Trying to understand tax terms? Feel free to scroll through our Glossary of Tax Terms with simplified definitions and learn more about the most common tax terminology.
2% of AGI Rule: For miscellaneous itemized deductions, those deductions can only be taken if the total amount of deductions exceeds 2% of the taxpayer’s Adjusted Gross Income.
2-out-of-5 Rule: Another term for the Section 121 exclusion. (Also see Section 121 Exclusion)
401(k) Plan: A type of qualified retirement plan maintained by a business for its employees. Employees deposit money into a retirement account. Those deposits are considered pre-tax, so they reduce the taxpayer’s wages. (Also see Pre-tax, Qualified Plan)
529 Plan: A savings plan that lets a taxpayer save for their children’s college expenses. Money put into a 529 plan does NOT result in a federal tax deduction, but withdrawals (including earnings) are tax-free if used for college expenses. Many states, allow for a deduction on the state tax return for money put into a 529 plan.
1099: A reporting issued to the IRS and taxpayers that reports certain payments made to the taxpayer. There are more than a dozen types of 1099.
AARP: American Association of Retired Persons
Accrual: An accounting method where income is reported when it is earned rather than when the customer pays, and expenses are recorded when they are incurred rather than when the business pays the expense. (Also see Cash-basis)
Active Participation: When a taxpayer makes significant rental or business management decisions, such as approving rental terms, repairs, expenditures, and new tenants (versus passive activity). Taxpayers who use a leasing agent or property manager are still considered active participants if they retain final management rights.
Active Pay: The military income a service member receives while on active duty (versus retirement or retainer pay).
Actual Expense Method: One of two methods for calculating business automobile expenses. For the actual expense method, the taxpayer determines the business portion of expenses for fuel, auto maintenance, parking fees and tolls, and auto loan interest. (The other method is the standard mileage method). The actual expense method is out of scope for the VITA/TCE programs.
Additional Child Tax Credit: The Child Tax Credit is generally non-refundable. However, part or all of it may be fully refundable, depending on a taxpayer’s earned income for the year. This refundable portion is called the Additional Child Tax Credit. (Also see Child Tax Credit)
Affordable Care Act Surtaxes: Refers to two different surtaxes created as part of the Affordable Care Act: a 3.8% surtax on investment income for taxpayers whose income is above $200,000 (if single) or $250,000 (if married) and a 0.9% surtax on earned income for taxpayers whose earned income is above $200,000 (if single) or $250,000 (if married).
After-tax: After-tax means a deduction from an employee’s wages that does not reduce the employee’s taxable income. (Also see Pre-tax)
After-tax Basis: When a taxpayer makes nondeductible contributions to an IRA, the nondeductible contributions give the taxpayer an after-tax basis in the IRA. When the taxpayer withdraws money from the IRA, the after-tax portion is not taxable. (Also see IRA)
Adjusted Basis: The adjusted basis is the taxpayer’s basis in a home increased or decreased by certain amounts. Increases include additions or improvements to the home such as installing a recreation room or putting on a new roof. To be considered an increase, the improvement must have a useful life of more than one year. Repairs that maintain the home in good condition are not considered improvements and should not be added to the basis of the property
AGI: Stands for Adjusted Gross Income. AGI is a key number on an individual’s tax return, as many calculations refer back to AGI. AGI is the number on the bottom line of page 1 of Form 1040. The calculation of AGI can be complicated but the basic formula is Income minus certain “front-side” deductions such as student loan interest and IRA contributions. (Also see Front-side Deductions)
Adoption Taxpayer Identification Number: A nine-digit tax-processing number issued by the IRS for children who are in the process of being adopted and who can be claimed as a dependent or claimed for a childcare credit. The ATIN is used wherever the child’s social security number is requested.
Advance EIC Payments: Payments of the earned income credit (EIC) are paid to qualified taxpayers through the regular paycheck.
AEIC: Advance Earned Income Credit Payments
After-tax Contributions: After-tax means the employee paid taxes on the money when it was contributed, i.e., the taxpayer has a cost basis in the plan.
Age Test: One of the tests for identifying a qualifying child: Was the potential dependent under age 19 and younger than the taxpayer at the end of the year? Or, was the person under age 24 at the end of the year and a full-time student for some part of each of five months during the year? Or, Was the person any age and permanently disabled?
Alimony: Alimony is a payment to or for a spouse or former spouse under a separation or divorce instrument.
Allocated Tips: Tips an employer assigns to an employee. They are in addition to the tips the employee reported to the employer.
Alternative Motor Vehicle Credit: Taxpayers may be able to claim a credit for an alternative motor vehicle placed in service for business or personal use. Refer taxpayers who choose to claim this credit to a professional tax preparer.
American Opportunity Credit: A tax credit available for college expenses of students completing their first 4 years of a college education. Part of the credit is non-refundable and part of the credit is fully refundable. (Also see Lifetime Learning Credit, Non-refundable Credits, Refundable Credits)
Amount Realized: The amount realized is the selling price minus selling expenses commissions, advertising fees, legal fees, and loan charges paid by the seller, such as points).
Annuity: A series of payments under a contract from an insurance company, a trusted company, or an individual. Annuity payments are made at regular intervals over more than one full year.
ARRA: American Recovery and Reinvestment Act
ATIN: Adoption Taxpayer Identification Number, issued by the IRS while a final domestic adoption is pending and the child does not have a social security number.
At-Risk Rule: One of two restrictions on how much a loss from passive activity can offset other sources of income. Taxpayers are restricted from claiming a loss for more than they could actually lose from the activity; they can claim a loss only up to the amount for which they are personally at-risk in the activity. (The other restriction is the passive activity rule.)
Amortization: A tax deduction for certain assets that are considered intangible assets (computer software, and other types of assets that you can’t physically touch). The deduction is similar in concept to depreciation. (Also see: Assets, Depreciation)
AMT: Stands for “alternative minimum tax.” AMT is an alternative tax calculation that affects higher-income individuals. The AMT calculation takes away personal exemptions and many itemized deductions in arriving at taxable income for AMT purposes.
Annual Filing Season Program: An IRS program launched in 2014 for unlicensed tax preparers. Preparers can voluntarily take an annual tax update quiz and be a part of the program. The IRS will list the preparer in a directory along with EAs, CPAs, and attorneys. (Also see Enrolled Agent, RTRP)
Asset: For businesses, an asset is something the business purchases that has a useful life of one year or more (equipment, for example). For individuals, things such as houses, stocks, and other such items are considered assets.
Audit (Of Financial Statements): In financial accounting, an audit refers to a CPA firm reviewing a company’s financials and internal controls, and reviewing documentation to verify the amounts shown on the financials. The firm then issues an audit report saying (hopefully) that the financials fairly present the financial position of the company and that the financials are kept in accordance with generally accepted accounting principles. (Also see Review [Of Financial Statements])
Audit Technique Guide: IRS guidance for its auditors for various industries and situations. Audit technique guides are public documents and can be found here.
BAH: Basic allowance for housing, a type of excludable military income.
BAS: Basic allowance for subsistence, a type of excludable military income.
Balance Sheet: A financial statement that summarizes a business’s assets, liabilities, and equity. The reason it’s called a balance sheet is that assets must equal liabilities plus equities.
Basis: Refers to the taxpayer’s stake in an asset or business, usually what the taxpayer originally paid for the asset or business. The basis is used to determine the capital gain or capital loss. (Also see Asset, Capital Gain/Capital Loss)
Before-tax Contributions: Before-tax simply means that the employee did not pay taxes on the money at the time it was contributed, i.e., the taxpayer has no cost basis in the plan.
Blocked income: Blocked income is when a taxpayer cannot convert foreign currency to U.S. dollars due to local law or local government policy. Special tax rules allow taxpayers with blocked income to delay reporting part of their income.
BMF(Business Master File): The IRS tracks every Fro-Profit and every Not-For-Profit Business through its Business Master File System.
Bona Fide Residence Test: To meet the bona fide residence test for the foreign earned income exclusion, taxpayers must show that they have set up permanent quarters in a foreign country for an entire, uninterrupted tax year.
Business Expenses: Business expenses are amounts that are ordinary and necessary to carry on a business.
Business Income: Business income is income received from the sale of products or services. For example, fees received by a professional person are considered business income. Rents received by a person in the real estate business are business income. Payments received in the form of property or services must be included in income at their fair market value.
Business Travel Expenses: Qualified business expenses for members of the armed forces such as uniforms, education, and travel. Military employee business expenses are necessary business-related expenses incurred by active members of the U.S. Armed Forces.
Bonus Depreciation: A special, accelerated depreciation deduction available for purchases of brand-new assets. Bonus depreciation allows immediate expensing of a certain portion of the purchase price of the asset, with the remaining cost being depreciated. The bonus depreciation amount is set by Congress and varies from 100% (in other words, immediate expensing in full) to some lesser percentage (oftentimes 50%). (Also see Asset, Depreciation, Section 179)
Cancellation of Debt For Principal Residence: Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude certain debt forgiven or canceled on their principal residence. This exclusion is applicable to the discharge of qualified principal residence indebtedness. If the canceled debt qualifies for exclusion from gross income, the debtor may be required to reduce tax attributes (certain credits, losses, and basis of assets) by the amount excluded.
Cafeteria Plan: See Flexible Spending Account
Capital Gain/Capital Loss: Gain or loss from the sale of an asset. Long-term capital gains may be subject to special, preferential tax rates. Capital losses are limited to $3,000/year. (Also see Asset)
Capital Loss Carryover: A taxpayer cannot take net losses of more than $3,000 ($1,500 for married taxpayers filing separately) in figuring taxable income for any single tax year. The allowable loss is referred to as the deduction limit. Unused losses can be carried over to later years until they are completely used up. The carryover losses are combined with the gains and losses that actually occur in the next year.
Capital Loss Limit: Tax law places a limit on how much a taxpayer can deduct in capital losses each year. That limit is $3,000/year. Unused losses in one year can be carried forward to be used in future years. (Also see Capital Gain/Capital Loss)
Capital Gain Distributions: Capital gains are passed to investors typically by Mutual funds (regulated investment companies) and real estate investment trusts (REITs)
Cash-basis: A method of accounting where a business reports income when the customer pays, and expenses are recorded when the business pays the expense. Contrast with Accrual-basis.
Casualty and Theft Loss: A deduction allowed for destruction or theft of property. For individuals, the allowable deduction is based on the taxpayer’s basis, the change in the market value of the property after the casualty event, and the taxpayer’s AGI. Individuals take a casualty loss as an itemized deduction. (Also see AGI, Basis, AGI, Itemized Deductions)
C-Corporation: By default, any incorporated business entity is taxed as a C-Corporation. A corporation can elect to be taxed as an S-Corporation. A C-Corporation is a separate taxpaying entity. The results of C-Corporation operations stay within the corporation, and the corporation itself pays taxes on corporate net income.
Child Tax Credit: A $1,000 per child tax credit available for parents who have kids under the age of 17. The credit is non-refundable. However, part of the credit may be refundable depending on the amount of earned income the taxpayer has. (Also see Additional Child Tax Credit, Non-refundable Credits, Refundable Credits)
Child and Dependent Care Credit: A nonrefundable credit that allows taxpayers to claim a credit for paying someone to care for their qualifying Dependents under the age of 13 or spouses or dependents who are unable to care for themselves. The credit ranges from 20 to 35% of the taxpayer’s expenses.
Circular 230: An IRS publication that provides regulations governing Enrolled Agents, CPAs, attorneys, enrolled actuaries, enrolled retirement plan agents, and appraisers. (Also see Circular 230 Practitioner)
Circular 230 Practitioner: A practitioner covered under the rules of Circular 230 (Also see Circular 230)
Citizen or Resident Test: One of the tests for identifying a qualifying child or qualifying relative as a dependent: Assuming all other dependency tests are met, the citizen or resident test allows taxpayers to claim a dependency exemption for persons who are U.S. citizens for some part of the year or who live in the United States, Canada, or Mexico for some part of the year.
Combat Zone: Any area (1) 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, (2) the Department of Defense has certified for combat zone tax benefits due to its direct support of military operations, or (3) a Qualified Hazardous Duty Area established by statute where the service member receives imminent danger pay. Members of the U.S. Armed Forces who serve in a combat zone may exclude military pay from their taxable income.
Compensation: Wages, salaries, commissions, tips, bonuses, professional fees, earnings from self-employment, and alimony.
Constructively Received: When an amount is credited to the taxpayer’s account or made available to the taxpayer (or taxpayer’s agent) without restriction.
Cost Basis: An amount for which taxes have already been paid.
Credit: A direct reduction of the taxpayer’s liability. Credits are allowed for such purposes as child care expenses, higher education costs, qualifying children, and earned income of low-income taxpayers.
Credit for the Elderly or Disabled: The credit for the elderly or the disabled is calculated on Schedule R and reported in the Tax and Credits section of Form 1040.
Community Property: Most states follow “common law,” but 9 states in the United States follow “community property” laws. When married couples in community property states file separate tax returns, they must employ community property rules. Those rules require splitting most of the items of income 50/50 between both spouses. The 9 states that follow community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Compilation: A financial statement report issued by a public accountant. A compilation report only states that the financials are presented under Generally Accepted Accounting Principles. As opposed to audits or reviews, a compilation report does NOT give any assurances about the financials other than that they were prepared based on a particular basis of accounting, such as GAAP or OCBOA. (Also see Audit [of Financial Statements], GAAP, OCBOA, Review [of Financial Statements])
Cost of Goods Sold: A deduction from gross receipts that accounts for the cost of the items a business sells. Doing this leaves gross income. For example, if Company X sells widgets for $20 each, and it costs the company $10 to make or acquire the widget, Company A’s tax return will show $20 as gross revenue, minus $10 for the cost of goods sold, leaving $10 gross income. (Also see Gross Income, Gross Receipts)
Coupling/De-coupling: In tax terminology, this refers to whether or not a state will follow federal tax law on state tax returns. For example, some states “de-couple” from federal bonus depreciation rules, requiring a recalculation of depreciation deductions on the state return. (Also see Bonus Depreciation)
Coverdell Education Savings Accounts: A type of tax-advantaged savings account for saving for college expenses. Taxpayers whose income is below a certain limit can put up to $2,000 per beneficiary into a Coverdell account. The beneficiary of the account must be under age 18 in order to put money into the account. Amounts put into the account are not tax-deductible, but withdrawals (including withdrawals of earnings) are tax-free if used to pay for education expenses.
CPA: Stands for Certified Public Accountant. CPAs are licensed by and regulated by states. Only CPAs are allowed to perform audits of financial statements. In the tax world, CPAs have unlimited practice rights, same as Enrolled Agents and attorneys. (Also see Enrolled Agent, LPA)
Custodial Parent: When referring to divorced or separated parents, a custodial parent is a parent with whom a child spends more than half the nights out of the year. (Also see Non-Custodial Parent)
Date of Transaction: Either the date on a check made payable to the taxpayer or the date money is credited to the taxpayer’s account. When converting foreign currency to U.S. dollars, the date of the transaction is the date that determines the exchange rate to use.
Death Master File: A file published by the federal government that lists the name, Social Security Number, and date of birth of people who have died. For years, the file was available as a public document, which made it a gold mine for identity thieves. In 2013, Congress passed legislation that limits who has access to the file.
Defense of Marriage Act (often abbreviated as DOMA): A federal law passed in 1996 that said, for all federal purposes, that marriage is defined as “one man, one woman.” Because of DOMA, the federal government did not recognize any same-sex marriage, civil unions or domestic partnerships. The U.S. Supreme Court ruled the law unconstitutional on June 26, 2013.
Dependency Exemptions: Amount that taxpayers can claim for a “qualifying child” or “qualifying relative”. Each exemption reduces the income subject to tax. One exemption is allowed for each qualifying child or qualifying relative claimed as a dependent.
Dependency Tests: Tests used for identifying qualifying children or qualifying relatives as dependents.
Dependent: Refers to a taxpayer’s child (if the taxpayer claims the child on the tax return) or others that the taxpayer supports. A dependency exemption and certain other tax benefits are available for claiming dependents on a tax return. (Also see Personal Exemptions)
Dependent Care Benefits: These benefits include amounts employers pay to a taxpayer or directly to the care provider.
Dependent Taxpayer Test: One of the tests for identifying a qualifying child or qualifying relative as a dependent: Can the taxpayer or spouse (if filing jointly) be claimed as a dependent by another person?
Depreciation (for financial statements): Under Generally Accepted Accounting Principles, an asset is depreciated over its estimated useful life. For example, if a business determines that it will use a computer for 3 years and then replace it, the computer is depreciated over 3 years. (Also see Asset, Depreciation [for taxes])
Depreciation (for taxes): For tax purposes, depreciation is a deduction taken by businesses on the purchase of assets. Rather than taking a deduction in full in the year of purchase, the deduction is spread over time. The IRS determines the length of time. For example, a computer is depreciated over 5 years because that’s the length of time for depreciating computers set out by the IRS. (Also see Amortization, Asset, Depreciation [for financial statements], MACRS)
Depreciation Recapture: When an asset is sold for a gain, the gain is generally a capital gain. However, if depreciation has been claimed on the asset, some or all of the gain may instead be treated as ordinary income. This is referred to as depreciation recapture. (Also see Depreciation [for taxes])
Depreciation: An annual deduction that allows taxpayers to recover the cost of property used in a trade or business or held for the production of income. The amount of depreciation depends on the basis of the property, its recovery period, and the depreciation method. This is in-scope for Military certification only (rental property).
Disability Income: This income comes from an employer’s disability insurance, health plan, or pension plan. The payments replace wages for the time the taxpayer missed work because of the disability.
Disability Pension: Generally paid to a taxpayer who retires because of a disability before the minimum retirement age (set by the employer). The disability pension is considered regular pension income when the taxpayer reaches the minimum retirement age.
DITY Move: Do-it-yourself move. The most common form of military move is the partial DITY move, where the military provides a moving company to transport some of the service member’s goods. Service members who receive DITY payments must include them in their gross income if it exceeds the allowable expenses.
Dividends: A corporation’s distributions to its shareholders from its earnings and profits.
Divorced, separated, or never married parents: Special rules apply if the dependent is supported by parents who are divorced or separated; these rules also apply to parents who were never married. In general, the child will be considered a dependent of the custodial parent, assuming the child meets all the rules for a qualifying child or qualifying relative. However, the custodial parent can agree to allow the noncustodial parent to treat the child as a qualifying child or qualifying relative if certain conditions are met. A signed Form 8332 or equivalent is required and must be attached to the noncustodial parent’s return, or attached to Form 8453 if filing electronically.
Domicile: A taxpayer’s legal, permanent residence. It is not always where the person presently lives.
Draws: Withdrawals from a sole proprietorship or partnership by the proprietor. In a sole proprietorship, Draws are not deductible. In a partnership, draws are also not deductible but must be tracked because draws reduce the partner’s basis in the partnership. (Also see Partnership, Sole Proprietorship)
DRIP Accounts: DRIP accounts leave cash dividends with the company for the purchase of additional shares. Even though these shares are from the same company, they retain their own individual basis separate from the original purchase. Each newly purchased share could have a different basis.
Dual Status Alien: An alien who is both a nonresident and resident alien during the same tax year. The most common dual-status tax years are the years of arrival and departure.
Earned Income: Any income received for work, such as wages or business income. Earned income also includes net earnings from self-employment and other income received for personal services.
Earned Income Credit (EIC) – A tax credit available to taxpayers between the ages of 25 and 65 whose income is below certain levels. The income level varies depending on filing status and how many children the taxpayer has. The credit is fully refundable. (Also see Filing Status, Refundable Credits)
Education credits: Credits that reduce the amount of tax due and are based on qualified education expenses that the taxpayer paid during the tax year.
Educator Expenses: public-school teachers in grades K-12 can deduct up to $250 of unreimbursed expenses that they paid for classroom supplies. The deduction is taken as a front-side deduction that reduces Adjusted Gross Income. Any expenses above $250 are claimed as miscellaneous itemized deductions. (Also see Adjusted Gross Income, Miscellaneous Itemized Deductions)
EITC: Earned Income Tax Credit. See EIC.
EFTPS: Stands for “Electronic Federal Tax Payment System.” EFTPS is the way the IRS prefers for businesses and individuals to submit tax payments, in particular for payroll taxes and corporate taxes. For more information, visit www.eftps.gov.
Electronic Filing (e-file): The computer transmission of a tax return directly to the IRS.
Employee: Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Employer Identification Number (EIN) – A 9-digit number assigned by the IRS to businesses. All business entities other than sole proprietors must have EINs. Sole proprietors may need an EIN in certain circumstances.
Enrolled Agent: Federally licensed tax practitioners. In the tax world, Enrolled Agents have equal rights and privileges as attorneys and CPAs.
Estimated Tax Payments: Quarterly tax payments that self-employed taxpayers and other taxpayers who have income without tax withholdings are encouraged to make to the IRS. Similar in concept to withholding from paychecks. (Also see Withholding)
ESA: Coverdell Education Savings Account
Excludable Income: Income that is not included in the taxpayer’s gross income and therefore exempt from federal income tax. Certain income may be exempt from tax but must be reported on the tax return.
Exempt (from withholding): Free from withholding of federal income tax. Must meet certain income, tax liability, and dependency criteria. Does not exempt a person from other kinds of tax withholding, such as social security tax.
Exemption Amount: The dollar amount that can be deducted from an individual’s total income, thereby reducing the taxable income.
Exemptions (Personal or Dependency): Amount that taxpayers can claim for themselves, their spouses, and eligible dependents. An exemption is a dollar amount that can be deducted from an individual’s total income, thereby reducing the taxable income.
FICA – Stands for “Federal Insurance Contributions Act.” FICA taxes fund Medicare and Social Security and are generally paid for through withholdings from paychecks (if an employee) or through paying self-employment tax (for people who are self-employed). (Also see Self-Employment Tax)
Filing Status – There are 5 filing statuses one can choose from when filing a federal income tax return: single, head of household, married filing jointly, married filing separately, and qualified widow(er). Each status comes with its own standard deduction, tax bracket, and (sometimes) special rules or restrictions on certain deductions and credits.
First-time Homebuyer Credit: The first-time homebuyer credit is a maximum of $8,000 ($4,000 for Married Filing Separately). This is a refundable credit which means that even if the taxpayer does not owe any tax, the money will be refunded to the taxpayer. There are payback provisions if the home was sold within a 36 month period.
Fiscal Year: Refers to the last day of a taxpayer or business’s tax year. Individuals have a fiscal year of December 31. C-corporations can choose to end their fiscal year on the last day of any month the corporation chooses. Most partnerships and S-corporations are required to have a fiscal year of December 31, though they can choose other months if they meet certain requirements.
Five-Year Test Period Suspension: Taxpayers can choose to have the five-year test period for ownership and use suspended during any period the homeowner (either spouse if married) served on qualified official extended duty as a member of the uniformed services or Foreign Service of the United States, as an employee of the intelligence community, or as an employee or volunteer of the Peace Corps. This means that the taxpayer may be able to meet the two-year use test even if the taxpayer and/or spouse did not actually live in the home during the normal five-year period required of other taxpayers.
Foreign Earned Income Exclusion: The foreign earned income exclusion allows eligible taxpayers to avoid paying federal income tax on their foreign earned income.
Foreign Tax Credit: U.S. tax credit used to offset any foreign income tax taxpayers have paid on qualified income that is also subject to U.S. federal income tax.
Flexible Spending Account: Also known as a cafeteria plan. FSAs provide a tax-advantaged way of paying for medical and daycare expenses. The employee puts money into the FSA pre-tax. Withdrawals from the FSA are tax-free as long as the money is used to pay qualifying expenses.
Form 1040: Tax return used to report income from wages, salaries, and tips; qualified tuition program earnings; Alaska Permanent Fund dividends; taxable scholarships and fellowship grants; interest of $1,500 or less; and unemployment compensation.
Form 1040 Schedule A: Itemized Deductions
Form 1040 Schedule B: Interest and Ordinary Dividends
Form 1040 Schedule C-EZ: Net Profit from Business
Form 1040 Schedule D: Capital Gains and Losses
Form 1040 Schedule E: Supplemental Income and Loss
Form 1040 Schedule L: Standard Deduction for Certain Filers
Form 1040 Schedule M: Making Work Pay and Government Retiree Credits
Form 1040 Schedule SE: Self-Employment Tax
Form 1040A: Tax return used to report all Form 1040A items, plus all other forms of income.
Form 1040ES: Estimated Tax for Individuals
Form 1040EZ: Tax Return for Single and Joint Filers with No Dependents, used to report income from wages, salaries, and tips, plus income from dividends and interest greater than $1,500; capital gain distributions; IRA, pension, and annuity income; and social security and railroad retirement benefits.
Form 1040NR: U.S. Nonresident Alien Income Tax Return
Form 1040NR-EZ: U.S. Nonresident Alien Income Tax Return
Form 1040X: Amended U.S. Individual Income Tax Return, used to modify a previously filed tax return.
Form 1041 Schedule K-1: Beneficiary’s Share of Income, Deductions, Credits, etc. Used by the fiduciary of a domestic decedent’s estate, trust, or bankruptcy estate to report income, gains, losses, etc., of the estate or trust.
Form 1042-S: Foreign Person’s U.S. Source Income Subject to Withholding
Form 1065 Schedule K-1: Partner’s Share of Income, Deductions, Credits, etc. Used by partnerships to report the taxpayers’ share of the partnership’s income, deductions, credits, etc.
Form 1098: Statement showing Mortgage Interest
Form 1098-E: Statement showing Student Loan Interest
Form 1098-MA: Form 1098-MA, Mortgage Assistance Payments, is a new information return. The form is used to report to the IRS and homeowners the total amounts of certain mortgage assistance payments made to mortgage servicers. Although mortgage assistance payments are not included in income, taxpayers cannot deduct the interest that is paid for them.
Form 1099-A: Acquisition or Abandonment of Secured Property
Form 1099-B: Proceeds From Broker and Barter Exchange Transactions
Form 1099-C: Cancellation of Debt
Form 1099-DIV: Statement showing Dividends and Distributions
Form 1099-G: Statement showing certain government payments (such as Unemployment Compensation Income)
Form 1099-INT: Statement showing Interest Income
Form 1099-K: Form 1099-K is used to report the proceeds of payment card and third-party network transactions made to taxpayers under Internal Revenue Code section 6050W. Merchant card and third party network payers, as payment settlement entities (PSE), must report the proceeds of payment card and third party network transactions made to taxpayers on Form 1099-K.
Form 1099-LTC: Long-term Care and Accelerated Death Benefits
Form 1099-MISC: Statement showing miscellaneous income (such as rents, royalties, fishing boat proceeds, non-employee compensation, medical and healthcare payments, substitute payments in lieu of dividends or interest, crop insurance proceeds, gross proceeds paid to an attorney, excess golden parachute payments, and other miscellaneous income)
Form 1099-OID: Statement showing Original Issue Discount
Form 1099-R: Statement showing Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc
Form 1099-S: Proceeds From Real Estate Transactions
Form 1116: Foreign Tax Credit (Individual, Estate or Trust)
Form 1120S Schedule K-1: Shareholder’s Share of Income, Deductions, Credits, etc. Used by S corporations to report the taxpayers’ share of the corporation’s income (reduced by any tax the corporation paid on the income), as well as any deductions, credits, etc.
Form 13614-C: Intake/Interview & Quality Review Sheet
Form 2106: Employee Business Expenses
Form 2106-EZ: Unreimbursed Employee Business Expenses
Form 2120: Multiple Support Declaration, allows taxpayers to identify other eligible individuals who paid over 10% of the support of another person.
Form 2210: Underpayment of Estimated Tax by Individual, Estates, and Trusts. While completion of Form 2210 is out of scope, volunteers need to caution taxpayers they will receive a notice of an estimated tax penalty if it is applicable.
Form 2441: Child and Dependent Care Expenses
Form 2555: Foreign Earned Income Exclusion
Form 2555-EZ: Foreign Earned Income Exclusion
Form 2848: Power of Attorney and Declaration of Representative
Form 3903: Moving Expenses
Form 4137: Social Security and Medicare Tax on Unreported Tip Income, is used to report unreported tip income.
Form 4506: Request for Copy or Transcript of Tax Form
Form 4852: Substitute for Form W-2, Wage, and Tax Statement, or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA’s, Insurance Contracts, Etc., used by taxpayers who have been unable to obtain (or have received incorrect) wage or distribution statements.
Form 4868: Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Form 4952: Investment Interest Expense Deduction
Form 5329: Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts
Form 5405: First-Time Homebuyer Credit
Form 5695: Residential Energy Efficient Property Credit
Form 8233: Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual
Form 8316: Information Regarding Request for Refund of Social Security Tax
Form 8332: Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. This form allows a taxpayer who is a custodial parent (and who was married to his or her child’s noncustodial parent) to release his or her claim on the child’s exemption.
Form 8379: Injured Spouse Claim and Allocation, allows taxpayers to request relief from a spouse’s past due federal debts, including back child support and past due taxes.
Form 843: Claim for Refund and Request for Abatement
Form 8453-OL: Income tax declaration used for e-filing
Form 8582: Passive Activity Loss Limitations
Form 8606: Nondeductible IRAs, reports nondeductible contributions to traditional IRAs and/or distributions taken from certain IRAs. Part I explains in detail when this form is used.
Form 8812: Additional Child Tax Credit
Form 8822: Change of Address
Form 8840: Closer Connection Exception Statement for Aliens
Form 8843: Statement for Exempt Individuals and Individuals with a Medical Condition
Form 8857: Request for Innocent Spouse Relief. This form explains various forms of relief and who may qualify.
Form 8863: Education Credits, may be used instead of Form 2106, Employee Business Expenses, if education expenses were the only business expenses.
Form 8879: IRS e-file Signature Authorization
Form 8880: Credit for Qualified Retirement Savings Contributions
Form 8888: Direct Deposit of Refund to More Than One Account
Form 8901: Information on Qualifying Children Who Are Not Dependents (For Child Tax Credit)
Form 8949: Sales and Other Dispositions of Capital Assets. This form is new in 2010 and used to report capital gains or losses.
Form 9452: Filing Assistance Program, helps taxpayers determine whether they are required to file a federal income tax return.
Form 9465: Installment Agreement Request, used to request a monthly installment plan for taxes owed.
Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness
Form RRB-1099: Payments by the Railroad Retirement Board
Form RRB-1099-R: Annuities or Pensions by the Railroad Retirement Board
Form SS-5: Application for a Social Security Card.
Form SSA-1099: Social Security Benefit Statement
Form W-2: Wages and Tax Statement, issued by employers to report their employees’ earned income for the year. Generally, employers should issue Form W-2 to every employee and a copy to the Social Security Administration.
Form W-2c: Corrected Wage and Tax Statement, used to correct information issued on a W-2.
Form W-4: Employee’s Withholding Allowance Certificate is completed by the employee and used by an employer to determine how much to withhold from an employee’s paycheck for federal income tax purposes.
Form W-4P: Withholding Certificate for Pension or Annuity Payments. The form allows taxpayers to tell payers the correct amount of federal income tax to withhold from payments.
Form W-4V: Voluntary Withholding Request, filed by taxpayers (or estates) who are recipients of social security benefits and want to request withholding from their payments from the Social Security Administration.
Form W-5: Earned Income Credit Advance Payment Certificate, used by taxpayers who have a qualifying child, may be eligible for the earned income credit and choose to get advance EIC payments.
Form W-7: Application for IRS Individual Taxpayer Identification Number.
Form W-8BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
Form K-1: A reporting form issued by partnerships, S-Corporations, estates, and trusts. Form K-1 reports an individual shareholder’s or beneficiary’s share of the entity’s income and deductions for the year.
Form W-2: A reporting form issued by employers to employees. Form W-2 reports wages paid to the employee and taxes withheld on the employee’s behalf during the calendar year. (Also see Withholding)
Form W-9: A form used by companies that employ independent contractors. The form provides the company with the contractor’s name and EIN or Social Security Number and is useful for the company in preparing the Form 1099 that may need to be issued to the contractor.
Front-side Deductions: Refers to tax deductions for individuals that are taken on the first page of Form 1040. These deductions reduce AGI and are not itemized deductions. Examples include deductions for student loan interest and deductions for amounts contributed to an IRA. (Also see AGI, Itemized Deductions, IRA)
FSA: Stands for “flexible spending account,” sometimes called a “cafeteria plan.” FSA’s allow a taxpayer to set money aside to pay for things such as medical expenses or daycare. Money put into an FSA is tax-deductible, and withdrawals are tax-free if used for qualified expenses.
Generally Accepted Accounting Principles (GAAP): A set of accounting policies and procedures used in the formal compilation of financial statements. Some parts of GAAP come from formal accounting standards from various boards and agencies, and some come from industry standards.
Gift Tax: A federal tax assessed against the givers of gifts above a certain amount. For 2013, that amount is $14,000. If a person gives gifts to any one person that totals more than $14,000 for the year, that person may need to file a gift tax return and potentially pay gift tax.
Green Card Test: The determination that an individual has been issued a “green card” by the United States Citizenship and Immigration Services (USCIS), generally making that person a lawful, permanent resident of the United States
Gross Income or Gross Profit (business): Refers to business income after cost of goods sold is accounted for (gross receipts minus cost of goods sold), but before any other deductions are taken. (Also see Cost of Goods Sold, Gross Receipts (Business))
Gross Income Test: One of the tests for identifying a qualifying relative as a dependent. Example: “Did the potential dependent have a gross income in excess of the personal exemption amount during the tax year?”
Gross Receipts (Business): When used in connection with a business, gross receipts refer to the business’s income before any deductions are taken.
Head of Household: A filing status on a tax return that provides a tax bracket that is halfway between that of a single person and that of a married person. A person can qualify for head of household if they are single and have a qualifying dependent living with them. (Also sees Filing Status)
Health Reimbursement Arrangement: Abbreviated “HRA” and sometimes called a “Section 105 Plan.” This is an arrangement where an employer agrees to reimburse employees for medical expenses. These are especially useful for sole proprietors who are in a position to hire their spouse as an employee.
High Taxed Income: Passive income that is taxed by a foreign government at a rate higher than the highest U.S. income tax rate, and may be classified as “general category income,” making it eligible for the foreign tax credit.
Hobby Loss Rules: When a taxpayer has a business that is not operated with a profit motive, the IRS may say the “hobby loss rules” apply. This means all income from the operation is considered ordinary income, but expenses can only be claimed as miscellaneous itemized deductions, and expenses are limited to the amount of income generated by the activity. (Also see Miscellaneous Itemized Deductions)
Holding Period: Schedule D requires entries for the stock purchase and sale date. Taxpayers must provide the date the stock was acquired and Form 1099-B will indicate the date the stock was sold. These two dates will determine the holding period.
Household Employment Taxes: Taxes owed by an individual who hires home assistants, generally nannies. Sometimes called the “nanny tax.” The taxpayer generally pays all withholdings and other payroll taxes at once when the taxpayer files their tax return. (Also see Schedule H, Withholding)
HSA: Stands for “health savings account.” An HSA allows you to save money, tax-advantaged, for medical expenses. Contributions to an HSA reduce your taxable income, and withdrawals from an HSA are tax-free if used for medical expenses. To qualify, you must meet certain requirements, such as being enrolled in a high-deductible health care plan. See IRS Publication 969 for more information.
Income Statement: A financial statement that shows an entity’s revenue and expenses for a period of time. Sometimes referred to as a “P & L” statement, with the P and L standing for “profit and loss.”
Income Taxes: Taxes on income, both earned (for example, salaries, wages, tips, commissions) and unearned (for example, interest, and dividends). Income taxes can be levied both on individuals (personal income tax) and businesses (business and corporate income taxes).
Independent Contractor: A worker who performs services for a business but who is not an employee of the business. (Also see Form 1099-MISC)
Identity Protection PIN: There is a new field next to spouse’s occupation at the bottom of Form 1040 labeled Identity Protection PIN. This is designed to help prevent refunds from being issued to an identity thief. It the taxpayer has been a victim of identity theft, verify the special PIN (6 digit IPPIN) is correct using CP01A Notice or see Form 1040 Instructions for more information.
IMF(Individual Master File): The IRS tracks every taxpayer through its Individual Master File System
Individual Taxpayer Identification Number (ITIN): Income a person receives from certain financial accounts or from lending money to someone else.
Injured Spouse Relief: A provision of tax law that allows a taxpayer to get back his or her share of a joint overpayment when the overpayment was used to pay one spouse’s past-due federal tax, state income tax, child support, spousal support, or federal non-tax debt, such as a student loan.
Innocent Spouse Relief: A provision of tax law that allows a taxpayer to be relieved of responsibility for paying tax, interest, and penalties if the taxpayer’s spouse (or former spouse) improperly reported items or omitted items on a joint tax return.
Intake and Interview sheet: Form 13614-C used to conduct the initial interview and screen the taxpayer.
Interest Income: Income a person receives from certain financial accounts or from lending money to someone else.
Investment Income: Investment Income includes taxable interest and dividends, tax-exempt interest, capital gain net income, net income from rents and royalties not derived from a trade or business, and net income from passive activities
IRA: Individual Retirement Arrangement – A tax-sheltered savings plan set up by the taxpayer, generally for retirement income.
Individual Retirement Account (IRA): a retirement account that is not part of an employer-provided retirement plan. Anyone can set up and make deposits into an IRA. Those deposits may or may not be deductible, depending on the taxpayer’s income.
Itemized Deductions: Taxpayers can choose to take either the standard deduction or itemized deductions on their tax return. Itemized deductions are for things such as mortgage interest, property taxes, charitable contributions, and medical expenses. (Also see Schedule A, Standard Deduction)
ITIN: Individual taxpayer identification number, issued by the IRS to individuals who are not eligible for a social security number.
Intangible Asset: A type of asset that cannot be physically touched. Most intangible assets must be amortized, which is a similar concept to depreciation. (Also see: Amortization, Asset, Depreciation)
Joint Return Test: One of the tests for identifying a qualifying child or qualifying relative as a dependent. Generally, a married person cannot be claimed as a dependent if he or she files a joint return.
Letter of Determination: Document from the Department of Veterans Affairs (VA) sent to discharged service members who qualify for severance pay subject to medical disability, which is nontaxable.
Lifetime Learning Credit: A tax credit available for college tuition expenses. Similar to the American Opportunity Credit except the Lifetime Learning Credit is less restrictive (anyone taking college classes, even part-time, can take the credit) but the credit amount is smaller than the American Opportunity Credit. Also, the Lifetime Learning Credit is non-refundable. (Also see American Opportunity Credit, Non-Refundable Credit)
Listed Property: For tax purposes, “listed property” means depreciable property that has elements of personal use. Examples include vehicles and computers. The IRS generally requires stricter documentation of usage of property that is considered “listed” property. (Also see Depreciation)
LLC: Stands for “Limited Liability Company.” LLCs are entities formed under state law. As with corporations, LLCs give liability protection but LLCs are usually simpler to form and administer. One-person LLCs are taxed as sole proprietorships by default and multi-member LLCs are taxed as partnerships by default, but an LLC can elect to be taxed as an S-Corporation or a C-Corporation. (Also see Sole Proprietorship, S-Corporation, C-Corporation)
Long-term Capital Gain/Loss: A capital gain resulting from the sale of an asset held for more than 1 year. Taxpayers can often receive preferential tax rates on gains from the sale of long-term assets. (Also see Capital Gain/Loss, Short-term Capital Gain/Loss)
LPA: Stands for Licensed Public Accountant. The LPA license is awarded in 3 states: Iowa, Delaware, and Minnesota. LPAs are public accountants and can do the same things a CPA can do except for audits and reviews of financial statements. In the tax world, the LPA is not recognized. (Also see CPA)
Lump-sum Distribution: A lump-sum distribution is a distribution or payment within one tax year of an employee’s entire balance from all qualified pension, stock bonus, or profit-sharing plans that the employer maintains.
Main home: A taxpayer’s “main” home is where they live most of the time. It does not have to be a traditional house; for example, it may be a houseboat, mobile home, cooperative apartment, or condominium, but it must have cooking, sleeping, and bathroom facilities.
Making Work Pay Tax Credit: A refundable tax credit of up to $400 for working individuals ($800 for Married Filing Jointly) calculated at a rate of 6.2 percent of earned income and phased out for taxpayers with a modified Adjusted Gross Income (AGI) in excess of $75,000 ($150,000 for Married Filing Jointly). Claimed on Schedule M (Form 1040A or 1040).
MACRS: Stands for “Modified Accelerated Cost Recovery System.” MACRS is the default method of depreciation for tax purposes. (Also see Depreciation [for taxes])
Marriage Penalty: An informal term referring to the fact that married couples will sometimes pay more in taxes as a married couple than they did as two single people. The marriage penalty is not a literal penalty. Historically, about 50% of married couples experience the marriage penalty.
Married Filing Jointly: a filing status on tax returns for taxpayers who are married at the end of the year. (Also see Filing Status, Married Filing Separately)
Married Filing Separately: A filing status on tax returns for married taxpayers who choose to file separate tax returns. (Also see Filing Status, Married Filing Jointly)
Married Filing Separately on a Combined Return: A filing status on Iowa income tax returns. Taxpayers using this status calculate taxable income separately and then combine the tax liability into one lump sum at the end of the return.
Medical Dependent: A person can be a dependent for purposes of medical expenses and health insurance coverage, without the taxpayer actually claiming the person as a dependent on a tax return. The test for someone to be a medical dependent is: did they live with the taxpayer all year and did the taxpayer provide more than half of their support? If so, they might be the taxpayer’s medical dependent.
Medical Severance Pay: A type of includable military income given to service members who have been separated from the service for medical reasons
Member of Household or Relationship Test: One of the tests for identifying a qualifying relative as a dependent: Was the person related to the taxpayer in any of the following ways: Son, daughter, foster child, or a descendant of any of them; brother, sister, or a son or daughter of either of them; father, mother, or an ancestor or sibling of either of them; stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law? Any other person (other than the taxpayer’s spouse) who lived with the taxpayer all year as a member of the taxpayer’s household?
Miscellaneous Itemized Deductions: Deductions for things such as unreimbursed employee expenses, expenses relating to investments, and fees for safe-deposit boxes at banks, among many other possibilities. The total of a taxpayer’s miscellaneous itemized deductions must exceed 2% of their AGI in order to be deductible. (Also see 2% of AGI Rule)
Modified Adjusted Gross Income (MAGI): The adjusted gross income with certain modifications.
Mortgage Interest Credit: Taxpayers who hold qualified mortgage credit certificates (MCCs) under a qualified state or local government program may claim a nonrefundable credit for mortgage interest paid.
Mortgage Insurance Premiums: Qualified mortgage insurance is provided by the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, and private mortgage insurance (PMI) companies. Taxpayers can treat qualified mortgage insurance premiums paid or accrued during the tax year as home mortgage interest. PMI is deductible on line 13 of Schedule A.
Multiple Support Agreements: If one person has not provided over half the support, go to step 8 to determine if multiple support exists. Multiple support means that two or more people together, who could claim the person as a dependent except for the support test, provide more than half the dependent’s support. However, only one taxpayer can claim the exemption for a dependent with multiple support. In this situation, the individuals who provide more than 10% of the person’s total support (step 9), and who meet the other tests for a qualifying relative, can agree that one of them will take the person’s exemption.
A mutual fund is a regulated investment company generally created by pooling funds of investors, which allows investors to take advantage of a diversity of investments and professional management. Owners of mutual funds may receive both Form 1099-DIV and Form 1099-B. Form.
Nanny Taxes: See Household Employment Taxes
Net Income or Net Loss: For businesses, net income or net loss refers to what’s left after expenses are accounted for. The formula is gross income minus expenses. (Also see Gross Income)
Net Operating Loss: When business losses exceed business income, a net operating loss may exist. The loss can be carried back to prior years and/or forward to future years to offset income in those years. The exact rules vary depending on the taxpayer’s circumstances.
Nonbusiness energy property credit: Taxpayers may be able to claim a nonbusiness energy property credit for certain energy-efficient property or improvements.
Nondeductible Traditional IRA Contributions: Traditional IRA contributions that taxpayers may not deduct from their total income because the taxpayers do not meet the requirements; also includes remaining contributions from a partial IRA deduction.
Nonrecourse Debt: Nonrecourse debt is satisfied by the surrender of the secured property regardless of the fair market value (FMV) at the time of surrender and the borrower is not personally liable for the debt. If property subject to nonrecourse debt is abandoned, foreclosed upon, subject of a short sale, or repossessed by the lender, the circumstances will be treated as a sale of the property by the taxpayer.
Nonrefundable Credit: A nonrefundable credit can only reduce the tax liability to zero. Any excess credit is not refunded to the taxpayer.
Nonresident Alien: A residency status of an individual who does not meet the Green Card Test or the Substantial Presence Test,
Nontaxable Income: Any income exempt from federal income tax. Although some types of nontaxable income are reported on the return, it is not added into the amount of income subject to tax.
Nondeductible Traditional IRA Contributions: Traditional IRA contributions that taxpayers may not deduct from their adjusted gross income because the taxpayers do not meet the requirements; also includes remaining contributions from a partial IRA deduction.
Non-custodial Parent: In tax terms, when referring to divorced or separated parents, a non-custodial parent is the parent with whom a child spends less than half the nights out of the year. (Also see Custodial Parent)
Non-deductible Contributions: Refers to deposits into a traditional IRA that are not deductible because of income restrictions. The deposit can still be made but is not deductible on the taxpayer’s tax return. Non-deductible contributions give the taxpayer after-tax basis in their IRA. (Also see IRA, After-Tax Basis)
Non-refundable Credit: A tax credit that reduces taxable income to $0 but cannot generate a refund in and of itself.
Not-for-Profit: A legal term referring to how an entity is organized under state law. “Not-for-profit” is often used interchangeably with “tax exempt” but the two terms mean different things. It is possible for an entity to be a not-for-profit and not be tax exempt.
OCBOA: Stands for “other comprehensive basis of accounting.” This is an alternative to GAAP-basis accounting. An example of OCBOA is a cash-basis accounting. (Also see Cash-basis)
OHA: Overseas housing allowance, a type of excludable military income.
Ordinary Dividends: Corporate distributions paid out of the earnings and profits of the corporation.
Ordinary Income: Income that is reported on a taxpayer’s tax return that is subject to income tax but not to self-employment tax or capital gain treatment. (Also see Self-employment Tax, Capital Gain/Capital Loss)
Paid Preparers: Paid preparers are legally liable under federal law for the returns they prepare; volunteers are not.
Passive Income: Taxable income that comes from passive activity, such as dividends, interest, royalties, rents, and annuities.
Partnership: A business entity involving two or more people who are conducting business together but who are not incorporated.
Passive Activity Losses: A passive activity is an investment activity in which a taxpayer doesn’t “actively participate.” In overly simplified terms, this means the taxpayer doesn’t work in the business day-to-day. There are limits on the number of losses a taxpayer can deduct from passive activities.
Pass-through Entity: Sometimes called “flow-through” entities. This term refers to business entities that do not pay income taxes themselves. Instead, results of business operations “pass through” to the owners, who report their share of the operations on their personal tax returns. Examples include partnerships and S-corporations.
Patient-Centered Outcomes Research Fee: A fee created as part of the Affordable Care Act. The fee is imposed on businesses or insurance companies at a rate of $2.18 per participant in a health plan.
Payroll Taxes: For employees, this refers to FICA taxes withheld from the employee’s wages. For employers, this refers to the employer half of FICA taxes and unemployment taxes. (Also see FICA)
Personal Exemptions: A deduction for exemptions claimed on a tax return. Exemptions refer to the taxpayer, the taxpayer’s spouse, and people listed as dependent on the tax return.
PCS: Permanent change of station for a military service member.
Pension: A series of definitely determinable payments made to an employee or survivor (the beneficiary of a deceased employee’s pension) after the employee retires from work.
Period of Stay: Amount of time a taxpayer stays in a foreign country, which is one of the factors used to determine whether the taxpayer is eligible for the foreign earned income exclusion. To meet the period of stay requirement, the taxpayer must meet either the Bona Fide Residency test or the Physical Presence test.
Personal Exemption: An exemption that allows taxpayers to claim themselves as exemptions on their tax returns. Also included in this category is the taxpayer’s spouse when filing a joint return.
Physical Presence Test: To meet the physical presence test for the foreign earned income exclusion, a taxpayer must be physically present in a foreign country 330 full days during a period of twelve consecutive months.
Power of Attorney: In tax terms, a power of attorney is a form (Form 2848) that taxpayers sign to allow a third party to act on their behalf in front of the IRS.
Pre-tax: Pre-tax means a deduction from an employee’s wages that reduces the employee’s taxable income. (Also see After-tax)
Private Letter Rulings: An IRS ruling addressed to one taxpayer, answering a question specific to that taxpayer’s situation. Private letter rulings are binding only on that taxpayer’s situation, meaning others cannot use the ruling as precedent. However, private letter rulings are useful for helping understand how the IRS interprets the law.
Property Taxes: Taxes on property, especially real estate. It can also be levied on boats, automobiles (often paid along with license fees), recreational vehicles, and business inventories.
Qualified Charitable Contributions (QCD): A QCD is a distribution from an IRA made to an organization eligible to receive tax-deductible contributions. If all requirements are met, this will exclude any part of the distribution that would otherwise be taxable.
Qualified Principal Residence Indebtedness: Qualified principal residence indebtedness is any debt incurred in acquiring, constructing, or substantially improving a principal residence and which is secured by the principal residence. Qualified principal residence indebtedness also includes any debt secured by the principal residence resulting from the refinancing of debt incurred to acquire, construct, or substantially improve a principal residence but only to the extent the amount of the debt does not exceed the amount of the refinanced debt.
Qualified Tuition Program: A program set up to allow taxpayers to either prepay or contribute to an account established for paying a student’s qualified expenses at an eligible educational institution. The program must meet certain requirements set by the state. Also known as a 529 program.
Qualifying Child: To be identified as a qualifying child, a person must meet certain basic tests. In addition, there may be other requirements to claim various tax benefits for that qualifying child.
Qualifying Child of More than One Person Test: One of the tests for identifying a qualifying child or qualifying relative as a dependent: Is the person the qualified child of any other person?
Qualified Medical Expenses: For HSA, MSA, FSA, and HRA purposes, a medicine or drug will be a qualified medical expense only if the medicine or drug: requires a prescription, is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or is insulin.
Qualifying Relative: To be identified as a qualifying relative, a person must meet seven tests: Member of household or relationship test, Qualifying child of another taxpayer test, Citizen or resident test, Gross income test, Support test, Joint return test, and Dependent taxpayer test.
Qualifying Widow(er) With Dependent Child: Filing status is for widow or widower with one or more dependent children.
Qualified Plan: Generally refers to a 401(k) retirement plan offered by an employer. If a plan is “qualified,” deposits into the plan by employees reduce the employees’ taxable income, and deposits into the plan by employers reduce the employers’ taxable income.
Qualifying Child: A qualifying child is a dependent under the age of 19 (or under age 23 if in college) who is the taxpayer’s child, foster child, step-child, or grandchild. Certain other requirements must be met as well. A qualifying child can qualify a taxpayer for certain tax benefits such as head of household filing status, and credits such as the child tax credit and earned income credit.
Qualifying Relative: A qualifying relative is a dependent who does not meet the tests to be a qualifying child. The tests for qualifying relative include: the taxpayer must provide more than 1/2 of the person’s support, and the person must live with the taxpayer all year (in most cases). A taxpayer will qualify for a dependency exemption for a qualifying relative, but other tax benefits are generally not available for this type of dependent.
Qualifying Widow(er): A filing status on a tax return for a person whose spouse has died and the surviving spouse is still raising kids. In the year of the spouse’s death, the couple will file as married filing jointly. The surviving spouse can use Qualifying Widow(er) as a filing status for the next two tax years after that. This filing status provides the same tax brackets and standard deduction as married filing jointly. (Also see Filing Status)
Railroad Retirement Benefits (RRB): Refers to retirement benefits for employees of railroad companies. Taxation of these benefits depends on whether the benefits are Tier I or Tier II benefits. (Also see Tier I/Tier II Railroad Retirement Benefits)
Recourse Debt: Recourse debt holds the borrower personally liable for any amount not satisfied by the surrender of the secured property. If a lender forecloses on property subject to a recourse debt and cancels the portion of the debt in excess of the fair market value (FMV) of the property, the canceled portion of the debt will be treated as ordinary income from cancellation of indebtedness and will be required to be included in gross income unless the cancellation of indebtedness qualifies for one of the exceptions or exclusions from gross income under some provision of the Internal Revenue Code.
Refundable Credit: Occurs when the amount of a credit is greater than the tax owed. Taxpayers not only can have their tax reduced to zero; they can also receive a “refund” of excess credit.
Refundable Child Tax Credit: The Child Tax Credit is generally non-refundable. However, part or all of it may be fully refundable, depending on a taxpayer’s earned income for the year.
Regular Method: A most common method for computing self-employment tax. Under the regular method, the net self-employment income entered on Schedule SE is the sum of net self-employment earnings from the taxpayer’s Schedules C, C-EZ, and F. (Taxpayers should consult a professional tax preparer or a military legal assistance officer if they use a different method or require Schedule F.
Relationship Test: One of the tests for identifying a qualifying child as a dependent: Was the person the taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (i.e., the taxpayer’s grandchild, niece, or nephew)?
Relative: Someone related to the taxpayer by blood, marriage, or adoption, including the following:
- Child, grandchild, great grandchild
- Stepchild, stepbrother, stepsister
- Brother, sister
- Half-brother, half sister
- Parent, grandparent, or other direct ancestors (but not foster parent)
- Stepmother or stepfather
- Brother or sister of one’s father or mother
- Son or daughter of one’s brother or sister
- Father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law.
Rental Expenses: Ordinary and necessary expenses attributable to the production of rental income and maintenance of the rental property, such as advertising, cleaning and repairs, insurance premiums, and property management fees.
Rental Income: Payments received by a taxpayer from tenants who rent the taxpayer’s property, including regular and advanced rent, payments for breaking a lease, expenses paid by the tenant, and the fair market value of property or services received in lieu of monetary rental payments.
Required Minimum Distribution (RMD): The amount that must be distributed each year from a retirement plan or IRA.
Residence Test: One of the tests for identifying a qualifying child as a dependent: Did the potential dependent live with the taxpayer as a member of the taxpayer’s household for more than half of the year?
Resident Alien: An individual is considered to be a U.S. resident alien if he or she meets either the Green Card Test or the Substantial Presence Test.
Residential Energy Efficient Property Credit: Taxpayers may qualify for an energy credit for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. This credit is claimed on Part II of Form 5695. This information is out of scope for the VITA/TCE programs and is included for your awareness only.
Retirement Tax Act (RTTA): Tier I Railroad Retirement Tax is the railroad retirement equivalent of social security wages and benefit amounts.
Retirement Savers Credit: A non-refundable tax credit available to certain taxpayers who contribute to a retirement plan. The credit is 10% of the amount contributed, with a maximum credit of $200. Income restrictions apply and the credit is unavailable to taxpayers above certain income levels.
Revenue Procedure: Official IRS guidance on procedures for a taxpayer to follow in complying with tax law and regulations.
Revenue Ruling: Official IRS guidance that interprets the law and regulations in regards to a specific set of facts and circumstances.
Review (Of Financials): Refers to a report issued by a CPA firm that is a step down from an audit. In a review, the firm examines a company’s financials to verify that they are free of deficiencies, but the firm does not review internal controls or fraud risks as in an audit. (Also see Audit [Of Financials])
RMD: Stands for Required Minimum Distribution. When a taxpayer has money in tax-deferred retirement accounts such as an IRA or a 401(k), they generally must start taking yearly withdrawals from those accounts when they turn age 70 1/2. The required withdrawal amount varies from year-to-year based on IRS tables.
ROBS Transaction: Stands for Rollover for Business Startup. In a ROBS transaction, a new corporation is formed, and a retirement plan is formed inside the corporation. The owner rolls over money from a different retirement account into the new plan inside the corporation. Once the money is in the new plan, the owner purchases stock in the new company. This can be a tax-free way to tap existing retirement funds to start a new business, but there are many pitfalls. ROBS transactions are on an IRS watch list as a potentially abusive tax transaction.
Rollover: A tax term that means a transfer from one retirement account to another retirement account. For example, a transfer from an IRA to a 401(k) account or vice-versa.
Roth Conversion: Refers to converting a traditional IRA into a Roth IRA. The taxpayer claims the value of the traditional IRA as income in the year of the conversion. (Also see Individual Retirement Account, Roth IRA)
Roth IRA: A type of individual retirement account in which contributions into the account are not tax-deductible, but qualified withdrawals from the account are tax-free.
Roth Recharacterization: Refers to a reversal of a Roth conversion. A recharacterization restores the IRA back to a traditional IRA and the conversion is treated as though it never happened, thus saving the taxpayer from claiming the conversion as income. The recharacterization must generally be done by October 15th of the year following the date of conversion. (Also see Roth Conversion, Traditional IRA, Roth IRA)
RTRP: Stands for “registered tax return preparer.” The IRS tried to make the RTRP program mandatory but it was struck down in the courts. The program would have required unlicensed preparers to pass an open-book test before they could prepare tax returns.
Sale of Main Home: Only a gain from the sale of a taxpayer’s main home may be excluded from the taxpayer’s income; a gain from a sale of a home that is not the taxpayer’s main home will generally have to be reported as income.
Sales Tax: A tax, levied by states, collected by businesses on the sale of certain goods and services. Sales tax is not an expense of the business. Rather, it is a tax collected from the customer by the business. The business then sends its sales tax collections to the state periodically.
Schedule A: The form on which an individual claim itemized deductions. (Also see Itemized Deductions)
Schedule C Business: Another term for a sole proprietorship. (Also see Sole Proprietorship)
Schedule H: The form used by individuals to report household employment taxes. (Also see Household Employment Taxes)
S-Corporation: A corporation that elects to be taxed under subchapter S of the Internal Revenue Code. S-Corporations are required to file an informational tax return on Form 1120-S, but generally, do not pay taxes themselves. Instead, as with a partnership, S-Corporations are “flow-through” entities, meaning the results of the corporate operations flow through to the individual shareholders, who are taxed on the corporation’s operations on their personal tax returns.
Section 121 Exclusion: Refers to the ability of most homeowners to avoid taxation on gains from the sale of their home. A homeowner who has lived in their home for at least 2 out of the 5 years prior to the sale of the home can exclude up to $250,000 of gain from the sale if single, or $500,000 of gain if married.
Section 179: A deduction, similar to depreciation, that allows a business to expense 100% of the cost of an asset in the year of purchase. A business can take the Section 179 deduction on any assets it purchases, whether new or used. The deduction is limited to the business’s net income for the year.
Section 1231/1245: Both terms refer to business assets. Section 1245 refers to depreciation taken on assets. When those assets are sold at a gain, the depreciation that has been taken over the life of the asset may need to be claimed as ordinary income in the year of the sale. Any remaining gain after depreciation recapture is treated as a Section 1231 gain, which means losses are deductible in full, while gains are treated as capital gains.
Self-employment Income: Earned income from a trade, business, farming or profession that is not paid by an employer. For example, hair stylists and lawn care workers who work for themselves (and not for someone else) are considered self-employed.
Self-employment Tax: the self-employed person’s version of FICA taxes (see also). Self-employment tax is equal to 15.3% x self-employment earnings. The full formula is: (self employment earnings x .9235) x .153. Self-employment (SE) tax is social security and Medicare taxes collected primarily from individuals who work for themselves, similar to the social security and Medicare taxes withheld from the pay of most wage earners.
Short-term Capital Gain/Loss: A capital gain resulting from the sale of an asset held for less than 1 year. Income from the sale of a short-term asset is usually treated as ordinary income and is not subject to special tax treatment, as opposed to income from long-term capital gains. (Also see Capital Gain/Loss, Long-term Capital Gain/Loss)
Single Filing Status: Filing status that applies to a taxpayer who (1) has never married, or (2) is legally separated or divorced.
Simplified Method: This method is used to calculate the tax-free portion of each pension or annuity payment.
Social Security Benefits: Payments made under Title II of the Social Security Act. They include old-age, survivors, disability insurance, and some workers’ compensation benefits.
Social Security Wage Base: The maximum amount of wages or self-employment income subject to Social Security tax (which is part of the FICA tax/self-employment tax calculation).
Sole Proprietorship: A business entity that involves one person and that is not incorporated. Results of sole proprietorship operations are reported on Schedule C, which is attached to the business owner’s personal Form 1040.
Special Enrollment Exam: Often abbreviated “SEE.” This is the 3-part test a person must pass in order to become an Enrolled Agent. (Also see Enrolled Agent)
SSA: Social Security Administration
SSB: Special separation benefits, a type of military severance payment that affects the amount of VA compensation paid.
SSN: Social Security Number
Standard Deduction: A deduction all taxpayers are entitled to, as a reduction of taxable income, on their tax return. The amount of the standard deduction depends on the taxpayers’ filing status. Taxpayers can choose between taking the standard deduction or taking itemized deductions. (Also see Itemized Deductions)
Standard Mileage Method: One of two methods for calculating business automobile expenses. For the standard mileage method, the taxpayer multiplies the business miles by the mileage rate for that tax year. (The other method is the actual expense method).
Statutory employee: If workers are independent contractors, such workers may nevertheless be treated as employees by statute (a statutory employee) for certain employment tax purposes.
Stock dividends: Stock dividends merely increase the taxpayer’s number of shares in the company and generally are not taxable.
Stock split: A stock split is a method used by corporations to lower the market price of stock. A two-for-one stock split will decrease the basis per share by half. The original basis of $200 for 100 shares becomes $200 for 200 shares.
Student Loan Interest: The interest paid during the year on a loan for qualified higher education expenses that were for the taxpayer, the taxpayer’s spouse, or a person who was the taxpayer’s dependent when the loan was obtained.
Substantial Presence Test: The criteria that an individual without a green card must meet in order to be considered a resident alien; the criteria relate to specific numbers of days physically present in the United States.
Support Test: One of the tests for identifying a qualifying child or a qualifying relative as a dependent: Did the taxpayer provide over half of the potential dependent’s total support for the year?
TAD: Temporary additional duty for military service members. (See TDY)
TANF: Temporary Assistance for Needy Families (previously known as AFDC), a state benefit also known as welfare.
Tax Credit: A dollar-for-dollar reduction in the tax. Can be deducted directly from taxes owed.
Tax Deduction: An amount (often a personal or business expense) that reduces income subject to tax.
Tax Forgiveness: For U.S. military personnel who die while serving in a combat zone or as a result of wounds, disease, or injury incurred while so serving, any unpaid tax liability is waived and any forgiven tax liability that has already been paid is refunded.
Tax Home: The country in which the taxpayer is permanently or indefinitely engaged to work as an employee or self-employed individual, regardless of where the taxpayer maintains his or her family home. For taxpayers who work abroad, but do not have a regular place of business because of the nature of the work, their tax home is the place where they regularly live.
Tax Liability (or total tax bill): The amount of tax after nonrefundable credits have been subtracted. Taxpayers meet (pay) their federal income tax liability through withholding, estimated tax payments, and payments made with the income tax return.
Taxable Income: Any income subject to federal income tax.
Tax-exempt Interest: Interest that is exempt from federal income tax such as bonds issued by state and political subdivisions (county or city), District of Columbia, and U.S. possessions and political subdivisions.
TCE: Tax Counseling for the Elderly
TDY: Temporary duty for military service members. (See TAD.)
Temporary Work Location: A work location is considered temporary if the service member’s employment is realistically expected to last (and in fact does last) for one year or less. Service members assigned to temporary work locations can deduct travel expenses.
Third-Party Designee: Person authorized by a taxpayer to discuss the taxpayer’s return with the IRS, give the IRS information missing from the return, request copies of notices or transcripts related to the return, and respond to certain IRS notices. The taxpayer designates third party by checking the Yes box and entering the person’s name, phone number, and personal identification number (PIN) in the “Third party designee” section of the return.
TIN see ITIN: Taxpayer Identification Number, same as Individual Taxpayer Identification Number
Tip Income: Money and goods received for services performed by food servers, baggage handlers, hairdressers, and others. Tips go beyond the stated amount of the bill and are given voluntarily.
Traditional IRA: An individual retirement arrangement that is not a Roth IRA or a SIMPLE IRA.
Transportation Expenses: Expenses service members incur when traveling to locations within their city or general area that is their tax home or post of duty (versus travel expenses).
Travel Expenses: Expenses service members incur when traveling away from their tax home or post of duty (versus transportation expenses).
TSP: Thrift Savings Account, retirement savings and investment plan that has been available to civilian employees of the federal government since 1987, and was made available to U.S. service personnel in 2002.
Tuition and fees: Qualified higher education expenses for which taxpayers can deduct up to $4,000 in qualified tuition and related expenses paid during the tax year. The amount of the deduction is determined by filing status, modified AGI (MAGI), and other factors. Form 8917, Tuition and Fees Deduction, will help compute the MAGI for this deduction.
Tangible Asset: An asset that can be touched or felt. Contrast with intangible asset. (Also see Asset, Intangible Asset)
Tax Exempt: A tax term relating to not-for-profit entities. An entity is tax exempt if it qualifies for exemption from income tax under one of more than 25 exclusions under Section 501 of the Internal Revenue Code. While the terms “tax exempt” and “not-for-profit” are often used interchangeably, the terms mean different things. (Also see Not-for-Profit)
Tier I/Tier II Railroad Retirement Benefits: Tier I RRB benefits are considered the equivalent of Social Security benefits and are taxed in the same manner as Social Security. Tier II RRB benefits are considered the equivalent of pension distributions and are taxed in the same manner as any other withdrawal from an IRA or pension. (Also see Railroad Retirement Benefits)
Treasury Regulations: Regulations are written by the U.S. Treasury Department and serve to interpret and expand on the tax code as passed by Congres.
U.S. Citizen or Resident Test: See Citizen or Resident Test
Unearned Income: Income other than pay for work performed. Interest and dividends from savings or investments are common types of unearned income.
Unemployment Compensation: Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. In most cases, it is taxable. Unemployment income is not considered earned income for the purposes of calculating EITC.
Unearned Income: Any income produced by investments, such as interest on savings, dividends on stocks, or rental income.
VA Disability Compensation: VA disability compensation is a monetary benefit paid to veterans who are disabled because of injury or disease incurred or aggravated during active military service.
VITA: Volunteer Income Tax Assistance
Wash sale: A wash sale occurs when a taxpayer sells or otherwise disposes of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, the taxpayer buys, acquires, or enters into a contract or option to acquire substantially identical stock or securities.
Withholding Allowance: Claimed by an employee on Form W-4. An employer uses the number of allowances claimed, together with income earned and marital status, to determine how much income tax to withhold from wages.
Withholding Tax: Income tax is withheld from the pay of most employees. Income tax may also be withheld from gambling winnings, pensions/annuities, unemployment compensation, and certain federal payments, such as social security. In some cases income tax may be withheld on other types of income such as interest or dividend income.
Withholding: Refers to income taxes and FICA taxes withheld from income before the income is paid to the recipient. For example, employers withhold taxes from wages paid to employees. The pay the employees receive is reduced by the taxes withheld from the pay. (Also see FICA)
Work Opportunity Credit: A tax credit available to businesses that employ certain individuals such as veterans or people recently released from prison.
Worldwide Income: U.S. citizens and U.S. resident aliens are required to report worldwide income on a U.S. tax return regardless of where they live and even if the income is taxed by the country in which it was earned. Filing requirements are the same as for U.S. citizens and U.S. resident aliens living in the United States and apply whether income is from within or outside the U.S.
W-2: (See Form W-2)