Basic Income Tax Vocabulary

Front 1

Accelerated Cost Recover System (ACRS)

Back 1

The System of depreciation in effect from 1981 through 1986. The Tax Reform Act of 1986 contained several changes to the rules for property placed in service after 1986.

Front 2

Accelerated Depreciation

Back 2

Varius methods of depreciation that yield larger deductions in the earlier years of the life of an asset that does the straight-line method. The double (or 200%) declining balance method is an example of an accelerated depreciation method.

Front 3

Accountable Plan

Back 3

A plan for reimbursing employees for expenses such as meals, entertainment, travel, and transportation incurred for business purposes on behalf of the employer. A plan is an accountable plan if the employer requires the employee to account for all business expenses and to return any excess reimbursements. For employees under an accountable plan, reimbursements are not entered on the tax return as income and the expenses are not deductible.

Front 4

Accounting Method

Back 4

The method under which a taxpayer uses to determine for tax purposes. Major accounting methods are the cash method and the accrual method.

Front 5

Accounting Period

Back 5

The 12-month period which a taxpayer uses to determine federal income tax liability. Unless a taxpayer makes a specifice choice to the contrary, his accounting period is the calendar year.

Front 6

Accrual Method of Accounting

Back 6

One of the two most common methods of accounting, the other being the cash method. Under the accrual method of accounting, income is reported in the tax year earned, whether of not received, and deductions are claimed in the tax year incurred, whether or not paid.

Front 7

Accrued Interest

Back 7

Interest that has been earned but not yet paid or credited; for example, interest earned on a bond since the last interest payment was made.

Front 8

Acquisition Debt

Back 8

Debt incurred to acquire, construct, or improve the taxpayer's principal or secondary residence.

Front 9

Active Income and Losses

Back 9

For purposes of the passive loss rules, income and losses must be divided into three categories: active, passive, and portfolio. Active income and losses are those for which the taxpayer performs services. Examples are wages, salaries, tips, bonuses, and income and losses from business and partnership activities in which the taxpayer materially participates.

Front 10

Active Participant

Back 10

A taxpayer who is covered by a qualified employer-maintained retirement plan, or a qualified self-employed retirement plan, if even for only one day during the year.

Front 11

Actual Expenses (Regular Method)

Back 11

The method of deducting automobile expenses based on actual costs incurred.

Front 12

Additional Child Tax Credit

Back 12

A refundable credit available to taxpayers with earned income exceeding $11,000 or with three or more qualifying children and whose regular child tax credit exceeds tax liabilities minus other nonrefundable credits. The additional child tax credit is computed on Form 8812.

Front 13

Adjusted Basis

Back 13

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

Front 14

Adjusted Gross Income (AGI)

Back 14

Adjusted gross income equals gross income less reductions that are allowable regardless of whether personal deductions are itemized. On the 2005 tax forms, AGI is entered on line 4, Form 1040EZ; line 21, Form 1040A; and line 37, Form 1040.

Front 15

Adjustment to Income

Back 15

An expense which may be deducted even if the taxpayer does not itemize deductions. Adjustments to income are subtracted from gross income to arrive at adjusted gross income.

Front 16

Adoption Credit

Back 16

A nonrefundable credit for qualified adoption expenses incurred for each eligible child. The credit cannot exceed $10,630 per child (for 2005). The limit is a per-child limit, nolt an annual limit, and can be carried forward for up to five years or until used.

Front 17

Advance Earned Income Credit

Back 17

Payment by an employer based on an employee's claim to entitlement to the earned income credit. Advance earned income credit payments are treated as additional taxes on the tax return.

Front 18

Alimony Payments

Back 18

Payments made by one spouse to the other spouse former spouse under a written separation or divorce instrument. Qualified alimony and separate maintenance payments are includable in the gross income of the recipient and are deductible by the payer. Child support payments and property settlements are not treated as alimony.

Front 19

Alternate (Straight-line) Method

Back 19

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

Front 20

Alternative Minimum Tax

Back 20

The alternative minimum tax was designed to prevent higher-income taxpayers from escaping taxation through excessive use of certain tax breaks. A taxpayer may be subject to this tax if he has certain minimum tax adjustments or tax preference items and his alternative minimum taxable income exceeds the exemption allowed for his filing status and income level. The alternative minimum tax is computed on Form 6251.

Front 21

Credits

Back 21

Reductions of tax liability allowed for various purposes to taxpayers who meet the qualifications. Some credits are refundable; that is, the IRS will send the taxpayer a refund for any amount in excess of the tax liability. Some credits are nonrefundable; that is, they can only reduce tax liability to zero. Some credits may be carried to other tax years.

Front 22

Earned Income

Back 22

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

Front 23

Exemption

Back 23

An amount ($3,200 for 2005) allowed by law as a reduction of income that would otherwise be taxed.

Front 24

Federal Income Tax Withheld

Back 24

The amount taken out of income by the payer and submitted to the IRS as an advance payment of the taxpayer's federal income tax.

Front 25

Gross Income

Back 25

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

Front 26

Income

Back 26

The word "income," in its broad sense, is the gain derived from capital, labor, or a combination of the two. It is distinguishable from the capital itself. Ordinarily, for income tax purposes, the word "income" is not used alone. Rather it is used within such descriptive terms as gross income, taxable income, and adjusted gross income, all of which are defined elsewhere in this glossary.

Front 27

Medicare Part A (Medicare Tax Liability)

Back 27

The medicare tax taken out of an employee's wages, or the same tax paid by a self-employed person on net self-employment income. The medicare A tax rate is 1.45% of gross wages (2.9% for self-employed individuals).

Front 28

Social Security Tax Withheld

Back 28

The employee's share of social security tax that was taken out of the employee's pay and submitted along with the employer's share to the IRS by the employer. Both the employee and the employer pay 6.2% of the first $90,000 of the employee's gross wages (for 2005).

Front 29

Social Security Wages

Back 29

Total wages paid to an employee that are subject to this tax. This amount does not include tips. Wages are also subject to medicare tax.

Front 30

Tax Liability

Back 30

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

Front 31

Taxable Income

Back 31

Adjusted gross income less itemized deductions or the standard deduction, less allowable personal and dependent exemption amounts. This term is also used to refer to income that is not exempt or excluded from taxation. For example, "Wages are taxable income, but gifts are not."

Front 32

Unearned Income

Back 32

Taxable income other than that received for services performed (earned income). Unearned income includes money received for the investment of money or other property, such as interest, dividends, and royalties. It also includes pensions, alimony, unemployment compensation, and other income that is not earned.

Front 33

Common-Law Marriage

Back 33

A marriage established in a state that legally recognizes non-ceremonial marriages. The parties must have the legal capacity and the intent to marry, and must live together and present themselves publicly as husband and wife.

Front 34

Community Income

Back 34

Income of a married couple, living in a community property state, that is considered to belong equally to each spouse, regardless of which spouse receives the income.

Front 35

Community Property

Back 35

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

Front 36

Dependent

Back 36

An individual whose personal exemption may be claimed on another person's income tax return. To be claimed as a dependent, a person must meet certain tests.

Front 37

Tip Income

Back 37

Gratuities received by the taxpayer for services rendered. Tips of $20 or more from any one job during a calendar month must be reported to the taxpayer's employer.

Front 38

Custodial Parent

Back 38

The parent with whom a child lives for more than half the year.

Front 39

Eligible Foster Child

Back 39

A child, other than the taxpayer's biological child, stepchild, or adopted child, who was placed with the taxpayer by an authorized placement agency or by a court order, decree, or judgement.

Front 40

Fair Rental Value

Back 40

the amount the owner of property could reasonably expect to receive from a stranger for the same type of lodging; generally, the amount at which a home with its furnishings could be rented to a similar size family in a similar location.

Front 41

Full-Time Student

Back 41

An individual who is enrolled in a school for the number of hours or courses by the school to be full-time. School included elementary & secondary schools, post-secondary colleges & technical & trade schools. It does not include on-the-job training, correspondence schools or night school. However, a student will not be disqualified by night classes that are part of a full-time course of study.

Front 42

Non-custodial Parent

Back 42

The parent who doesn't have physical custody of the child.

Front 43

Permanent & Total Disability

Back 43

A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment that is expected to result in death or that has lasted or is expected to last for a continuous period of not less than 12 months.

Front 44

Physical Custody

Back 44

The taxpayer with whom a child lives is considered to have physical custody, regardless of who has nominal legal custody.

Front 45

Principal Place of Abode
(Principal Residencd)

Back 45

The place that an individual considers to be his permanent home. A person's abode doesn't change when he is temporarily absent due to illness, school, military service, etc., as long as his living area is maintained & he can reasonably be expected to return home after the temporary absence.

Front 46

Qualifying Child

Back 46

For 2005, and later years, a child who meets the relationship, residency, and age tests with regard to a taxpayer determine the taxpayers eligibility to claim the dependency exemption, child tax credit, earned income credit, or child and dependent care with regard to the child, or to the use of H/H filing status. The rests are discussed in detail in Chap. 3. Prior to 2005, separate sets of tests were used for each tax purpose.