Tax Glossary

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A

Accelerated Cost Recovery System (ACRS) - The ACRS system of depreciation allows for larger depreciation deductions for businesses in the early years of ownership. The Tax Reform Act of 1986 sited several changes to the ACRS rules, thus ACRS was replaced by MACRS (Modified Accelerated Cost Recovery System.)

Accelerated Depreciation - As opposed to the straight-line depreciation method, this method of depreciation allows for larger deduction amounts in the earlier years of ownership and lesser in the later years.

Accountable Plan - A plan for reimbursing employees for business related expenses, such as meals and travel, under which an employee is required to account for all his/her expenses and return any excess reimbursements.

Accrual Method of Accounting - This accounting method allows for income to be reported in the year it was earned, whether or not received, and deductions to be claimed in the year incurred, whether or not paid.

Active Participant - A taxpayer who is eligible to participate in his/her employer's retirement or pension plan. Ability to deduct the IRA contribution is based on income.

Acquisition Debt - Debt incurred to acquire or improve a principal or secondary residence, of which the interest is fully deductible.

Adjusted Basis - A calculated measure, which reflects profit or loss in property value. The value is reduced by depreciation, increased by the cost of improvements.

Alternative Minimum Tax (AMT) - AMT is a federal tax system designed to ensure taxpayers pay their fair share of tax liability. In short, this system was implemented to prevent higher-income individuals from claiming too many deductions and paying too little in taxes.

Amended Return - A tax return filed with a 1040X within three years of an original return, which allows for correction of errors or changes regarding the original return.

Amortization - Claimed on form 4562 and similar to depreciation, amortization is a way of writing off intangible assets, such as goodwill.

Amount Realized - The fair market value of property received by a taxpayer on the sale or exchange of property.

Annuity - Purchased by an individual for investment and retirement purposes, this investment product is paid periodically and includes the return of invested capital plus the income generated by it.

Asset - A property or investment of value.

Audit - An IRS examination and inquisition into your financial records regarding your tax returns.

Away From Home Overnight - A period longer than a workday when one is away from home. Expenses incurred MAY be deducted as a business travel expense.

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B

Bad Debts - Uncollectible, legally binding debts that are owed to you but you probably will never receive. These may be tax-deductible.

Bankruptcy - Legal action filed in a formal petition in Bankruptcy Court which stops creditors' collection actions against you.

Basis - The tax basis of property, or more simply, the cost of an asset.

Bearer Bond - This bond does not have an owner's name on it and is therefore payable to the holder.

Beneficiaries - The individuals to which you name to inherit your assets.

Bequest - A gift of personal property by will to a beneficiary that is not included as income of the recipient.

Boot - Taxable cash or property received in an otherwise tax-free exchange of investment real estate.

Business Assets - Assets used in business or to produce rental or royalty income.

Business Gifts - A cost that is deductible to the maximum of $25 per client per year, unless the gift is a promotional item of under a $4 value.

Business Interest - A tax deduction that businesses take for interest paid on business loans.

Business Use Property - Property used for the production of income, such as an office, or using your car for non-commuting business purposes.

Bypass Trust - A way of sheltering your assets from taxes when a spouse dies. Since only $1,000,000 can be passed on free of federal estate taxes, a bypass trust can be created whereby upon the death, that spouse's individual assets go into a trust.

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C

Calendar Year - A 12-month period beginning January 1 and ending December 31.

Call - An option to purchase fixed-price stock in a specified amount of time.
Capital Expenditure - Costs incurred for additions or improvements that increase the value of property. You may not immediately deduct these expenses but you can depreciate them overtime by adding them to the basis of your property.

Capital Gain - A taxable gain from the sale or exchange of a property or financial asset.

Capitalize - To treat the cost of additions to property as an increase to the property's basis, as opposed to treating it as a deduction.

Capital Loss - A taxable loss from the sale or exchange of a property or financial asset.

Cash Method of Accounting - Common method of accounting wherein income is reported in the year it is received and expenses are deducted in the year they were paid.

Casualty Loss - A deductible loss resulting from complete or partial property destruction due to an unexpected occurrence, such as earthquake, flood, etc.

Charitable Contribution - Allowable deduction on taxes for cash or properties donated to approved charities.

Child Support Payments - Non-tax deductible payments made to support a minor child after a divorce.

Community Property - Property that belongs equally to husband and wife. This concept of ownership is followed in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.

Condemnation - The seizure of property by a public entity, who in turn compensates the owner. The power to condemn property is known as the right of eminent domain.

Constructive Receipt - Income you are taxed on due to the fact that it is available to you, even if you chose not to receive it. An example of this is interest credited to a savings account. The money is there and available to you, regardless of whether you choose to withdraw it.

Credits - Reductions of tax liability for taxpayers who meet certain criteria, which reduce your tax bill dollar-for-dollar.

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D

Declining Balance Method of Depreciation - A method of accelerated depreciation wherein a larger depreciation deduction is taken in the current year and the deduction for the next year is reduced.

Deduction - An expense that may be deducted from your income that is otherwise taxable so as to lower your taxable income.

Deferred Gain - Nonrecognition of realized that gain on which taxation can be deferred until a later year.

Dependency Exemption - An exemption of $3,050 (for 2003) for qualified individuals with dependents.

Dependent - An individual who is supported by a taxpayer and qualifies to be claimed as an exemption on your tax return.

Dependent Care Credit - A nonrefundable credit to reduce your taxes based on expenses paid for a dependent's care, which allows for you to be gainfully employed.

Depletion - A deductible expense reflecting the decrease of a depletable natural resource, such as oil or gas.

Depreciation - The tax deduction for writing off the cost of wear and tear of tangible property and business assets over an IRS-specified number of years.

Dividend - A taxable share of the profits of a corporation that is distributed to shareholders.

Dual Status Alien - An individual who is both a nonresident alien and a resident alien for different parts of the same year.

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E

Earned Income - Taxable money, services or property you receive for doing work, such as tips, wages and bonuses.

Education IRA - A tax-favored savings plan created for the purpose of paying for qualified higher education expenses.

Estate - Established upon the death of a taxpayer, its value is that of all assets minus loans and liabilities. An estate may be taxable at state and local levels depending on its value.

Estimated Tax - Estimated tax payments you make to the IRS either on a quarterly basis or through regular payroll withholding.

Exclusion - An amount of income that is excluded from your adjusted gross income.

Exemption - A personal or dependency deduction amount allowed by law as a reduction that would otherwise be taxed.

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F

Fair Market Value - The price at which property is being bought by a willing buyer and sold by a willing seller.

Fiduciary - One who is responsible for an estate or trust.

Finance Charges - Interest paid for the privilege of making purchases on a deferred-payment basis.

Fiscal Year - A 12-month accounting year ending on the last day of any month other than December.

Foreign Corporation - A corporation organized outside the laws of one of the states or territories of the United States.

Foreign Tax Credit or Deduction - This credit applies to taxes paid to foreign countries and is available to a U.S citizen or resident alien, and in limited circumstances to a U.S. non-resident alien.

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G

Goodwill - Pertaining to a business, goodwill represents the difference between the purchase price and the value of net assets. Goodwill is depreciated or amortized over the years.

Gross Income - Your total taxable worldwide income of a taxpayer before subtracting any allowable deductions.

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H

Head of Household - A filing status used by a taxpayer who is unmarried, pays over fifty percent of the cost of maintaining the principal residence for over half of the tax year and lives with a relative who is a qualifying individual.

Hobby Loss - Losses that cannot be used to reduce other taxable income that arise from personal, enjoyable activities that are not conducted for profit.

Holding Period - The length of time an asset has been owned used to determine whether a sale or exchange is a short-term or long-term capital gain or loss.

Home Office Expenses - Tax deductions are allowed for expenses of operating a place of business from your residence.

Hope Scholarship Credit - An income tax credit of up to $1,500 for each eligible student for tuition and fees paid for the first two years of post-secondary education.

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I

Imputed Interest - Interest amounts deemed to have been earned on a debt if the stated interest rates are below the federal rate set by law.

Income Averaging - A method sometimes used by farmers that taxes some of the income in a high-income year as if it were spread evenly over a four year period. Income averaging is not available for years after 1986.

Independent Contractor - A taxpayer who contracts to do work according to his own methods and procedures and is treated for tax purposes as self-employed. People who qualify are responsible for paying their own estimated taxes.

Information Returns - Returns such as Form W-2, 1065 and 1099 forms which must be filed with the IRS as a means of reporting income and property transactions.

Investment Interest - Deductible interest paid on loans acquired to purchase investment property.

Involuntary Conversion - The receipt of money due to the forced disposition of property due to theft, casualty or condemnation.

Itemized Deductions - Personal expenses allowed to be claimed on your tax return as deductions from your adjusted gross income. Examples are medical expenses, mortgage interest and charitable contributions. Taxpayers who itemize deductions may not claim the standard deduction.

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J

Joint Return - Filing status for legally married couples combining their income, exemptions, credits and deductions.

Joint Tenancy - A form of joint ownership of property where each party is considered co-owner. On the death of one of the owners, the surviving partner becomes full owner of the whole.

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K

Keogh Plan - A retirement savings plan that is available to self-employed taxpayers. Contributions are deductible within specific limits.

Kiddie Tax - The relatively low rate of tax on the first $1,500 (for 2003) of income, such as interest from investments, of a dependent child under the age of 14.

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L

Legally Separated - A husband and wife separated under a decree of separate maintenance and are required to live apart.

Lien for Taxes - The U.S. Treasury may attach this legal claim on the property of a taxpayer who is delinquent in his tax payments to the IRS and has not made arrangements to pay. A lien prohibits the sale or transfer of property until the payment of the amount of the lien has been satisfied.

Lifetime Learning Credit - A nonrefundable credit equal to twenty percent for up to $10,000 of qualified tuition and related expenses for undergraduate (junior and senior year of college) and or graduate level courses. For first 2 years of college, see Hope Credit.

Like-Kind Exchange - A tax-free exchange of assets such as real-estate (not inventory, stocks or bonds) held for either productive use or investment purposes that you may defer paying taxes on if you purchase a property of the same type.

Long-Term Capital Gain or Loss - Profit or loss on the sale or exchange of assets or properties that have been held for more than 12 months.

Lump-Sum Distribution - The payment of an entire amount due within one tax year rather than in installments. The distribution is usually triggered by such events as retirement or death. Marginal Tax Rate - Combined federal and state tax rates at which additional dollars of interest over a specified ceiling are taxed at a higher rate.

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M

Marital Deduction - Provision that allows for unlimited asset transfers from one spouse to another without having to pay any gift or estate taxes.

Medical Expenses - If medical expenses of yourself, a dependent or spouse exceed 7.5% of your adjusted gross income, you may apply the amount over the 7.5% limit to an itemized deduction on Schedule A.

Miscellaneous Itemized Deductions - If expenses such as job expenses or union dues exceed 2% of your adjusted gross income, you may apply the amount over the 2% limit to an itemized deduction on Schedule A.

Modified Accelerated Cost Recovery System (MACRS) - A modified version of the ACRS depreciation system used for assets acquired after 1986. This system is less favorable for businesses and stretches out the number of years during which business assets can be depreciated.

Mortgage Interest - A tax cut whereby interest on your primary and secondary residences is deductible.

Mutual Fund - A professionally managed fund wherein the company invests its shareholders investments, usually in stocks and bonds.

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N

Negligence - A lack of reasonable care that results in failure to make a reasonable attempt at assessing your taxes.

Net Operating Loss (NOL) - A net loss in a business that exceeds your other income for a year. The law allows losses to be carried back 2 years or carried forward 20 years to reduce taxes in those years. For certain losses, the carryback can be 3 or even 5 years, rather than 2.

Nonrecourse Debt - An obligation for which the borrower is not personally liable and the lender must look to the financed property for repayment.

Nonresident Alien - An individual who is not a permanent resident or citizen of the United States and is required by the IRS to pay taxes only on income earned from US sources.

Nontaxable Exchange - An exchange in property for which no gains or losses are recognized for tax purposes.

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O

Ordinary Income - Income that derives from sources other than capital gain, such as employment, and is not subject to preferential tax treatment.

Owner-Employee - A self-employed individual who is the proprietor of a business.

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P

Partnership - An unincorporated business, which is owned by two or more persons. The entity itself is not taxable as the burden of tax obligation trickles down to the individual partners.

Passive Activity - A business deal in which an individual does not contribute to the actual management of the venture (silent partner.) These losses are subject to deduction limitations.

Patronage Dividend - A taxable rebate made unto members by a cooperative.

Pension - An arrangement where payments are made to qualified workers from an employee-funded plan for a specified period.

Percentage Depletion - A method of calculating depletion for nearly all natural resources (except timber) that applies a fixed percentage to the gross income generated from the property.

Personal Use Property - Non-necessity properties owned by a taxpayer, such as a home, vehicles, clothing, etc.)

Points - Premium charges on a loan that may be deducted as interest.

Proprietor - An individual who is the sole owner of a business.

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Q

Qualified Charitable Organization - A nonprofit organization especially approved by the US Treasury as a recipient of tax-deductible charitable contributions.

Qualified Plan - An employee-sponsored, government-approved plan in which none of the employer's contributions are taxed until withdrawn.

Qualifying Widow(er) - A filing status for a surviving spouse available for two tax years after the death of the spouse which entitles the living individual to use the same tax rate as if he/she were married and filing jointly.

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R

Real Property - Physical, unmovable property (real estate.)

Realized Gain or Loss - The difference between the amount you are to receive upon the sale of property and the adjusted basis of that property.

Recovery Property - Tangible depreciable property acquired between 1980 and 1987.

Regulated Investment Company (Mutual Fund) - An investment company subject to Security and Exchange Commission regulations that uses its capital to invest in other companies. This company does not pay any taxes as long as its income is distributed to its shareholders.

Reinvested Dividends - Taxable in the year received, these dividends are earnings that the shareholder chooses to reinvest in other stocks rather than receive the monetary payment for it.

Resident Alien - A citizen of another country who is a permanent resident of the United States.

Rollover - The distribution of a qualified plan that is reinvested in another plan tax-free. When one takes possession of this money, twenty percent is withheld for federal income taxes.

Roth IRA - Contributions to this IRA are not deductible and qualified distributions may be tax-free.

Royalty - Taxable income received from the sale or use of materials and property you own, such as mineral property, a book, a movie or a patent.

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S

Salvage Value - The estimated value of depreciated property after the end of its useful life.

S Corporation - A business, which benefits as an incorporation, yet is nontaxable as the burden of income tax falls on its individual shareholders.

Section 179 Expense Deduction - An election to deduct up to $100,000 for the cost of business equipment and property instead of depreciating it.

Self-Employed Individuals - Individuals who work for themselves and pay their own expenses.

Self-Employment Act - Social security and Medicare taxes paid by self-employed individuals. This tax is computed on Schedule SE.

Separate Maintenance Payments - Amounts paid to one spouse by the other spouse while living apart, such as alimony.

Service Business - A business whereby income is produced solely based on services rendered, such as an accounting firm.

Short-Term Gain or Loss - The gain or loss on the exchange or sale of a capital asset held one year or less.

Simplified Employee Pension - An easily established retirement plan in which an employer makes contributions to your IRS.

Single - Required filing status for an individual who was unmarried as of the last day of the year.

Standard Business Mileage Rate - Used for claiming deductions for business related travel expenses, the rate is 36 cents per mile.

Standard Deduction - A base amount of income used by taxpayers who do not itemize their deductions.

Stock Dividend - The distribution of additional shares of a corporation to its shareholders.

Straight-Line Depreciation Method - A method of depreciation whereby the deduction is taken in equal amounts each year for the useful life of its asset.

Support - Payments made on behalf of a dependent for food and lodging as well as nonessential expenditures.

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T

Tangible Personal Property - Property, other than real estate, that has value. Examples are equipment and vehicles.

Taxable Income - The amount on which you actually pay. This is the adjusted gross income less itemized or standard deductions.

Tax-Exempt Income - Income that is not subject to taxation, such as municipal bonds.

Tax Home - This location is used to determine whether certain expenses are to be considered deductible as business related travel costs.

Tax Preference Items - Tax items that may result in subjecting you to the Alternative Minimum Tax (AMT.)

Tax Rate Schedule - Instead of Tax Tables, Tax rate schedules are used in figuring individual income tax for people with a taxable income of over $100,000.

Tax Table - Instead of Tax Rate Schedules, these tables are used in figuring individual income tax for people with a taxable income under $100,000.

Tenancy by the Entirety - A form of ownership in which a husband and wife jointly own property. After the death of one, the other takes possession of the entirety. Without consent of both parties, creditors may not force a sale of property for payment of debts.

Tenancy in Common - A form of ownership in which two or more individuals jointly own property. Unlike tenancy by the entirety, when one dies, the shares remain separate.

Trade Date - The date on which an asset is actually bought, sold or exchanged.

Trust - Legal arrangement, which distributes one's assets amongst its beneficiaries.

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U

Useful Life - The amount of time a depreciable asset may be expected to be in use.

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W

Wash Sale - The purchase of stock 30 days before or after the sale of similar stock at the loss. Losses from wash sales are not deductible.

Work Opportunity Credit - A credit available to certain employers who hire employees from specified disadvantaged groups.

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