without reduction for depreciation previously claimed.
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If you did not pay enough tax during the year either through withholding or by making estimated tax payments, you may have to pay a penalty. In certain situations, you will not have to pay the penalty, such as if you had no tax liability in the prior year or if your current-year tax minus withholding is $1,000 or less.
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Unearned income includes investment-type income such as interest, dividends, and capital gains. It also includes unemployment compensation, alimony, taxable Social Security benefits, pensions, annuities, royalties, and distributions of unearned income from a trust.
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Unlike properties are properties of a different nature or character. For example, personal property and real property are unlike.
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An estimate of how long an item of property can be expected to produce income or be usable in trade or business. To be depreciable, your property must have a determinable useful life. This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
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The Internal Revenue Service classifies a home as a personal residence, personal residence/rental property, or a rental property. If you do not rent out your vacation home or you only rent it out for 14 days or less, you can deduct only your mortgage interest and real estate taxes if you itemize deductions. If you rent it out over 14 days, you must include the rental income in your tax return, but you can also claim rental expenses subject to certain limitations. The number of days you use the home for personal use and how actively you are involved with renting it out affects the amount of the expenses you can claim.
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A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: (1) buy substantially identical stock or securities, (2) acquire substantially identical stock or securities in a fully taxable trade, or (3) acquire a contract or option to buy substantially identical stock or securities. You cannot deduct losses from sales or trades of stock or securities in a wash sale.
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If you are an employee, your employer probably withholds income tax from your pay. Other taxes withheld include Social Security tax and Medicare tax. How much is withheld from your pay depends on your income and the information you provided on Form W-4, Employee's Withholding Allowance Certificate. Tax may also be withheld from certain other income, including pensions, bonuses, commissions, and gambling winnings. In each case, the income tax amount withheld is paid to the Internal Revenue Service in your name.
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