Tax Glossary
Tax Glossary: Understanding Important Tax Terms
At NPBC Accounting & Tax, PC, we understand that navigating the world of taxes can be complex. To help you better understand important tax terminology, we have compiled a comprehensive tax glossary.
This user-friendly guide provides explanations and definitions of key tax terms, empowering you to enhance your tax knowledge and make more informed financial decisions.
A
- Accrual method: Accounting method that reports income when earned (not necessarily received) and expenses when incurred (not necessarily paid), as opposed to the cash method.
- 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: A credit that may be taken if the full amount of the child tax credit cannot be claimed.
- 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. In order 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
- Adjusted Gross Income (AGI): The total income from all sources minus specific deductions, such as student loan interest or contributions to retirement accounts. AGI is used to determine eligibility for certain deductions and tax credits.
- 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.
B
- BAH: Basic allowance for housing, a type of excludable military income.
- BAS: Basic allowance for subsistence, a type of excludable military income.
- 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.
- 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.
C
- 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.
- Capital Gain or Loss: Sale of stock, mutual funds, and the sale of a personal residence. The Capital Gain or Loss lesson will help you identify the asset’s holding period, adjusted basis, net short-term and long-term capital gains or losses, the taxable gain or deductible loss, the tax liability, and the amount of any capital loss carryover.
- Capital Gain Distributions: Capital gains passed to investors typically by Mutual funds (regulated investment companies) and real estate investment trusts (REITs)
- Capital Gains: See Capital Gain Distributions
- 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.
- Cash Method: Accounting method that reports income when constructively received (not earned) and expenses when paid (not incurred), as opposed to the accrual method.
- 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.
- Child Tax Credit: A credit that may reduce tax by as much as $1,000 for each qualifying child.
- 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.
- Cost basis: An amount for which taxes have already been paid.
- Coverdell ESA: A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the designated beneficiary of the account.
- Credit: A direct reduction of the taxpayer’s liability. Credits are allowed for such purposes as childcare 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.
D
- 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 transaction is the date that determines the exchange rate to use.
- Deduction: An expense or amount that can be subtracted from gross income, reducing the taxable income and potentially lowering the overall tax liability.
- 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.
- Dependent: Someone who meets all applicable dependency tests to be claimed as a dependent.
- Dependent Care Benefits: These benefits include amounts employers pay to a taxpayer or directly to the care provider.
- 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.
- Domicile: A taxpayer’s legal, permanent residence. It is not always where the person presently lives.
- 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 new 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.
E
- 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 credit that can be paid to low-income workers, even if no income tax was withheld from the worker’s pay. To receive the credit, a taxpayer must file a tax return. Unemployment income is not considered earned income for the purposes of calculating EITC.
- 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.
- EIC: Earned income credit.
- EITC: Earned Income Tax Credit. See EIC.
- 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.
- 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: An amount that can be deducted from the total taxable income for the taxpayer, spouse, and dependents, reducing the taxable income and resulting tax liability.
G
Gross Income: This is all income received in the form of money, goods, property, and services that is not exempt from tax.
H
- Head of Household Filing Status: This filing status is generally for unmarried taxpayers who paid more than half the cost of keeping up a home for a qualified dependent relative during the tax year.
- 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.
- 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.
I
- 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: People who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax.
- 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.
- Individual Retirement Arrangement (IRA): A tax-sheltered retirement savings plan set up by the taxpayer.
- 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.
- 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.
- Itemized Deductions: Eligible expenses, such as medical expenses, state and local taxes, mortgage interest, and charitable contributions, that can be deducted from taxable income if the taxpayer chooses to itemize deductions instead of taking the standard deduction.
- ITIN: Individual taxpayer identification number, issued by the IRS to individuals who are not eligible for a social security number.
L
- 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: One of two tax credits available to offset costs of higher education by reducing the amount of income tax. The Lifetime Learning credit is a nonrefundable credit of up to $2,000 for qualified education expenses for students enrolled in eligible educational institutions. It is available to students for all years of postsecondary education and for courses to acquire or improve job skills.
- Lump-sum Distribution: A lump-sum distribution is the 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.
M
- 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: Modified Accelerated Cost Recovery System, a method for calculating a taxpayer’s depreciation deduction that uses the property’s placed-in-service date, recovery period, and depreciable basis.
- Married Filing Jointly: Filing status for taxpayers who are married to each other or live together in a common law marriage and combine their income and deductions on the same tax return. The status also applies to taxpayers who are separated but not divorced and to taxpayers whose spouse died during the tax year and has not remarried, as long as one tax return is used for both individuals.
- Married Filing Separately: Filing status for taxpayers who are married to each other or live together in a common law marriage and report their own incomes and deductions on separate returns.
- 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?
- 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.
- Mutual Funds: 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.
N
- 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.
O
- OHA: Overseas housing allowance, a type of excludable military income.
- Ordinary Dividends: Corporate distributions paid out of the earnings and profits of the corporation.
P
- Paid Preparers: Paid preparers are legally liable under federal law for the returns they prepare; volunteers are not.
- Passive Activity:When a taxpayer receives income mainly from the use of property rather than for services. Passive activity means the taxpayer is not involved in making significant rental or business management decisions (versus active participation). Because rental activities are generally considered passive activities, rental losses may not fully deductible.
- Passive Income: Taxable income that comes from passive activity, such as dividends, interest, royalties, rents, and annuities.
- Payroll Tax: A percentage of an employee’s paycheck withheld by an employer and paid to the government on their behalf for Medicare, Social Security programs and income taxes.
- 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 return. 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.
- 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.
Q
- 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.
R
- Railroad Retirement Benefits (RRBs): Benefits paid to railroad retirees covered by the Railroad Retirement Act. The RRA has two components. Tier 1 is the equivalent of social security benefits and Tier 2 is like an employer’s pension plan.
- Recourse Debt: Recourse debt holds the borrower personally liable for any amount not satisfied by the surrender of 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.
- 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 Savings Contributions Credit: The retirement savings contributions credit is a nonrefundable credit a qualifying taxpayer may claim if they made a contribution to a qualified plan.
- Retirement Tax Act (RTTA): Tier I Railroad Retirement Tax is the railroad retirement equivalent of social security wages and benefit amounts.
- Rollover: Generally, a rollover is a tax-free distribution to the taxpayer from one retirement account (traditional IRA or employer’s pension plan) that rolls over into a similar retirement account within 60 days.
S
- 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.
- Self-employment Income: Earned income from a trade, business, farming or profession that is not paid by an employer. For example, hair stylists and lawncare workers who work for themselves (and not for someone else) are considered self-employed.
- Self-employment Tax: 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.
- 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.
- 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: An amount, provided by law and based on filing status, age, blindness, and dependency that taxpayers can deduct from their adjusted gross income before tax is determined.
- 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.
T
- 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, a 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.
U
- 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.
V
- 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
W
- 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: The amount of income tax that is automatically deducted from an employee’s wages or a taxpayer’s income to meet tax obligations throughout the year.
- Worldwide Income: 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.
