Learn the Meaning of Various Tax Terms and Financial Vocabulary
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Allocated tips
These are tips that your employer is required to pay to you if you work in a restaurant, cocktail lounge or similar business. The normal calculation is to first subtract the amount of reported tips of all employees from 8% of the total food and drink sales and then you get a part of this difference. The rough idea is that you deserve your share of 8% of the establishment's total food and drink sales. The rate might be lower than 8% if the employer has approval from the IRS. Ask your employer for the exact calculation of your allocated tips. You must report your allocated tips unless your actual tips are more than the sum of the tips you reported to your employer and your allocated tips.
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Alternative Minimum Tax (AMT)
IRS Tax law gives preferential treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from these provisions of the law may have to pay an additional tax called the alternative minimum tax. It is a separate tax computation that, in effect, eliminates many deductions and credits and creates a tax liability for an individual who would otherwise pay little or no tax. The adjustments and tax preference items include such things as: standard or certain itemized deductions, taxable state and local tax refunds, accelerated depreciation of certain property, intangible drilling costs, certain tax exempt interest and the difference between AMT and regular tax gain or loss on the sale of property, treatment of incentive stock options and depletion allowances.
Our application automatically determines whether or not AMT requirements apply to you.
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Basis
The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items: Sales tax; Freight; Installation and testing; Excise taxes; Legal and accounting fees (when they must be capitalized); Revenue stamps; Recording fees; Real estate taxes (if assumed for the seller).
You may also have to capitalize certain other costs related to buying or producing property.
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Capital Gains or Capital Losses
Almost everything you own and use for either personal or investment purposes is a capital asset. Examples are your house, car, stock or bonds, mutual funds, gems and jewelry, coin or stamp collections, equipment etc. When you sell or exchange a capital asset, the difference between the amount you paid for it (your basis) and your selling price is a capital gain or loss. Your basis includes any other associated costs like shipping costs, fees, commissions, installation costs etc. Capital gains and losses are classified as long-term if you held the property for more than one year, or short-term if you held the property for one year or less before selling it. If your net long-term capital gain is greater than your net short-term capital loss, you have a net long term capital gain.
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Charitable Contribution (Cash)
A cash contribution to a recognized charitable organization. The IRS requires that you maintain a written acknowledgment in your own records for each contribution of $250 or more for 3 years after you have filed your taxes. The written acknowledgment should consist of the following information: Name of the organization; Amount of cash Contribution; Statement that no goods or services were provided by the organization, if that is the case; Description and good faith estimate of the value of goods or services, if any, that organization provided in return for the contribution; and Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
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Charitable Contribution (Other than Cash)
A non-cash donation of items or services to a recognized charitable organization.The IRS requires that you maintain a written acknowledgment in your own records for each contribution of $500 or more for 3 years after you have filed your taxes. The written acknowledgment should consist of the following information: Name of the organization; Description of non-cash contribution; Statement that no goods or services were provided by the organization, if that is the case; Description and good faith estimate of the value of goods or services, if any, that organization provided in return for the contribution; and Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
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Deduction
Any item or expenditure subtracted from gross income to reduce the amount of income subject to tax. Deductions must me certain criteria to be considered "Allowable" which simply means eligable. Unlike a credit, which is applied towards tax liability, Deductions reduce the amount of taxable income.
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Dependency Exemption
Amount that taxpayers can claim for their eligible dependents. Each exemption reduces the income subject to tax. The exemption amount is a set amount that changes from year to year.
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Dependent
As of 2005 the term dependent means either a Qualifying Child or a Qualifying Relative. You are allowed an exemption for each person you claim as a dependent. You can claim an exemption for a dependent even if your dependent files a return. In order to claim an exception for a dependent, you need to satisfy the following conditions:
(a) You cannot claim any dependents if you, or your spouse if filing jointly, could be claimed as a dependent by another taxpayer.
(b) You cannot claim a married person who files a joint return as a dependent unless that joint return is only a claim for refund and there would be no tax liability for either spouse on separate returns.
(c) You cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico , for some part of the year.
(d) You cannot claim a person as a dependent unless that person is your Qualifying Child or Qualifying Relative.
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Earned Income
includes wages, salaries, tips, and net income from a business; it also includes taxable scholarship and fellowship grants.
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Electronic Filing (e-file)
The transmission of tax information directly to the IRS using telephones or computers. Electronic filing options include (1) Online self-prepared using a personal computer and tax preparation software, or (2) using a tax professional. Electronic filing may take place at the taxpayer's home, a volunteer site, the library, a financial institution, the workplace, malls and stores, or a tax professional's place of business.
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Electronic Preparation
Electronic preparation means that tax preparation software and computers are used to complete tax returns. Electronic tax preparation helps to reduce errors.
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Electronic Return Originator (ERO)
The Authorized IRS e-file Provider that originates the electronic submission of an income tax return to the IRS. EROs may originate the electronic submission of income tax returns they either prepared or collected from taxpayers. Some EROs charge a fee for submitting returns electronically.
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Eligible Educational Institution
An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution. Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
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Estimated Tax
If you're an employee, your employer withholds a part of your salary as taxes and sends it to the IRS and your state tax authority. Thus you pay taxes as you go.
But if you are self employed, or if you have income beyond what you are paid as a salary, from which taxes are not withheld, you need to estimate the amount of taxes that you owe and pay these taxes as you go. Usually you are required to pay these taxes quarterly.
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Exemption
Amount that taxpayers can claim for themselves, their spouses, and eligible dependents. There are two types of exemptions-personal and dependency. Each exemption reduces the income subject to tax. The exemption amount is a set amount that changes from year to year.
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Filing Status
The category defining the type of tax-return form an individual will use. The filing status is closely tied to marital status. These are five filing statuses:
1. Single individual.
2. Married persons filing jointly or surviving spouse. .
3. Married persons filing separately. .
4. Head of households. .
5. Qualifying widow(er) with dependent child. .
The filing status is important because a person's tax bracket (and therefore the amount he or she must pay) is determined by marital status, number of children, occupation, and several other factors. You must file your status honestly, or it will be considered fraudulent and penalties will be assessed.
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Financial Records
Spending and income records and items to keep for tax purposes, including paycheck stubs, statements of interest or dividends earned, and records of gifts, tips, and bonuses. Spending records include canceled checks, cash register receipts, credit card statements, and rent receipts.
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Head of Household filing status
You must meet the following requirements: 1. You are unmarried or considered unmarried on the last day of the year. 2. You paid more than half the cost of keeping up a home for the year. 3. A qualifying person lived with you in the home for more than half the year (except temporary absences, such as school). However, your dependent parent does not have to live with you. A foster child must live with you all year.
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Hope Credit
The Hope Credit allows up to $1500 of credit for a student enrolled at least half time for one academic period. This credit can only be claimed for 2 years, and there are income restrictions that affect eligibility. Qualified Educational expenses must be incurred at a Qualified Educational Institution and must meet the following conditions: You pay qualified education expenses of higher education; You pay the education expenses for an eligible student; The eligible student is yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
Our system automatically determines if the Hope credit can be applied, or if it would be in your best interest to claim the Lifetime Learning Credit or the Tuition and Fees deduction.
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Lifetime Learning Credit
The Lifetime Learning Credit allows up to $2000 of credit for a student enrolled in at least one course throughout the tax year. The course can be in pursuit of a secondary education credential or simply to improve job skills. Qualified Educational expenses must be incurred at a Qualified Educational Institution and must meet the following conditions: You pay qualified education expenses of higher education; You pay the education expenses for an eligible student; The eligible student is yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Only one education credit can be claimed per student on a return, you cannot claim the Lifetime Learning Credit and the Hope Credit for a single student in one tax year. .
Our system automatically determines if the Lifetime Learning credit can be applied, or if it would be in your best interest to claim the Tuition and Fees deduction or Hope Credit.
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Married Filing Joint filing status
You are married and both you and your spouse agree to file a joint return. (On a joint return, you report your combined income and deduct your combined allowable expenses.)
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Married Filing Separate filing status
You must be married. This method may benefit you if you want to be responsible only for your own tax or if this method results in less tax than a joint return. If you and your spouse do not agree to file a joint return, you may have to use this filing status.
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Ordinary Dividends
dividends are what shareholders of a company get, as their part of the share of the company's profits. If you own stocks, mutual funds, or bonds, you receive dividends from these investments. Usually these dividends are called ordinary dividends and are treated as ordinary income for tax purposes.
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Personal Exemption
Can be claimed for the taxpayer and spouse. Each personal exemption reduces the income subject to tax by the exemption amount. For 2001, the exemption amount was $2,900. A person who has been claimed or will be claimed as a dependent on a different tax return cannot claim his or her personal exemption in the same year.
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Principal Residence
Your primary place of residence, where you live more than half the year, discounting vacation and travel. You can generally avoid paying capital gains tax from the sale of your principal residence so long as you purchase another of equal or greater value that is going to be your principal residence within the same tax year.
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Property Tax
Deductible personal property taxes are only those based on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year. To be deductible, the tax must be charged to you and must have been paid during your tax year. Taxes may be claimed only as an itemized deduction.
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Qualified Dividends
Those dividends for which the issuing company has already paid a certain amount of taxes. You will therefore be taxed for these dividends at a lower rate. These are normally shown in box 1b of your 1099-DIV, barring some exceptions where items reported in box 1b are not qualified dividends.
More info at: http://www.irs.gov/businesses/small/article/0,,id=122523,00.html
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Qualified Education Expenses
For purposes of the Hope Credit, Lifetime Learning Credit, and Tuition and Fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Related expenses: Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
**If you pay qualified education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refund(s) you received.
Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses.
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Qualifying Child
In order to be considered a Qualifying Child, the child must meet the 4 tests set out by the IRS's Uniform Definition, they are as follows:
Relationship — the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these.
Residence — has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.
Age — must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.
Support — did not provide more than one-half of his/her own support for the year.
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Qualifying Person
A person that lived with you in the home for more than half the year (except for temporary absences, such as school). If the person was born or died in 2005, then the person is said to have lived with you if the person lived with you all of the time that the person was alive. However, if the qualifying person is your dependent parent, he or she does not have to live with you. A qualifying person is either a qualifying child or relative who meets one of the Qualifying tests.
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Qualifying Relative
A qualifying relative is similar to a qualifying child in that it must meet several tests. Generally speaking, the Qualifying relative is a dependent adult as opposed to a qualifying child and must meet similar tests. They are as follows:
Gross Income – The dependent earns less than $3,200 in income during the year,
Total Support –You provide more than half of the dependent's total support during the year,
Relationship – They must be related as a son or daughter, grandson or granddaughter, stepson or stepdaughter, or adopted child, brother or sister, half- brother or half-sister, step-brother or step-sister, mother or father, grandparent, stepmother or stepfather, nephew or niece, aunt or uncle, son-in-law, daughter-in- law, brother-in-law, sister-in-law, father-in-law, or mother-in-law, or foster child by court order or by a government agency.
Joint Return– If the dependent is married, he/she cannot file a joint return with his/her spouse.
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Qualifying Widow(er) with Dependent Child filing status
You can use this status if all of the following apply: Your spouse died in the last two years and you did not/will not remarry this year . You have a child, adopted child, stepchild, or foster child whom you will claim as a dependent. This child will live in your home for all of this year . You will pay over half the cost of keeping up your home. You could have filed a joint return with your spouse the year he or she died, even if you did not actually do so.
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Railroad Retirement Benefits
The Railroad Retirement Board (or RRB) is an agency of the United States government created in the 1930s which established a retirement benefit program for the country's railroad workers. Today, the RRB serves railroad workers and their families and administers retirement, survivor, unemployment, and sickness benefits. Railroad workers do not pay money into Social Security nor do they receive Social Security Benefits.
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Refundable Credit Vs. NonRefundable Credit
A Refundable tax credit is not limited by the amount of an individual's tax liability (i.e. Earned Income Credit, Child Tax Credit). A nonrefundable tax credit is only capable of reducing an individual's tax liability to zero(i.e.Credits of Education, Credit for the Elderly and Disabled. Refundable credits go beyond this and so really can be considered the same as a payment.
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Self-employment Profit/Loss
Self-employment income minus self-employment expenses. When the self-employment income is greater than expenses, the result is Self-employment profit, when Self-employment expenses are greater, the result is Self-employment Loss.
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Self-employment Tax
Similar to Social Security and Medicare taxes. The self-employment tax rate is 15.3 percent of self-employment profit. The self-employment tax is calculated on Schedule SE. The self-employment tax is reported on Form 1040.
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Single filing status
If on the last day of the year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree and you do not qualify for another filing status.
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Support
For dependency test purposes, support includes food, clothing, shelter, education, medical and dental care, recreation, and transportation. It also includes welfare, food stamps, and housing provided by the state. Support includes all income, taxable and nontaxable.
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Tax Avoidance
An action taken to lessen tax liability and maximize after-tax income.
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Tax Bracket
The rate at which an individual is taxed due to a particular income level. Generally a higher income results in a higher tax rate.
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Tax Evasion
A failure to pay or a deliberate underpayment of taxes, punishable by IRS sanction and prosecution, etc.
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Tax Liability
The amount of tax that must be paid. Taxpayers meet (or pay) their federal income tax liability through withholding, estimated tax payments, and payments made with the tax forms they file with the government.
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Tax-exempt Interest Income
Interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by states, cities, or counties and the District of Columbia.
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Taxable Interest Income
Generally, any interest that you receive, or that is credited to your account and can be withdrawn, is considered income that is taxable. Examples of taxable interest are interest on bank accounts, money market accuracy certificates, and deposited insurance dividends. Interest on insurance dividends you leave on deposit with the Department of Veterans Affairs, however, is not taxable. Interest on Series EE and Series I U.S. Savings bonds generally does not have to be reported until you redeem or dispose of the bonds or until they mature. Interest from these bonds may be excluded from income if you pay qualified higher educational expenses during the year. Interest on municipal bonds are non-taxable. If your 1099-INT has the words “Income not reported to IRS” or “Details of 1099 tax exempt interest” then that interest is not taxable.
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Tip Income
This refers to cash tips you get directly from customers, tips from customers using charge cards that your employer pays you, and the value of any non-cash tips you get, such as tickets, passes, or other items of value. If your total tips for a month are less than $20, you do not have to report it to your employer. Any other tips you receive should be reported to your employer so that Social security, medicare tax and railroad retirement tax can be withheld from your tip income.
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Tuition and Fees Deduction
The Tuition and Fees deductions may reduce your tax liability by up to $4000 dollars. The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the deduction is allowed for qualified education expenses and must meet the following conditions: You pay qualified education expenses of higher education; You pay the education expenses for an eligible student; The eligible student is yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
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Unearned Income
includes interest, dividends, capital gains, unemployment compensation, taxable Social Security benefits, pensions, annuities, and trust distributions.
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Withholding ("Pay-as-you-earn")
Money, for example, that employers withhold from employees paychecks. This money is deposited for the government. (It will be credited against the employees' tax liability when they file their returns.) Employers withhold money for federal income taxes, Social Security taxes and state and local income taxes in some states and localities. Total withholding amounts are listed on the W2 form that the employer issues at the end of the tax year.
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