Tax Glossary

BAH and BAS - Excludable income for Military Members

The IRS allows members of the Armed Services to exclude certain cash benefits from their gross income for tax purposes. These income exclusions include the basic allowance for housing (BAH) and basic allowance for subsistence (BAS). Excludable income is not subject to federal income tax, and usually does not have to be reported on a person's tax return.

Basis

To determine whether you had a capital gain or loss from the sale of property like a home, stocks, artwork, musical instruments or virtual currency, you need to know your basis in the property. Basis is essentially a measure of your total investment. If you purchase or build property, then your basis is typically the purchase price or building cost, including fees and commissions. If you trade for property, then your basis may be the fair market value (FMV) of either the property you give up or the property you receive. In these scenarios, your basis may be called cost basis. For inherited or gifted property, your initial basis may be determined by its FMV, the previous owner's basis or other factors. Some activities, such as making improvements to a building or claiming depreciation deductions, can increase or decrease your basis in an asset. In these cases, you may need to determine your adjusted basis.

Before-Tax Contributions - see Pre-Tax Contributions. Bequeath / Bequeathal / Bequest

These terms usually refer to the act of passing property along to heirs, or otherwise giving it away as instructed in a deceased person's will. For example, if Armon's last will dictates that $200,000 of his assets are to be given to the local library upon his death, then Armon has bequeathed this money to the library. Similarly, if Armon's son and daughter receive his house as an inheritance, then Armon bequeathed the home to them. In both cases, the transferred property is called a bequeathal or bequest. Bequests in excess of the donor's lifetime exclusion may be subject to gift and estate tax.

Blocked income

Generally, U.S. citizens and residents must report and pay tax on their foreign income in U.S. dollars. In some cases, however, foreign income cannot be readily converted into U.S. dollars due to laws or other restrictions imposed by a foreign government. The IRS calls this non-convertible income blocked income. In most cases, people may choose to either report and pay tax on blocked income, or defer reporting and paying tax on the income until it is unblocked. If you choose to defer paying tax on blocked income, then you generally must submit an information return called a Report of Deferrable Foreign Income, to explain the situation to the IRS.

Bona Fide Residence (or Residency) Test

The IRS applies multiple tests to determine whether a person qualifies for the foreign earned income exclusion. The bona fide residence test generally requires people to prove that they have set up a permanent residence in a foreign country and maintained it for an entire, uninterrupted year. Depending on details of their period of stay in a foreign country, people who do not meet this test may still qualify for the exclusion based on the physical presence test.

Bonus Depreciation

Also called accelerated depreciation, bonus depreciation allows businesses and self-employed people to deduct the cost of capital business expenses more quickly than standard depreciation rules would allow. For example, a business that qualifies for bonus depreciation might be able to deduct 50% or more of the cost of new machinery during the year when it was first put into service. The business would then take smaller depreciation deductions throughout the remaining years of the machinery's useful life.

Book Value (of a Capital Asset)

The book value of capital property is the theoretical remaining value of the asset, as indicated by depreciation deductions. Generally, book value is equal to the owner's basis minus those deductions. For example, suppose that you purchase business equipment at a total cost of $15,000. You claim a $2,600 depreciation deduction for the equipment in each of the first three years after putting it in service, for a total of $2,600 X 3 = $7,800 in deductions. After those three years, the book value of the equipment would generally be $15,000 - $7,800 = $7,200. At the end of the recovery period for an asset, its book value should equal its salvage value.

Business Entity or Business Entity Type

A business entity (or business structure) is a legal framework for the ownership of an enterprise. The type of entity established affects not only how a business is taxed, but also how well the owners' personal assets are protected from a business failure or legal action against the company. The most commonly used business entities are sole proprietorships, partnerships, limited liability partnerships (LLPs), limited liability companies (LLCs), S corporations, C corporations and nonprofit organizations. Setting up a business entity other than a sole proprietorship often requires the assistance of both a tax professional and a business attorney.

Business Expenses - Basic IRS Rules

People with business income, including sole proprietors, independent contractors, self-employed freelancers and many gig economy workers, may generally deduct business expenses on their tax returns. These deductions reduce tax liability by lowering the net profit of a person or business. IRS rules state that in order to be deductible, an expense must be "ordinary and necessary" to conduct a trade or business. There is no precise definition of these terms, but the basic ideas are:

Ordinary: Broadly, this term means that the expense is common within a particular trade or industry. For example, purchasing sheet metal would be ordinary for a welder, but not for a freelance writer. The more unusual an expenditure is within your field, the better prepared you should be to show how it contributes to your ability to earn income.

Necessary: To qualify as "necessary," a business expense does not have to be absolutely indispensable. However, it does need to have a clear connection to the ongoing success of your business or self-employment activities.

Business Income

For tax purposes, this term refers to income not only from formal business ownership, but also from a broad range of self-employment activities. These activities may include freelancing, gig economy work, or work as an independent contractor or artist. Note that if you accept goods, property or services as forms of payment in the course of your business activities, you generally must include the fair market value (FMV) of those payments in your business income. Business income may be subject to both income tax and self-employment tax. People with significant business income may need to make quarterly estimated tax payments to avoid tax penalties.

Business Structure - see Business Entity. Business Use of a Home - see Home Office Deduction. Business Vehicle Expense Deduction

Business owners and self-employed people may generally deduct expenses related to business use of one or more vehicles on their tax returns. This deduction may generally be calculated either by tracking and reporting actual expenses in detail, or by using the IRS standard mileage rate.

Cafeteria Plan / Cafeteria Benefits Plan / Cafeteria 125 Plan

The term cafeteria plan refers to a variety of employer-sponsored benefit packages with optional participation, and rules based on Section 125 of the federal tax code. Cafeteria plans often include tax-advantaged accounts that can be funded with pre-tax contributions, such as flexible spending arrangements (FSAs), health savings accounts (HSAs) and 401(k) plans. Some employers also offer cafeteria plans for term life insurance, adoption costs or dependent care expenses.

Capital Asset / Capital Property (Personal)

The terms capital asset and capital property generally refer to property held as an investment and/or used to generate income. Examples of personal capital property include real estate, artwork, stocks and virtual currency. Selling capital property may result in a capital gain or loss.

Capital Business Asset / Capital Business Property

A capital business asset, or capital business property, is any capital asset that is either held by a business entity (like an LLC or corporation), or used by an individual for business purposes. Common examples of capital business property include financial assets, intangible assets like intellectual property, and fixed assets like buildings, machinery, furniture and computers. Selling capital business property may result in a capital gain or loss, and possibly the need to report a depreciation recapture. Also see Capital Business Expense.

Capital Business Expense

The IRS divides business expenses into two main categories: operating (or ordinary) expenses and capital expenses. The category of capital expenses includes costs associated with acquiring capital business assets, including not only purchase prices but also required taxes, commissions and fees. Under standard IRS rules, a capital expense cannot be deducted all at once. Instead, the cost usually must be recovered gradually, through depreciation deductions. However, some capital assets may qualify for bonus depreciation, or for a one-time Section 179 Expense deduction.

Capital Gain or Capital Loss

The sale of real estate, stocks, antiques, musical instruments, mutual funds, virtual currency, artwork, capital business property or other long-term investment assets may result in a capital gain or capital loss. The amount of gain or loss is the difference between your basis or adjusted basis in the property, and the amount realized in the sale (the selling price minus necessary expenses). If the amount realized is greater than your basis, then you generally must report a capital gain, which may be subject to capital gains tax. If your basis is greater than the amount realized, then you may have a capital loss that can be used to offset capital gains or other income, reducing your tax liability. Capital gains and losses are classified as either short-term or long-term:

Short-term capital gain or loss: This classification generally applies to a gain or loss from the sale of property held for a year or less. Long-term capital gain or loss: This classification generally applies to a gain or loss resulting from the sale of property held for more than a year. Capital Gain Distributions

Certain investment portfolios and packages, such as mutual funds and real estate investment trusts (REITs), distribute capital gains to investors. Recipients of these capital gain distributions generally must report the income on their personal tax returns. Capital gain distributions are usually taxed at the long-term capital gains tax rate. Also see Capital Gains Tax, along with long-term capital gain or loss under Capital Gain or Capital Loss.

Capital Gains Tax

The IRS and many states assess capital gains tax on income derived from the sale of investment or business property. The rules for capital gains tax may differ significantly from the tax rules for other income. To determine whether you owe capital gains tax, first calculate your net capital gain or net capital loss for the year. The tax rate that applies to a net gain will depend on your adjusted gross income (AGI), and on how long you held the property in question. Also see short-term capital gain or loss and long-term capital gain or loss under Capital Gain or Capital Loss, and Capital Gains Tax Rate.

Capital Gains Tax Rate

This term usually refers to special tax rates applied to long-term capital gains. By contrast, short-term capital gains are generally taxed as ordinary income. Also see long-term capital gain or loss under Capital Gain or Capital Loss.

Capital Loss Carryover

The IRS generally limits the dollar value of capital losses that people can use to offset other income, reducing their tax liability. The maximum loss that can be used as an offset during a particular year is referred to as the capital loss deduction limit. In most cases, losses above the limit may be carried forward to future years. You may generally repeat this capital loss carryover process until excess losses get completely used up.

Capital Loss - see Capital Gain or Capital Loss. Capital Loss Deduction Limit

The IRS limits the extent to which people can use capital losses to offset other income, reducing their tax liability. The maximum dollar value of losses that may be used for this purpose is known as the capital loss deduction limit. Also see Capital Loss Carryover.

Capitalization of Expenses

Rather than being claimed on a single tax return, certain deductible expenses must be divided up between multiple tax years. For example, a self-employed person might claim a deduction for 1/4 of a particular business expense in each of four consecutive years. This process is called capitalization of the expense. The most common forms of expense capitalization are depreciation and amortization.

Cash Accounting

Cash accounting is one of two major bookkeeping techniques that businesses may use for tax purposes (the other being accrual accounting). With cash accounting, a business or self-employed person reports income when it is constructively received, regardless of the date of the underlying transaction. Similarly, most expenses are recorded when they are paid, regardless when they are incurred. Many businesses that generally qualify to use cash accounting for tax purposes must use accrual methods for a few specific situations, such as inventory accounting. In such cases, the IRS may allow hybrid accounting, which involves using accrual bookkeeping for limited purposes, and cash accounting for all other transactions.

C Corporation

Also called a traditional or true corporation, a C corporation is a business entity that, for tax and legal purposes, exists separately from its owners or shareholders. C corporations generally must pay corporate income tax, which can lead to double taxation. However, the C corporation structure also provides the highest degree of personal asset protection for shareowners in the event of a business failure, lawsuit or other legal action against the company.

Charitable Contributions / Charitable Donations Deduction

People who itemize deductions may claim a tax deduction for contributions they make to qualifying nonprofit charities. The maximum allowed deduction for charitable donations is typically based on a percentage of a person's adjusted gross income (AGI). Contributions in excess of the deduction limit may generally be carried over to the next tax year. Generally, people who use the standard deduction cannot deduct charitable contributions, except in years when special IRS rules apply. Corporations may also deduct charitable contributions, up to an annual limit based on the company's taxable income.

Child and Dependent Care Credit

The IRS offers this credit to people who pay for the care of a qualifying child under the age of 13, or the care of other dependents of any age who cannot care for themselves. To be eligible for this credit, a person must have earned income, and must pay the care expenses to make it possible to work or seek work. Based on a person's income, the credit may be as high as 50% of qualifying care expenses.

Child Tax Credit (CTC)

People with adjusted gross incomes below a limit set by Congress may claim the Child Tax Credit (CTC) for each of their qualifying children. This credit can reduce an individual or married couple's tax by thousands of dollars. Depending on current laws, the CTC may be a nonrefundable credit, partially refundable credit, or entirely refundable credit. Also see Additional Child Tax Credit.

Children's Health Insurance Program (CHIP)

This federal government program provides low-cost healthcare coverage to children in families whose incomes are too high to qualify for Medicaid, but too low to purchase health insurance. Some states also allow families with slightly higher incomes to buy into CHIP coverage for an increased premium amount. Any premiums that a family pays for such a CHIP buy-in program may qualify for the Premium Tax Credit (PTC) under the Affordable Care Act (ACA).

Citizen or Resident Test / Citizenship or Residency Test

Some tax credits and deductions are available only to people who claim a qualifying child or other qualifying relative as a dependent. One of the tests the IRS uses to determine whether a person is a qualifying dependent is the citizenship or residency test. In general, this test requires that the person be a U.S. citizen for some part of the year, and/or live in the U.S., Canada or Mexico for some part of the year.

Clean Vehicle Credit - see Qualified Plug-In Electric Drive Motor Vehicle Credit. Combat Zone (Special Tax Rules for Armed Services Personnel)

Members of the U.S. Armed Forces who serve in a designated combat zone may typically exclude military pay from their taxable income. However, eligible military personnel may instead elect to include combat pay in their reported income for the purpose of qualifying for the Earned Income Tax Credit. In general, a combat zone is any area that (1) the President of the United States designates by Executive Order as an area in which U.S. forces are engaged in combat; (2) the Department of Defense has certified for combat zone tax benefits; or (3) has been established by statute as a Qualified Hazardous Duty Area where service members receive imminent danger pay.

Compensation

For tax purposes, the term compensation refers to a wide range of benefits that a person might receive for work or business activities. Forms of potentially taxable compensation include wages, salaries, commissions, tips, bonuses, royalties, professional fees, earnings from self-employment, and various non-monetary benefits like free housing or free personal use of a company vehicle.

Community Income

This term refers to income received by either spouse in a married couple whose domicile is a community property state.

Community Property State

A community property law holds that any assets or property acquired by either spouse during a marriage belongs equally to both spouses. States that operate under laws of this type are called community property states. Some IRS rules apply differently for married couples in community property states than for couples in other states. These differences may affect both couples who file joint returns and those whose filing status is married filing separately.

Constructively Received

In tax accounting, income and other payments are considered constructively received when they become available to the recipient (or recipient's agent) without restriction. In other words, you have constructively received income if you have full control over the money or property, even if you have not yet converted it to cash or deposited it into an account. If your business uses cash accounting, you should generally report all income on the date it was constructively received.

Contractor - see Independent Contractor, and also Employee vs. Independent Contractor. Conversion (of Retirement Account) - see IRA Conversion. Contribution Limit - see Annual Contribution Limits. Corporate Income Tax

This term refers to federal or state income tax paid by C corporations. Corporate income taxes have their own tax rates and tax brackets, separate from the rates and brackets for individuals.

Cost basis

Cost basis generally refers to a person's or company's initial investment in a capital asset. In most cases, cost basis is the total amount paid to acquire the property, including any required taxes, fees or commissions. However, your cost basis for a particular asset could also be based on the fair market value (FMV) of the property when you took possession of it, the former owner's basis, or the FMV of any goods, services or property that you exchanged for it. Cost basis plays a critical role in calculating a capital gain or capital loss. Also see Adjusted Basis.

Cost of Goods Sold (COGS)

An important component of inventory accounting, cost of goods sold (COGS) represents the total amount that a business or self-employed person paid to acquire or manufacture the products that they sold in a given year. Generally, COGS is subtracted from gross revenue to compute the gross profit of a business. As a simple example, if you purchase a single item for $350 and then sell it for $525, your COGS is $350, your gross revenue is $525, and your gross profit is $525 - $350 = $175.

Coverdell Education Savings Account (ESA)

A Coverdell ESA is a tax-advantaged account created for the purpose of paying the qualified education expenses of a designated beneficiary. Qualified education expenses typically include tuition and school fees, along with certain other required purchases like books and supplies. Individuals may make after-tax contributions to an ESA if their adjusted gross income (AGI) is below a specified limit, while trusts and corporations may generally contribute to ESAs regardless of their income. The beneficiary of an ESA may subsequently take tax-free withdrawals from the account to pay qualified education expenses. Overall, a Coverdell ESA works similarly to a qualified tuition program plan, also called a Section 529 plan.

Credit - see Tax Credit. Credit for the Elderly or Disabled

This nonrefundable tax credit is available to people who are 65 years old or older, or retired due to permanent disability, and have incomes below a limit set by the IRS. Because the credit is nonrefundable, it can reduce or eliminate a person's tax bill, but cannot generate an IRS refund.

Credit for Other Dependents

This nonrefundable tax credit is available to people with one or more dependents who do not meet the criteria to be qualifying children for the Child Tax Credit (CTC). The maximum credit amount is significantly lower than the CTC, so always check your eligibility for the CTC before claiming the Credit for Other Dependents.

Cryptocurrency

Like other virtual currencies, cryptocurrencies ("crypto" for short) are digital assets that are not regulated or distributed by a national government. The term cryptocurrency refers to the computer coding that supports the creation and distribution of these currencies. People must report a wide variety of crypto transactions on their tax returns, because those transactions may generate taxable capital gains. Also see Virtual Currency Tax Rules.

Cryptocurrency Tax Rules - see Virtual Currency Tax Rules.

Date of Transaction

IRS rules sometimes require people or businesses to report exactly when a particular transaction occurred. For example, if a transaction is conducted in a foreign currency, then the conversion to U.S. dollars should be based on the exchange rate on the date when the transaction occurs. For individuals, the official date of a transaction is typically either the date when they make a payment, or the date when they constructively receive income. For a business, the correct transaction date for tax purposes may depend on whether the business uses cash accounting or accrual accounting.

Deduction - see Tax Deduction. Deduction for Business Use of a Home / Deduction for Home Office - see Home Office Deduction. Deduction for One Half of Self-Employment Tax

People with self-employment income may generally claim a tax deduction for one-half of the self-employment tax that they owe for a given year. This is an above-the-line deduction, so you do not need to itemize deductions in order to claim it.

Defined Benefit Plan - see Pension. Defined Contribution Plan - see Pension. Department of Veterans Affairs (VA)

This federal government agency manages a wide variety of programs and benefits for U.S. military veterans, including VA disability compensation, military pensions, and free or low-cost medical care. Many VA benefits qualify as excludable income, and so are not subject to federal income tax.

Dependency Tests

This term refers to the various rules that the IRS applies to determine if someone qualifies as a person's dependent for tax purposes. The main dependency tests are the Support Test, Age Test, Relationship or Member of Household Test, Gross Income Test, Joint Return Test, and Citizen or Resident Test.

Dependent

In general, a person is your dependent if you provide significant financial support for that person (usually more than half of the person's total support), and the person meets several other dependency tests. Having one or more dependents may make you eligible for tax benefits like the Child Tax Credit (CTC), Earned Income Credit (EITC) or Credit for Other Dependents. If you are unmarried, having dependents may also qualify you to use Head of Household or Qualifying Surviving Spouse as your filing status.

Dependent Exemptions / Dependency Exemptions

Depending on current tax laws, a person may qualify to claim income adjustments called exemptions in addition to tax deductions like the standard deduction or itemized deductions. As the name suggests, dependent exemptions are based on the number of dependents a person has. When they are allowed, exemptions work similarly to deductions, reducing a person's tax liability by lowering their taxable income. Also see personal exemption.

Dependent Care Benefits

Some workplaces provide dependent care benefit programs for employees. These programs help employees who have qualifying dependents pay for child care or other services that allow the employee to work. In some cases, the employee can make pre-tax contributions to a dependent care flexible spending arrangement (FSA), then withdraw funds from the account tax-free for qualifying care expenses.

Dependent Taxpayer Test

This term may refer to two different IRS rules: (1) If another person can claim you as a dependent for tax purposes (even if they choose not to do so), then you will generally have a reduced standard deduction. You also may not qualify for certain tax benefits. (2) When determining whether a person is your qualifying child or qualifying other relative dependent, you need to know whether anyone else could claim that person as a dependent. In such cases, only one of you may claim the dependent.

Depreciated Asset

This term refers to any property for which a person or business has claimed depreciation deductions.

Depreciable Cost

The depreciable cost of a capital business asset is the portion of its acquisition cost that qualifies for depreciation deductions. In other words, it is the depreciable part of a capital business expense. For most property, the depreciable cost is equal to the acquisition cost minus the property's salvage value. The total of all depreciation deductions claimed for a particular asset cannot exceed its depreciable cost.

Depreciation / Depreciation Deductions

For tax purposes, depreciation is the process of claiming tax deductions for a capital expense over a series of years. It is the most common example of capitalization of an expense. Depreciation usually involves deducting a portion of the cost of an asset each year throughout a specified depreciation period. However, businesses and self-employed people can sometimes shorten the timeline through the use of bonus depreciation or Section 179 deductions. The two most common methods of calculating depreciation deductions are the straight-line method and the modified accelerated cost recovery system (MACRS). In some cases, the IRS allows alternative depreciation techniques, such as the units of production method. Also see Amortization.

Depreciation Period

Also called a recovery period, a depreciation period is the number of years required to deduct the total depreciable cost of property through annual depreciation deductions. For example, if IRS rules require a business to deduct the cost of new machinery gradually over the course of six years, then the machinery has a 6-year depreciation period. Depending on the date an asset is put into service and the depreciation method used, the asset's depreciation period may differ slightly from its useful life.

Depreciation Recapture

The process of depreciation is based on the assumption that a capital asset will lose value over time, ultimately retaining only a nominal salvage value or no value at all. The theoretical remaining value of an asset at any point during the depreciation process is known as its book value. However, the true residual value of property may be significantly higher than its book value. If you sell or exchange a depreciated asset for more than its book value (or more than its salvage value after the depreciation period ends), then you may need to report that gain as a depreciation recapture. A depreciation recapture may be taxed as ordinary income, rather than at capital gains tax rates.

Digital Assets

This term refers to not only virtual currencies like cryptocurrency, but also other purely digital commodities like non-fungible tokens (NFTs). Many types of transactions involving digital assets must be reported to the IRS, because those transactions may result in a capital gain or loss.

Direct Expenses - see Home Office Deduction. Disability Income

This term generally refers to payments that a person receives to replace wages or other earned income while the person is unable to work due to a disability. Disability income may come from an employer, Social Security benefits or some other source. Depending on circumstances, disability payments may be either excludable income or taxable income.

Disability Pension

This special type of pension is paid to an employee who retires early due to a permanent disability. Different tax rules may apply for disability pension payments than for other pension benefits. However, once a person receiving disability pension benefits reaches standard retirement age, further benefits from the plan are usually treated as ordinary pension income.

Disaster Tax Relief Programs

The IRS offers a variety of tax relief programs for people and businesses affected by disasters like storms, floods, earthquakes and wildfires. These programs are usually available only in areas covered by major disaster declarations signed by the President. Relief measures may include tax filing and/or payment extensions, special tax deductions, and waivers of tax penalties and IRS interest. People who lose vital records in a disaster may also request free transcripts of their past tax returns from the IRS.

DITY Move or DIY Move (Military) - see Personally Procured Move. Dividends Corporations typically distribute earnings to shareholders in the form of stock dividends, often on a quarterly basis. Like other investment returns, dividends are generally taxable income. Different tax rates may apply for ordinary dividends than for qualified dividends. Domestic Employee - see Household Employee. Domicile

A person's domicile is the state where they maintain a legal, permanent residence. Note that your domicile might not be the same as the state where you currently reside. For example, if you have a permanent home in Tennessee but live for two years in a rented home in Delaware to complete a work contract, your domicile would generally still be Tennessee. If you regularly use homes in multiple states, then the IRS and state governments will apply a variety of tests to determine which state is your domicile.

Double Taxation

The term double taxation refers to any situation where the IRS or a state revenue department taxes the same income twice. A common example of double taxation occurs with C corporation earnings. The company generally must pay corporate income tax on its net profits. Stockholders then pay individual income tax on any stock dividends they receive, which are distributions from those same profits.

DRIP (Dividend ReInvestment Plan) Accounts

A DRIP account allows stockholders in a company to automatically reinvest dividends to purchase new shares (or in some cases, fractions of shares) of stock. In most cases, the dividends that are reinvested through a DRIP account are still considered taxable income for the stockholder.

Dual Status Alien

The IRS designates a person as a dual-status alien if the person was both a resident alien and a nonresident alien during the same tax year. Such dual status most often occurs during the year when a person arrives in or departs from the U.S. Since different tax rules apply for resident and nonresident aliens, people classified as dual-status aliens must take extra care when preparing their tax returns.

Dual-use Property

This term most often refers to property that a person uses for both personal and business purposes. Common examples include vehicles, computers and cell phones used by independent contractors, freelancers and sole proprietors. When deducting business expenses related to dual-use property, you generally must prorate each expense based on your percentage of business use. For example, if you use your computer for business purposes 40% of the time, then you may claim at most 40% of costs related to the computer (such as repairs and software updates) as business expenses.

Early Withdrawal Penalty (IRAs and Other Retirement Accounts)

In general, a person who withdraws funds from a traditional IRA before reaching 59 1/2 years of age may need to pay an early withdrawal penalty, also called the additional tax penalty. Other qualified retirement plans may also have penalties for early withdrawals. Exceptions exist for certain withdrawals taken due to financial hardship, and for loans taken from the retirement account that are repaid within a short time. A withdrawal from a Roth IRA before age 59 1/2 may or may not be subject to an early withdrawal penalty, depending on the reason for the withdrawal, the amount withdrawn and how long the withdrawn funds have been in the account. Also see Qualifying Reason for Roth IRA Withdrawal and Roth IRA Early Withdrawal Rules.

Earned Income

The term earned income refers to any income received for performing work. Examples of earned income include a salary, wages, tips and self-employment earnings (such as payments for work as an independent contractor or gig economy worker). Also see Unearned Income.

Earned Income Tax Credit / Earned Income Credit (EITC or EIC)

People with modest incomes may qualify for the Earned Income Tax Credit (EITC or EIC), which is a refundable tax credit. Generally, to claim this credit, you must have an adjusted gross income (AGI) below the limit set by the IRS for your filing status and number of qualifying children, and have some earned income for the tax year. The rules for the EITC also include a limit on unearned income. Because the EITC is fully refundable, you can receive the credit as an IRS refund even if you owe no tax and did not have tax withheld from your pay. However, you must file a tax return to claim the credit.

Education Credits

The IRS offers multiple tax credits for qualified education expenses, including the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit.

Educator Expense Deduction

Eligible educators like teachers, counselors, principals and classroom aides may claim this tax deduction for purchases of qualifying classroom supplies. The educator expense deduction is an above-the-line deduction, so it is available regardless of whether a person itemizes deductions.

Effective Tax Rate

A person's effective tax rate is the percent of their income that they actually pay in tax. This percentage typically differs from the person's marginal tax rate (also called nominal tax rate). For example, suppose that Jamal's gross income for a year was $67,780, but he qualified for tax deductions totaling $22,860. His taxable income was therefore $67,780 - $22,860 = $44,920, and his resulting tax liability was $8,700. Based on that year's tax brackets, Jamal's marginal tax rate was 22%. Yet his effective tax rate was only $8,700 ÷ $67,780 = 0.128 = 12.8%.

E-file (Electronic Filing)

E-filing is the process of transmitting forms and documents to the IRS or other U.S. Treasury departments over the internet. Electronically filing a federal tax return generally results in faster processing and a shorter wait time to receive a tax refund than mailing a paper return. Because tax forms contain a great deal of sensitive information, it is critical to use a secure, IRS-approved platform for e-filing. If you use public wifi, also use a VPN to encrypt the information on your tax documents.

EFTPS - see Electronic Federal Tax Payment System. EIC or EITC - see Earned Income Tax Credit / Earned Income Credit. EIN - see Employer Identification Number. Electric Vehicle Credit - see Qualified Plug-In Electric Drive Motor Vehicle Credit. Electronic Federal Tax Payment System (EFTPS)

The Electronic Federal Tax Payment System (EFPTS) is an online portal that businesses, individuals and paid tax preparers can use to pay any type of federal tax, including income tax, FICA taxes, estimated tax and unemployment tax (FUTA). To use the EFPTS, a person or business must complete an identity verification process.

Electronic Filing - see E-file. Employee vs. Independent Contractor

Whether workers are classified as employees or independent contractors has major tax impacts for both the workers and those who hire them. An employer must generally withhold income tax and the employee share of FICA taxes from each employee's pay, and also pay unemployment tax and the employer share of FICA taxes. By contrast, hirers generally do not need to withhold or pay taxes related to payments to independent contractors. Instead, independent contractors usually pay self-employment tax on their net earnings. The primary factor that the IRS examines to determine whether a worker should be classified as an employee or independent contractor is how much control the hirer exerts over when, where and how the worker must complete tasks.

Employer Identification Number (EIN)

If you pay employees, including household employees, then you likely need to withhold taxes from their pay. You may also have to pay unemployment tax. In order to properly report and remit these taxes, you will need an Employer Identification Number (EIN) from the IRS. EINs are available at no charge to residents of the U.S. and its territories. Also see Household Employment Taxes.

Employment Taxes

The IRS uses this term to refer to all the federal taxes that are calculated based on an employee's pay. Employment taxes typically include income tax, FICA taxes, and federal unemployment tax (FUTA). The required reporting and remittance schedule for employment taxes depends on an enterprise's gross revenues and payroll size. Also see Payroll Taxes.

ESA - see Coverdell Education Savings Account. Estimated Tax

The IRS enforces a "pay as you go" rule for taxes, meaning that people and businesses generally must make regular payments throughout the year. Employees usually meet this requirement through paycheck withholding. On the other hand, if a significant portion of your income derives from sources not subject to withholding, such as dividends, interest, rents, or self-employment earnings, then you may need to make quarterly estimated tax payments. In most cases, the total of your withholding and estimated tax payments for a given year must be at least 90% of your tax for that year, or 100% of your tax from the previous year, whichever is less. (The standard shifts to 110% of the previous year's tax at higher income levels.) Note that different rules may apply to income from farming or fishing.

Excludable Income

Certain types of income, including workers' compensation benefits, economic stimulus payments, child support, some public assistance payments and many gifts, do not have to be included in a person's gross income for tax purposes. The IRS refers to these income types as excludable. Note that you must still report certain forms of excludable income on your tax return, such as tax-exempt municipal bond interest, even though the income will not affect your tax liability.

Exempt from Withholding / Exempt Employee

Due to their income level, lack of tax liability or other factors, some employees are exempt from having federal income tax withheld from their pay. In most cases, such an exemption applies only to income tax, so the employer must still withhold FICA taxes.

Exemptions (Personal or Dependent)

Depending on current tax laws, a person may qualify to claim income adjustments called exemptions in addition to tax deductions like the standard deduction or itemized deductions. The two main types of exemptions are personal exemptions and dependent exemptions. When they are allowed, exemptions work similarly to deductions, reducing a person's tax liability by lowering their taxable income.

Expenses for Business Use of a Home - see Home Office Deduction. Expensing

This informal term is sometimes used to refer to the act of deducting a business expense all at once, as opposed to the process of capitalization of an expense. Most often in business tax contexts, the word "expensing" refers to claiming Section 179 deductions for capital business assets.

Fair Market Value (FMV)

Many tax situations require determining and reporting the fair market value (FMV) of goods or property. The IRS defines FMV as the price a willing buyer and willing seller would agree on if both were well informed. FMV can be determined in many ways, including appraisals, analysis of recent sales of similar property in the same region, and comparisons of prices published by distributors of the same or similar goods.

FBAR (Report of Foreign Bank and Financial Accounts)

Sometimes called the Foreign Bank Accounts Report (hence, FBAR), this form must be submitted annually by many Americans with foreign financial holdings. In general, you must file an FBAR if you have a financial interest in and/or control over foreign financial accounts with a total value above a threshold set by Congress. Note that the FBAR is not an IRS form and therefore cannot be filed with a tax return. Instead, FBARs must be filed with the Financial Crimes Enforcement Network (FinCEN). Electronic filing is required in most cases. Many people required to file an FBAR must also provide information about their foreign accounts on their tax returns, most often on Schedule B, and sometimes on Form 8938 as well.

FICA Taxes (Federal Insurance Contributions Act)

Enacted in 1935, the Federal Insurance Contributions Act (FICA) created a mechanism to fund the new Social Security system. Today, FICA taxes consist of both Social Security Tax and Medicare Tax. In general, employers must withhold half of the FICA tax due on each employee wages from paychecks, and pay the other half themselves. Because FICA taxes typically apply to a company's entire payroll, they are sometimes referred to as payroll taxes. (Since the pay of self-employed people is not subject to tax withholding, they generally must meet their FICA tax obligations by paying self-employment tax.)

Fiduciary

A fiduciary is someone who acts on behalf of another person or organization, generally in financial matters. For example, someone who manages a trust is typically serving as the trust's fiduciary. Fiduciaries have a legal obligation to act in the best interest of those they represent.

FIFO

One of four common methods used in inventory accounting to determine the cost of goods sold, the FIFO method assumes that the oldest items in stock are sold first ("first in, first out"). Alternatively, a business may track inventory by using the specific identification, LIFO, or weighted average cost (WAC) method.

Filing Deadline / General Filing Deadline

The term filing deadline may refer to any date by which a tax form must be submitted to the IRS. The general filing deadline (often just called the IRS deadline or tax deadline) is an annual due date for many tax returns, forms and payments related to the previous year. Ordinarily, the general filing deadline falls on April 15, or the first business day after April 15 if the 15th falls on a weekend or holiday. The IRS considers mailed forms and payments to be on time if they are postmarked on or before the relevant filing deadline. Deadline extensions are often included in IRS disaster tax relief programs.

Filing Status

When filing a tax return, people must select a filing status that reflects their circumstances. The standard options are Married Filing Jointly (MFJ), Qualifying Surviving Spouse (QSS), Head of Household (HoH), Single and Married Filing Separately (MFS). If you qualify for more than one status, you are free to choose whichever option results in the lowest tax liability.

Financial Assets

This term generally refers to long-term business or investment property that has a well-defined monetary value and could be readily converted to cash. Common examples of financial assets include stocks, bonds, savings accounts, mutual funds, cash and cryptocurrency. Also see Fixed Assets, Tangible Assets and Intangible Assets.

FinCEN (Financial Crimes Enforcement Network)

Formed as a bureau of the U.S. Department of the Treasury in 1990, FinCEN was originally created to investigate and combat money laundering. Today, the bureau investigates a wide range of financial crimes, including the concealment of income in offshore bank accounts. As part of these duties, FinCEN processes the FBAR forms that many people with foreign financial accounts must file annually.

Five-Year Test Period Suspension (Home Sale Gain Exclusion)

Generally, to claim the home sale capital gain exclusion, a person must have owned the home and lived in it as their main home for at least two of the previous five years. However, members of the U.S. military, Foreign Service or other uniformed services, along with intelligence and Peace Corps personnel, may request to have this five-year test period suspended while they are on qualified extended duty.

Fixed Assets

This term refers to physical capital business property or investment property that generally cannot be quickly converted into cash. Common types of fixed assets include machinery, equipment, and real estate like buildings and land. Also see Tangible Assets, Financial Assets and Intangible Assets.

Flexible Spending Arrangement (FSA) or Health FSA

A flexible spending arrangement (FSA) is a workplace benefit plan that enables employees to make pre-tax contributions to a tax-advantaged account for a designated purpose. The most common type of FSA is a health FSA, but many employers also offer FSAs for other purposes like adoption. Generally, FSAs are subject to annual contribution limits. People with FSAs can take tax-free withdrawals to pay eligible expenses, such as qualifying medical expenses. Most FSAs operate on an annual "use it or lose it" basis, meaning that employees forfeit any unused funds at the end of the year. However, the IRS allows employers to offer either a small carryover of unused health FSA funds to the next year, or a grace period (usually through March 15) to use up remaining funds. Also see Health Savings Account (HSA).

FMV - see Fair Market Value. Foreign Bank Accounts Report - see FBAR. Foreign Earned Income Exclusion or Foreign Income Exclusion

In general, U.S. citizens and residents must report and pay federal tax on their worldwide income, including income earned in other countries. However, the foreign earned income exclusion allows eligible people to leave certain foreign earnings out of their gross income for U.S. tax purposes. To determine whether someone qualifies for this exclusion, the IRS examines the person's period of stay in a foreign country, generally by applying the bona fide residence test and/or physical presence test.

Foreign Tax Credit

Generally, all of a U.S. citizen or resident's worldwide income may be subject to U.S. federal taxes. However, eligible people may claim the foreign tax credit for taxes they pay to another government. This credit can reduce a person's U.S. tax liability by either a portion or the entire amount of tax paid to foreign countries.

Form 1040, Individual Income Tax Return

Form 1040 is the standard federal tax return that most people file annually. The IRS updates the form every year, and also publishes variations of Form 1040 for special circumstances, such as Form 1040-NR and Form 1040-SR.

Form 1040-ES, Estimated Tax for Individuals

This form provides instructions to determine whether you must make estimated tax payments, and if so, how to calculate your payment amount each quarter. You may need to pay estimated tax if a significant portion of your income comes from sources not subject to tax withholding, like investment returns, rents or self-employment earnings.

Form 1040-NR, Nonresident Alien Income Tax Return

People classified as nonresident aliens by the IRS must generally use this version of Form 1040 to file their federal tax returns. Among other differences from the standard Form 1040, this form does not include an option to claim a standard deduction, since that option is not available to nonresident aliens.

Form 1040 Schedules

The IRS uses the term schedule to refer to a variety of specialized tax forms that accompany a more general form. For example, Form 1040 has a number of accompanying schedules that a person may need to complete to report income or claim tax benefits. The most commonly used Form 1040 schedules include:

Schedule 1, Additional Income and Adjustments to Income

Use this form to report income not accounted for on Form 1040 itself, including business income and certain capital gains. Schedule 1 also enables you to claim various above-the-line deductions, such as the educator expense deduction, the deduction for one-half of self-employment tax and the deduction for student loan interest.

Schedule 2, Additional Taxes

Many people must use this form to report other federal taxes they must pay besides income tax. These additional taxes may include alternative minimum tax (AMT), self-employment tax and household employment taxes.

Schedule 3, Additional Credits and Payments

This form enables people to claim credits and report payments not shown on Form 1040 itself. Credits that may be claimed on Schedule 3 include the foreign tax credit, the credit for child and dependent care, various education credits and the healthcare Premium Tax Credit.

Schedule A, Itemized Deductions

People who choose to itemize deductions instead of claiming the standard deduction use this form to list their deductions and calculate their total deduction amount.

Schedule B, Interest and Ordinary Dividends

It may be necessary to use this form to report unearned income from interest and ordinary dividends, and also to report foreign financial accounts that you hold or control.

Schedule C or C-EZ, Profit or Loss from Business

People classified as sole proprietors by the IRS must generally use one of these two forms to report their business income and deduct business expenses. For tax purposes, the sole proprietor designation includes many self-employed people, such as independent contractors, freelancers and gig economy workers. Net profits shown on Schedule C are usually subject to self-employment tax.

Schedule D, Capital Gains and Losses

If you have capital gains or losses, you will summarize them on this schedule, and compute your net gain or loss. In most cases, you will also have to complete Form 8949 to report the details of each transaction that resulted in a gain or loss.

Schedule E, Supplemental Income and Loss

People use this form to report rental income, real estate royalties, and some other types of income that are not accounted for on Form 1040 or other schedules.

Schedule EIC, Earned Income Credit

If you are claiming the Earned Income Tax Credit (EITC), you must file this form if you have one or more qualifying children.

Schedule H, Household Employment Taxes

People use this form to calculate the taxes they must remit on wages paid to household employees like nannies, housekeepers or gardeners. If you owe such household employment taxes, you will generally also report them on Schedule 2.

Schedule SE, Self-Employment Tax

You typically must file this schedule if you earn more than $400 during a year through self-employment activities, such as operating a business, freelancing, or working as an independent contractor or gig economy worker. Use Schedule SE to calculate your self-employment tax, which you must also report on Schedule 2.

Form 1040-SR, Tax Return for Seniors

People of age 65 or older may use either the standard Form 1040 or the specialized Form 1040-SR to file their annual tax returns. Form 1040-SR uses larger fonts and emphasizes tax benefits available to many seniors, including a larger standard deduction.

Form 1040-X, Amended Individual Income Tax Return

Use Form 1040-X to make corrections or adjustments to a tax return that you have already filed. You may need to file an amended return if you made a significant error when completing your original return, such as miscalculating or failing to report income, or neglecting to claim a tax credit or tax deduction. In order to complete Form 1040-X, you will need a copy of your previously filed return.

Form 1041, Income Tax Return for Estates and Trusts

Many trusts and estates have annual tax return filing obligations, just like individuals and businesses. The responsibility for filing required returns typically falls to an authorized representative of the trust or estate (such as an executor, manager or primary trustee), often called the fiduciary. Generally, the fiduciary files Form 1041 to report the trust or estate's gross income, deductions, taxable income, tax credits and, if applicable, tax liability.

Form 1041 Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc.

When Form 1041 must be filed for a trust or estate, the income, deductions, credits and other amounts reported on that return usually get allocated to beneficiaries. A Schedule K-1 (Form 1041) must then be filed for each beneficiary, showing that person's share of income, credits and deductions. The main advantage of allocating figures from Form 1041 to beneficiaries is that individuals can often claim more tax benefits than an entity like an estate or trust. Therefore, assigning trust or estate income to individual beneficiaries may result in lower overall tax liability.

Form 1065, U.S. Return of Partnership Income

Most businesses that operate as partnerships (including many limited liability partnerships and LLCs) must file Form 1065 as their annual tax return. Generally, the partnership itself does not pay tax. Rather, the income, deductions, credits and other amounts reported on Form 1065 are allocated to partners or LLC members on Form 1065 Schedule K-1. The partners or members then report their shares of these amounts on their individual tax returns.

Form 1065 Schedule K-1, Partner's Share of Income, Deductions, Credits, etc.

Businesses that operate as partnerships use Schedule K-1 (Form 1065) to report each partner or member's share of the income, deductions and other amounts shown on the partnership's tax return (usually Form 1065). Partners or members then report the figures shown on their Schedule K-1s on their individual tax returns.

Form 1098-T, Tuition Statement

This form shows tuition and related fees that a person has paid to an eligible college, university, trade school or other educational institution. You will need this form to claim certain education tax credits, such as the American Opportunity Tax Credit (AOTC) or Lifelong Learning Credit.

Form 1099 Series

IRS Forms with the number 1099 are used to report forms of income that do not appear on other information returns like Form W-2. The person or organization that made the payments completes the appropriate 1099 form, and sends copies to the IRS and the payment recipient. In most cases, people who receive 1099 forms must report the income shown on them on their tax returns, and may face tax penalties for failing to do so. Here are the most commonly used forms in the 1099 series:

Form 1099-DIV

This form shows ordinary dividends, qualified dividends and certain other distributions of corporate earnings, capital gains or profits to shareholders.

Form 1099-G, Certain Government Payments

This form shows potentially taxable payments that a person received through a government program (such as unemployment compensation).

Form 1099-INT

This form shows various types of interest income.

Form 1099-K

This form shows payments received for goods or services through a third-party payment processor.

Form 1099-MISC

This form covers various payments and income types not accounted for on other 1099 forms, such as rental income.

Form 1099-NEC (Non-employee Compensation)

This form is used to report payments made by a business or self-employed person to independent contractors and other non-employees.

Form 1099-R

This form reports distributions from pensions, annuities, IRAs, other retirement plans, profit-sharing plans, insurance contracts and similar sources.

Form 1099-S

This form shows proceeds from real estate transactions, such as home sales. You may need to report information from Form 1099-S when claiming the home sale capital gain exclusion.

Form 1099-SA

This form shows distributions received from a health savings account (HSA), Archer MSA or Medicare Advantage MSA.

Forms RRB-1099 and RRB-1099-R

These forms show various payments made by the Railroad Retirement Board, including annuity and pension payments.

Form SSA-1099

This form shows Social Security benefit payments, which may or may not be taxable income, depending on the person's total income for the year.

Form 1120, Corporation Income Tax Return

Form 1120 is the standard federal tax return filed by C Corporations. These corporations generally must pay corporate income tax on net profits or earnings.

Form 1120-S, Income Tax Return for S Corporation

Form 1120-S is the standard federal tax return used by S corporations, as well as LLCs that elect to be taxed as S corporations. These companies file Form 1120-S to report income, expenses, deductions and credits. However, because S corporations are pass-through entities, they do not pay corporate income tax. Instead, the company allocates the amounts reported on Form 1120-S to owners, shareholders or members, who then pay individual income tax on their shares of net earnings. Each owner, member or shareholder's portion of income, deductions, credits, etc. is reported on a Form 1120-S Schedule K-1.

Form 1120-S Schedule K-1, Shareholder's Share of Income, Deductions, Credits, etc.

An S corporation uses this form to report each owner or shareholder's allocated portion of the income, expenses, deductions and credits reported on the corporation's tax return (Form 1120-S). These allocations are based on percentages of ownership. Shareholders must report the figures shown on their Schedule K-1s on their personal tax returns, and pay any tax due. This process is known as pass-through taxation.

Form 2120, Multiple Support Declaration (Qualifying Child or Qualifying Other Relative)

In some cases, a person satisfies all the tests to be a qualifying child or qualifying other relative dependent, except that no one provides more than half of the person's support. Instead, the potential dependent's support comes from multiple different people. In these situations, the person who claims the dependent generally must file Form 2120. The form must list all other individuals who pay over 10% of the dependent's support, and include a statement certifying that they have waived their right to claim the dependent in writing. The IRS refers to these scenarios as multiple support agreements.

Form 4137, Social Security and Medicare Tax on Unreported Tip Income

Employees who receive tip income may need to use this form to report tips that they did not previously report to their employers. These tips may be subject to Social Security and Medicare (FICA) taxes. Depending on the amount of tax due on the tips, a tax penalty may apply.

Form 4868, Application for Automatic Extension of Time to File Individual Income Tax Return

You may use this form to request a six-month automatic filing extension to complete your tax return. Alternatively, you can submit your extension request electronically through the IRS website. It is important to remember that an automatic 6-month extension applies only to filing a tax return, not to paying any tax due. Payments made after the general filing deadline may be subject to tax penalties.

Form 8379, Injured Spouse Claim and Allocation

A person whose filing status is married filing jointly may use this form to request their share of a tax refund that was withheld by the IRS because of the other spouse's debts, such as past due child support. If the IRS accepts a claim made on Form 8379, up to half of the withheld refund will be issued to the injured spouse. Also see Form 8857.

Form 8582, Passive Activity Loss Limitations

The IRS limits the amount of losses from passive activities in business or real estate that a person may use to offset other income, and thus reduce their tax liability. If you have passive activity losses, use Form 8582 to calculate the limit on losses you can report for that particular year. Excess losses may generally be carried forward to future years.

Form 8857, Request for Innocent Spouse Relief

In most cases, couples whose filing status is married filing jointly share responsibility for their combined tax liability. In other words, the IRS holds both spouses responsible for paying any tax owed by the couple. However, in some situations, one spouse can legitimately claim that the other spouse should bear the sole responsibility for the couple's tax liability. A person with a sound basis for such a claim is called an innocent spouse. Innocent spouses may use Form 8857 to request relief from tax penalties and other consequences of the other spouse's actions. Residents of community property states whose filing status is married filing separately may also use this form to request relief from taxes or penalties related to community income or assets.

Form 8829, Expenses for Business Use of Your Home

Eligible people with business or other self-employment income may use this form to compute their home office deduction, which should then be reported on Schedule C.

Form 8938, Statement of Specified Foreign Financial Assets

Many people who are required to file an FBAR form must also include Form 8938 with their tax returns, providing detailed information about foreign bank accounts and assets. Note that the reporting thresholds for the FBAR and Form 8938 are different. The two forms also have different rules regarding which assets a person must report. Therefore, a person might need to file only an FBAR form, only Form 8938 or both forms. Also remember that Form 8938 should be filed with a person's federal tax return, whereas FBAR forms must be filed separately (and usually electronically) with FinCEN.

Form 8949, Sales and Other Dispositions of Capital Assets

Use this form to report transactions where you sold, donated or otherwise disposed of capital assets, including certain investments. For each transaction, you must state the selling price (if applicable), the amount realized, your basis or adjusted basis in the property, any other necessary adjustments, and any resulting capital gain or loss. Short-term gains and losses and long-term gains and losses must usually be reported separately. Report net gains and losses from this form on Schedule D.

Form 8962, Premium Tax Credit

People who purchase health insurance through the official Health Insurance Marketplace, and whose MAGI qualifies them for the Premium Tax Credit (PTC), use this form to compute the credit. If you receive the Advance Premium Tax Credit (APTC) during the year as a reduction in premiums, then you will use this form to reconcile those premium reductions with your actual credit amount. If your actual credit amount is more than the total APTC you received, you can claim the remaining credit on Form 1040, Schedule 3. However, if your total APTC was greater than your allowed PTC, then you may need to pay back a portion of your APTC, and may also have to pay a tax penalty.

Form 9465, Installment Agreement Request

If you are unable to pay the full amount of tax you owe to the IRS, you can request to make monthly payments over a period of up to 72 months (six years) to pay off the balance. You may request this installment agreement by filing Form 9465. Alternatively, you can submit your request online through the IRS website. Generally, people who enter into installment agreements must pay IRS interest charges with their monthly payments, so it is best to pay off a tax balance as quickly as possible.

Form SS-4, Application for EIN

You may use this form to apply for an Employer Identification Number (EIN). Alternatively, you can apply online through the IRS website. You will need an EIN if you pay any employees other than yourself, including household employees.

Form W-2, Wages and Tax Statement

This form reports the total wages or salary, along with any reported tips, that an employee received during a tax year. Form W-2 also shows all taxes that have been withheld from the employee's pay. Employees need the information on their W-2s to complete their tax returns. If you do not receive a W-2 from your workplace by mid-February, first contact your employer and request one. If the employer still does not send you the form, contact the IRS for assistance.

Form W-2c, Corrected Wage and Tax Statement

If you receive an inaccurate Form W-2 from your employer, you may request a new form. Your employer should use Form W-2c to correct the information from the original W-2. Similarly, if you own a business and mistakenly provide an inaccurate W-2 to an employee, then you can file form W-2c and give a copy to the employee to correct the error. People who receive a Form W-2c may need to file an amended tax return based on the updated information.

Form W-4, Employee's Withholding Certificate

Employees must give their employers information needed to compute how much tax to withhold from their paychecks. Generally, employees provide this information on Form W-4. In addition to giving basic information on the form like their filing status, employees can request withholding adjustments for situations like working multiple jobs or earning self-employment income. Employees should submit a new W-4 anytime their tax circumstances change.

Form W-7A, Application for Taxpayer ID Number for Pending Adoptions

Parents in the process of adopting a child may file this form to request an ATIN for the child.

FSA - see Flexible Spending Arrangement. FSA Carryover - see Use It or Lose It Rule. FSA Grace Period - see Use It or Lose It Rule. Fourteen-Day / 10% of Rental Time Rule for Rental Income and Expenses

IRS rules for reporting rental income and expenses vary depending on whether you also use the rental property as a personal residence. The IRS 14-day / 10% Rule states that you have used a rental property as your residence during a given year if you used it for personal purposes for more than the greater of 14 days, or 10% of the total number of days you rented it out at a fair price. Note that renting the property to someone at a substantially reduced price, or letting them stay there for free, generally counts as personal use for you. Also see the Minimal Rental Use exception.

Fourteen-Day Rental Exemption - see Minimal Rental Use. FUTA

Federal Unemployment Tax, or FUTA, must generally be paid by employers for all of their employees. Also see Unemployment Tax.

Gambling Winnings and Losses

Most winnings from gambling activities are taxable income that must be reported to the IRS. If you itemize deductions on your tax return, then you may be able to use gambling losses to offset winnings. However, you generally cannot deduct losses in excess of your winnings.

General Filing Deadline - see Filing Deadline. Generation-Skipping Transfer / Generation-Skipping Transfer Tax (GSTT)

A generation-skipping transfer is the direct passing of property through gift or inheritance from a person to their grandchildren or other "skip" recipients. For IRS purposes, "skip" means that the recipient is separated from the donor by more than one generation, as defined by age difference and other tests. Generation-skipping transfers may be subject to the generation skipping transfer tax, or GSTT. The GSTT is assessed at a flat rate equal to the highest gift and estate tax rate currently in use. Therefore, the tax assessed on these transfers may be substantially greater than taxes on gifts and bequeathals that do not skip a generation. However, the GSTT only affects gifts above the annual exclusion, and only after the donor has exceeded the lifetime exclusion.

Ghost Preparer

The IRS uses this term to describe individuals and agencies that charge fees to prepare tax returns, but do not follow federal laws for paid tax preparers. Typically, these ghost preparers do not have a PTIN and do not sign the tax returns they prepare, both of which are violations of federal law. Do not trust ghost preparers to handle any tax matters.

Gift and Estate Tax

In general, the IRS classifies any transfer of property (including financial assets, fixed assets and intangible property) from one person to another as a potentially taxable event. If the property is transferred as a gift or inheritance, the federal gift and estate tax may apply. However, a person can give away an unlimited number of gifts each year tax-free, as long as the total value given to each recipient is below the annual exclusion threshold. In addition, transfers only become taxable events if the total value of property given away or bequeathed by a person exceeds the lifetime exclusion. Gift and estate tax exemptions also exist for gifts to spouses, charities and political organizations. Note also that paying medical or education expenses for another person generally does not count as a gift for tax purposes.

Gig Economy

This informal term refers to a wide variety of work activities for which people earn income without being classified as employees. Common examples of gig economy work include dog walking, errand running, driving for a ride share service and obtaining work through an online freelancing platform. The IRS classifies many gig economy workers as independent contractors who must pay self-employment tax on their earnings. Also see Employee vs. Independent Contractor.

Green Card Test

Along with the substantial presence test, the green card test is one of the two main criteria that the IRS uses to determine whether a person is a resident alien for tax purposes. This test states that people should file their tax returns as resident aliens if, at any time during the tax year, they were granted lawful status to work and live in the U.S. Generally, immigrants with this status receive an alien registration card, commonly known as a green card, from U.S. Customs and Immigration Services (USCIS).

Gross Income / Total Income

For tax purposes, your gross income (also called total income) is the total of your earned income and unearned income from all sources during a year, with the exception of certain forms of excludable income. In addition to money, gross income may include goods, property and services that you receive. Also see Taxable Income, Adjusted Gross Income (AGI) and Nontaxable Income.

Gross Profit

Businesses (including individuals with self-employment income) generally compute their gross profit by subtracting the cost of goods sold (COGS) from gross revenue. Subtracting all other allowed business expenses from gross profit yields a person's or enterprise's net profit (net earnings) for the year.

Gross Revenue

The gross revenue of a business is generally the total value of all money, goods, property and services that the business receives during a year. Depending on the accounting method used, gross revenue may also include payments owed to the business but not yet received.

Half-Year Convention

This term refers to any method of calculating depreciation deductions that essentially splits up the deduction for the first year when an asset is placed in service. Part of the deduction is taken during that first year, while the remainder is effectively deferred until the year following the end of the asset's useful life. A half-year convention is built into MACRS depreciation calculations, and may also be incorporated into the straight-line method or other depreciation techniques.

Head of Household (HoH) Filing Status

You may qualify for this special filing status if you are unmarried, pay more than half the cost of maintaining a home, and have a qualifying child or qualifying relative dependent. Head of household (HoH) filers generally receive a larger standard deduction than people who file under single status. HoH status may also entitle you to higher income limits for various tax credits and deductions, and/or higher credit or deduction amounts.

Health FSA - see Flexible Spending Arrangement. HDHP - see High-Deductible Health Plan. Health Insurance Marketplace / Insurance Marketplace / Insurance Exchanges

The Affordable Care Act (ACA) established the official Health Insurance Marketplace, also called the Insurance Exchanges, for people to purchase individual or family healthcare coverage. If you qualify for the Premium Tax Credit (PTC), you must purchase your health plan through the official marketplace in order to receive the credit. If you qualify, you may elect to receive the Advance Premium Tax Credit (APTC) as a reduction in your monthly premiums. You can access the official Insurance Marketplace through healthcare.gov. Depending on where you live, you will use either the national website or an exchange operated by your state to purchase an ACA-approved plan. The system will also show which insurance plans qualify as high-deductible health plans (HDHPs).

Health Savings Account (HSA)

A health savings account is a tax-advantaged account that an individual may create to set money aside for future medical expenses. If you have an HSA, you (or another person) can make pre-tax contributions to the account up to an annual limit. Your employer may also contribute to your HSA (generally through a cafeteria plan arrangement). As with a health flexible spending arrangement (FSA), withdrawals can be taken from an HSA tax-free, as long as the funds are used for qualified medical expenses. However, unlike FSAs, HSAs do not have an annual "use it or lose it" rule. Generally, to be eligible to contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). In addition, it must not be possible for another person to claim you as a dependent.

High-Deductible Health Plan (HDHP)

The IRS classifies certain health insurance plans as high-deductible health plans, or HDHPs. To qualify as an HDHP, a healthcare plan must have an annual deductible equal to or higher than a threshold set by the IRS. The maximum yearly out-of-pocket expense for the insured person or family must also be equal to or LESS than the limit set by IRS rules. In addition, IRS rules restrict the types of healthcare procedures and expenses that an HDHP can cover. Generally, HDHPs have lower premiums than more comprehensive health insurance plans, but require the insured person or family to pay a larger share of medical expenses. You must have an HDHP in order to contribute to an HSA. The Health Insurance Marketplace shows which available plans qualify as HDHPs.

Holding Period

This term refers to the length of time that a person or business has possession of a capital asset or other item of investment property before selling or disposing of it. Generally, a holding period of one year or less results in a short-term capital gain or loss when the asset is sold, whereas longer holding periods result in long-term gains or losses.

Home Daycare Exception

People who use a portion of their home as a daycare facility may qualify to claim the home office deduction, even if they also use the same area for personal purposes. Typically, the area used as a daycare center must be well-defined, and must be used exclusively for daycare during specified time periods (such as Monday through Friday from 8 a.m. to 3 p.m.). If you provide daycare services and qualify for this exception, then you will use modified methods to compute your home office deduction. These methods take into account the percent of time when the designated area is used for daycare, in comparison to the percent of time when it is available for personal use.

Home Mortgage Interest - see Mortgage Interest Deduction and Mortgage Interest Credit. Home Office Deduction / Home Office Expenses

Officially called the Deduction for Expenses for Business Use of a Home, the home office deduction can reduce the tax liability of independent contractors, small business owners and other self-employed people. To claim the deduction, you typically must have a well-defined area of your home that you use regularly and exclusively for business purposes (unless the home daycare exception applies). With a few exceptions, the workspace must also be your principal place of business. Generally, home office expenses fall into two categories:

• Direct Expenses: These are expenses that pertain only to your home workspace, such as the cost to repair light fixtures in that specific area or room.

• Indirect Expenses: These are costs paid for your entire home, such as utilities, rent or a mortgage. Generally, you may deduct a portion of these expenses based on the area of your workspace in relation to the area of your entire home.

In most cases, you will report home office expenses on Form 8829, and claim the deduction on Schedule C. However, if you elect to use the Simplified Home Office Deduction Method, then you do not need to file Form 8829. Home Sale Capital Gain Exclusion / Primary Home Sale Exclusion / Main Home Sale Exclusion

Selling your home may result in a capital gain, which would usually be subject to capital gains tax. However, eligible people may exclude a substantial portion or even all of the gain from selling their main home from their gross income for tax purposes. To claim this exclusion, you generally must have owned the home and lived in it as your primary residence for at least two of the five years preceding the sale. (Military personnel may qualify for an exception called the five-year test suspension.) If the gain from selling your main home is less than the allowed exclusion, you may not even have to report the sale to the IRS. However, if you receive a Form 1099-S, then you must report the sale, even if you owe no tax on it.

Household Employee

The IRS defines household employees, also called domestic employees, as people who work in or on the grounds of your home, under terms giving you significant control over how they perform their duties. Common examples of household employees include nannies, babysitters, housekeepers and gardeners. In general, if you pay any household employee more than $2,000 during a year, or $1,000 or more during any calendar quarter, then you may need to pay household employment taxes, sometimes called the "Nanny Tax." Failure to pay these taxes could result in substantial tax penalties.

Household Employment Taxes ("Nanny Tax")

If you pay any household employee more than $2,000 during a year, or $1,000 or more during any calendar quarter, then you may need to pay household employment taxes (sometimes called the "Nanny Tax") for that employee. These taxes may include the employer and employee shares of FICA taxes (Social Security Tax and Medicare Tax), as well as federal unemployment tax (FUTA). In order to manage and remit household employment taxes, you will need a federal Employer Identification Number (EIN), which you can obtain for free from the IRS. Generally, you do NOT need to pay household employment taxes on wages paid to your spouse, or to your child under the age of 21. You also may not need to pay these taxes on wages paid to your parent, or to a household employee under 18 years old.

Hybrid Accounting

The term hybrid accounting refers to any bookkeeping system that uses accrual accounting methods for some transactions, and cash accounting for others. For tax purposes, the IRS only allows a few forms of hybrid accounting. Most commonly, a small business might use accrual methods for inventory accounting to calculate the cost of goods sold, and cash accounting for all other purposes.

Identity Protection PIN / IP PIN / Taxpayer PIN

To prevent identity theft and protect people from scammers who file fraudulent tax returns in other people's names, the IRS offers the option of getting an Identity Protection (IP) PIN. Originally provided only to victims of identity theft or tax-related scams, IP PINs are now available to everyone with a Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN). Obtaining and using an IP PIN helps ensure that the IRS will not accept a bogus return filed in your name, or issue your refund to the wrong person. You can apply for an IP PIN through the IRS website.

Income Adjustments - see Above-the-Line Deductions. Income Tax / Income Taxes

An income tax is any tax levied on money, goods or property that an individual or business receives as income. Income taxes may apply to earned income like wages, tips and self-employment earnings, unearned income like interest and dividends, or both. In addition to federal income tax, a person or business may need to pay state or local income taxes.

Independent Contractor

Generally, an independent contractor is someone who offers services for a fee to businesses, the general public or both. Independent contractors typically provide their services to more than one payer (client), and set their own fees and work schedules. Overall, independent contractors have more freedom than employees to decide when, how and where they work. Unlike employees, independent contractors ordinarily do not have taxes withheld from their pay. Instead, they generally must report and pay both income tax and self-employment tax on their net earnings. Often, they must make estimated tax payments in order to avoid tax penalties. Also see Employee vs. Independent Contractor.

Indirect Expenses - see Home Office Deduction. Individual Retirement Arrangement - see IRA. Individual Taxpayer Identification Number - see ITIN. Information Returns

An information return is a tax form that the IRS requires an individual or business to file to report payments, wages or other transactions. Information returns are filed separately from tax returns, and there is no requirement to pay tax when they are filed. However, many transactions reported on information returns have tax impacts. Common information returns include Form W-2 and the Form 1099 series.

Injured Spouse / Injured Spouse Claim

Sometimes when a married couple files a joint return, the IRS withholds some or all of the couple's tax refund due to debts owed by one spouse. For example, one spouse may have federal debts dating back before the marriage, such as overdue child support or student loan payments. In these cases, the IRS refers to the spouse who does not have the debts in question as an injured spouse. Depending on the circumstances, an injured spouse may be able to claim and receive their share of a withheld tax refund. A person can make this request, called an injured spouse claim, by filing IRS Form 8379.

Innocent Spouse / Innocent Spouse Relief

In general, people who inaccurately report income, deductions or other items on their tax returns may face tax penalties, IRS interest charges or even criminal charges. Sometimes, however, one spouse improperly reports (or fails to report) information on a married couple's joint return, without the other spouse's knowledge. In such cases, the IRS refers to the spouse who was unaware of any issues with the joint return as an innocent spouse. An innocent spouse may qualify for relief from paying any part of the tax penalties and IRS interest fees triggered by the other spouse's actions, as well as from any resulting criminal liability. People can apply for such innocent spouse relief by filing IRS Form 8857.

Installment Agreement

The IRS encourages people who cannot pay the full amount of tax they owe to enter into installment agreements. Under these agreements, a person makes monthly payments until they fully pay off their tax liability. Although installment agreements generally involve paying IRS interest fees, a person may be able to minimize or eliminate tax penalties by voluntarily requesting the payment plan. You can apply for an installment agreement by filing Form 9465, or through the IRS website.

Insurance Exchange / Insurance Marketplace - see Health Insurance Marketplace. Intangible Property / Intangible Asset

This accounting term generally refers to business or investment property that has no physical form or predetermined value - essentially ideas, concepts and the like. The most common intangible assets include intellectual property like trademarks, trade secrets, and copyrights for music or written content.

Interest Income

Many types of financial accounts, including savings accounts and CDs, pay interest to the account holder. In most cases, interest income is taxable, but there are a few types of tax-exempt interest. Like other forms of investment income (such as capital gains or dividends), interest income is classified as unearned income, so it cannot qualify a person for the Earned Income Tax Credit.

Internal Revenue Code - see Tax Code. Internal Revenue Service - see IRS. Inventory Accounting

This term describes the process of tracking and determining the value of items held by a business or self-employed person in inventory for sale. Among other purposes, inventory accounting makes it possible to calculate the cost of goods sold (COGS) and gross profit. The primary inventory accounting techniques accepted by the IRS are FIFO, LIFO, weighted average cost (WAC) and specific identification. However, small enterprises may qualify for the small business inventory exception, which allows for simplified inventory accounting and reporting.

Investment Income

The broad term investment income covers many types of unearned income, including interest and dividends, capital gains, and some net income from rents and real estate royalties. Income from certain passive business activities may also be classified as investment income for tax purposes.

Investment Property

Any property that a person or business holds because of its potential to rise in value or generate future income is typically designated as investment property for tax purposes. The income produced by investment property can take many forms, including rents, royalties, capital gains and various uses of the property in a trade or business. Types of investment property include real estate, equipment and facilities, artwork, intangible assets like copyrights and trademarks, and financial property like stocks or virtual currency. Different tax rules may apply for investment property than for other personal property.

IP PIN - see Identity Protection PIN. IRA (Individual Retirement Arrangement)

An individual retirement arrangement (IRA, also called individual retirement account) enables a person to set aside money for retirement in a tax-advantaged account. The specific tax advantages depend on the type of IRA, but all IRAs provide some form of tax-free or tax-deferred growth in value. The two most common IRA types are traditional IRAs and Roth IRAs.

IRA Contribution Limit

Like many other tax-advantaged savings plans, IRAs are subject to an annual contribution limit set by the IRS. The IRA contribution limit applies to the total amount that a person contributes to all of their IRAs, including both traditional IRAs and Roth IRAs.

IRA Conversion

An IRA conversion (also called a Roth conversion) is a special type of retirement plan rollover, where a person moves funds from a traditional IRA or other qualified retirement plan into a Roth IRA or similar account. A Roth conversion may be beneficial for people whose future income projections change, or who cannot directly fund a Roth IRA because their adjusted gross income (AGI) is too high. Roth IRA conversions are typically taxable events. Under current tax laws, it is not possible to reverse a Roth conversion, so the rollover should only be undertaken after careful planning.

IRS 30D Credit - see Qualified Plug-In Electric Drive Motor Vehicle Credit. IRS (Internal Revenue Service)

The Internal Revenue Service (IRS) is the U.S. Federal Government's primary tax administration, collection and enforcement agency. The IRS plays a role in many matters related to federal taxes, but not state or local taxes.

IRS Account - see IRS Online Account. IRS Deadline - see Filing Deadline / General Filing Deadline. IRS Interest / Interest on Tax Due or Tax Refunds

Generally, the IRS assesses interest fees when a person or business pays tax after the applicable due date or filing deadline. Conversely, the IRS pays interest to those whose tax refunds get excessively delayed. (In most cases, the law requires the IRS to issue a refund within 45 days after accepting a tax return for processing, or 45 days after the filing deadline for that return, whichever comes later.) The interest rates charged and paid by the IRS are periodically adjusted based on general economic conditions.

IRS Penalty - see Tax Penalty. IRS Online Account

Through the IRS website, a person can set up a personal online account. Creating the account requires completing an identity verification process that typically takes about 15 minutes. Once you have an online account, you can use it to complete many tax-related tasks, like accessing information from your past returns, making payments, checking the status of your tax refund, applying for an installment agreement, or checking your eligibility for the Child Tax Credit (CTC) and other tax benefits.

IRS Refund - see Tax Refund IRS Withholding Estimator - see Withholding Estimator Tool. Itemized Deductions

By claiming itemized deductions, people can reduce their taxable income based on specific expenses they incurred during the year. The most common itemized deductions include medical expenses, home mortgage interest and charitable donations. If the total of your itemized deductions is greater than your standard deduction, then you could reduce your tax liability by itemizing.

ITIN (Individual Taxpayer Identification Number)

The IRS issues ITINs to people who need an ID number for tax purposes, but are not eligible for a Social Security Number (SSN). Most commonly, ITINs are issued to resident aliens and nonresident aliens

Joint Return / Joint Tax Return

A joint return is a tax return submitted by a married couple whose filing status is married filing jointly. For many purposes, the IRS treats spouses who file a joint return as one individual. However, for certain tax benefits like the educator expense deduction, separate limits and reporting requirements may apply for each spouse.

Joint Return Test

This test is one of many factors that the IRS considers when determining whether a person can claim someone as a qualifying child or qualifying other relative dependent. Generally, you cannot claim a married person as your dependent if that person files a joint tax return. However, an exception exists for cases when the joint return is only filed to claim a tax refund.

1099-K Form - see Form 1099-K.

Letter of Determination

Sent by a federal agency, a letter of determination documents events or circumstances that may qualify a person for special tax programs or exemptions. For example, the Department of Veterans Affairs (VA) sends a letter of determination to discharged service members who qualify for disability severance pay, which is generally nontaxable income.

Lifetime Exclusion (for Gift and Estate Tax)

Individuals can give away a certain amount of property, either as gifts while they are living or through bequeathals after they pass away, without incurring gift and estate tax. The IRS limit for these tax-exempt property transfers is called the lifetime exclusion. Generally, each spouse in a married couple is entitled to the lifetime exclusion, regardless of the couple's filing status. Importantly, gifts that fall within the annual exclusion do not count toward a person's lifetime exclusion.

Lifetime Learning Credit (LLC)

Eligible people may claim the Lifetime Learning Credit (LLC) for qualifying higher education expenses. The credit may cover a significant portion of tuition and school fees paid for a student who is enrolled at a qualifying higher education institution. The student may be the person claiming the credit, or that person's spouse or dependent. Eligibility restrictions include a limit on modified adjusted gross income (MAGI). Unlike the American Opportunity Tax Credit (AOTC), the LLC is not refundable in any amount. However, the LLC has more flexible qualification rules.

LIFO

One of four common methods used in inventory accounting to determine the cost of goods sold (COGS), the LIFO method assumes that the newest items in stock are sold first ("last in, first out"). While the IRS currently accepts LIFO inventory accounting, some international reporting standards do not allow it because it tends to undervalue remaining inventory and inflate COGS. Alternatively, a business may track inventory using the FIFO, weighted average cost (WAC), or specific identification method.

Like Kind Exchange - see Section 1031 Exchange. Limited Liability Company (LLC)

The limited liability company (LLC) business entity type generally gives business owners more personal asset protection than a sole proprietorship, partnership or LLP. The LLC structure also allows for more flexibility in how a business is operated and managed than a corporate structure (S corporation or C corporation). While single-member LLCs generally get taxed as sole proprietorships, those with multiple members may elect to be taxed as partnerships, S corporations or C corporations. Therefore an LLC may either have a pass-through taxation structure, or pay corporate income tax.

Limited Liability Partnership (LLP)

One major drawback of a business partnership is that all owners (partners) may be liable for a single partner's activities. For example, if one partner engages in an act that results in a lawsuit, every partner's personal assets might be put at risk. The limited liability partnership (LLP) business entity type reduces each partner's potential liability for the actions of others. For example, many law firms have an LLP structure. For tax purposes, the IRS generally treats LLPs the same as ordinary partnerships.

Long-Term Capital Gain or Capital Loss - see Capital Gain or Capital Loss and Capital Gains Tax. Long-Term Capital Gains Tax Rate - see Capital Gains Tax Rate. Lump-Sum Distribution

Over the course of working for an employer, an employee may qualify for a variety of benefits, such as a pension, stock bonuses or a profit-sharing plan. Often, the benefits an employee accumulates are paid out in annual distributions after the employee retires. However, under certain circumstances (for instance, as part of a severance package), an employer might pay out an employee's entire benefits balance in a single tax year. This one-time payment is called a lump-sum distribution. In most cases, lump-sum distributions are taxable income.

Main home

The IRS usually defines a person's main home (or primary home) as the place where the person lives most of the time. Many types of dwellings besides houses and apartments can qualify as a main home, including houseboats, mobile homes and co-op housing. Generally, the home must have some type of cooking, sleeping, and bathroom facilities. If you own or maintain multiple homes and do not spend more than half the year at any of them, the IRS will consider additional factors to determine which one is your main home, such as the address listed on your driver's license or voter registration card. A home must qualify as your main home in order to be eligible for the home sale capital gain exclusion.

Main Home Sale Exclusion - see Home Sale Capital Gain Exclusion MACRS (for Depreciation Deductions)

The modified accelerated cost recovery system (MACRS) is a common method used to calculate depreciation deductions. Generally, MACRS allows for larger depreciation deductions during the early years of an asset's useful life than the straight-line method. IRS regulations require the use of MACRS depreciation for certain assets, and forbid its use for others. In many other cases, a business or person may use either MACRS or straight-line depreciation, or request permission to use alternative techniques like the units of production method.

Marginal Tax Rate

Also called a nominal tax rate, a marginal tax rate is the highest federal income tax rate that applies to any portion of a person's taxable income. Note that the IRS only applies a person's marginal tax rate to taxable income above the limit for the next lowest rate. Marginal tax rates also do not take into account any tax credits that a person qualifies to claim. Therefore, a person's effective tax rate may be significantly lower than their marginal tax rate, and will more accurately reflect their tax liability. Also see tax bracket.

Married Filing Jointly (MFJ)

Married couples and couples who live together in recognized common-law marriages may choose this filing status. Under this status, a couple files one tax return together (called a joint return), generally combining their income, deductions and credits. (Note, however, that some credits and deductions, like the educator expense deduction, require separate accounting for each spouse's share, even on a joint return.) Filing jointly often, but not always, results in lower tax liability than choosing married filing separately status. People whose spouses passed away during the year covered by a tax return may generally still file under MFJ status, as long as they have not remarried by the end of that year.

Married Filing Separately (MFS)

Married couples and couples who live together in recognized common-law marriages may choose this filing status, where each spouse files a separate tax return. If you choose this status, you will report only your income, deductions and credits on your return, and your spouse will do the same. However, if you live in a community property state, then all community income must generally be divided equally between your return and your spouse's. Filing separate returns often results in greater tax liability than married filing jointly (MFS) status, but there are circumstances where using MFS status reduces a couple's tax bill.

Material Participation

The term material participation (or materially participating) describes a high level of involvement in a trade or business during a tax year. The IRS uses a variety of tests to determine whether you materially participated in business activities, including the number of hours you devoted to those activities, and your level of involvement in fundamental business decisions and operations. In general, if you materially participate in a trade or business, then any resulting losses will not be subject to the passive activity loss rules. IMPORTANT EXCEPTION: Most rental income is considered passive income even if a person meets the usual tests for material participation, unless that person is a real estate professional.

Medicaid / Medicaid Expansion

Medicaid is a government program that provides healthcare coverage to millions of low-income Americans. Although the federal government funds and regulates Medicaid, the program is administered at the state level. Individual states may have different income requirements and coverage policies, and may refer to their Medicaid programs by different names. The term Medicaid expansion generally refers to any policy that makes more people eligible for Medicaid coverage.

Medical Expense Deduction

People who itemize deductions may claim a tax deduction for certain medical expenses. Deductible expenses include a range of procedures to diagnose, treat, mitigate or prevent illnesses, injuries and other health conditions. However, people generally may only claim the medical expense deduction for healthcare costs above a percentage of their gross income specified by the IRS.

Medicare

Medicare is a family of government-sponsored health insurance plans for Americans age 65 or older, and for those with certain disabilities or chronic illnesses. Most Americans become eligible to enroll in Medicare three months before their 65th birthday. The Medicare program is primarily funded by Medicare Tax, a component of FICA taxes.

Medicare Advantage MSA (Medicare Advantage Medical Savings Account)

A Medicare Advantage MSA is one of the available healthcare coverage options for people enrolled in Medicare. To create this special type of medical savings account, you must first enroll in a high-deductible Medicare Advantage health insurance plan. Next, you will need to set up an MSA with a financial services provider, usually a provider specified by the insurance company. The insurance company then periodically deposits money into the MSA. You can withdraw money from a Medicare Advantage MSA tax-free, as long as you use the funds for qualified medical expenses and have not yet met your insurance plan's deductible for the year.

Medicare Tax

Medicare tax is one of two components making up the FICA taxes that nearly all U.S. workers must pay (the other being Social Security tax). This tax is assessed at a flat rate of 2.9% of a worker's earnings. Employers and employees each pay half of Medicare tax, so the employee share is 1.45% of gross earnings. Meanwhile, people with self-employment income pay Medicare tax as part of self-employment (SE) tax. Workers with high incomes may also have to pay the additional Medicare tax. Paying Medicare tax over an extended period is necessary to qualify for Medicare benefits. It is therefore critical for people with significant earnings from self-employment (such as gig economy work) to pay SE tax, and for people with household employees to pay household employment taxes.

Military Travel Expense Deduction

If you are a member of the National Guard or military reserves, then you may be able to claim a tax deduction for certain unreimbursed travel expenses. To claim the deduction, you generally must incur the expenses while traveling more than 100 miles from your home in connection with the performance of your military or Guard duties. The travel must also involve an overnight stay. This military travel expense deduction is an above-the-line deduction, so you may claim it without itemizing deductions.

Minimal Rental Use / 14-day Rental Income Exemption / Augusta Rule

Generally, income from rental activities is taxable and must be reported to the IRS. However, an exception applies if you use a property as your personal residence, and rent it out to others for fewer than 15 days of the year. For such minimal rental use, you generally do not need to report any rental income, and cannot claim any deductions for rental expenses. This exemption is sometimes referred to as the "Augusta rule," since many residents of Augusta, Georgia rent out their homes during the week of the famous Masters golf tournament. Also see 14-day / 10% of Rental Use Rule.

Mixed-Use Property - see Dual-Use Property. Modified Accelerated Cost Recovery System - see MACRS. Modified Adjusted Gross Income (MAGI)

IRS rules set income limits for many tax benefits. In many cases, these limits are based on a person's adjusted gross income (AGI). However, certain IRS programs base eligibility on a different figure called modified adjusted gross income, or MAGI. To figure your MAGI, you will generally start with your AGI, and then add in or subtract away certain income types. The rules regarding which types of income to add or subtract vary for different programs, so your MAGI for one tax benefit may differ from your MAGI for another. Note that if the additions and subtractions required to calculate MAGI do not apply to your circumstances, then your AGI and MAGI will be identical.

Mortgage Interest Credit

Some people qualify for a nonrefundable tax credit for home mortgage interest. Generally, to claim this credit, you must have received a qualified mortgage credit certificate (MCC) from your state or local government. This credit is a separate tax benefit from the standard mortgage interest deduction.

Mortgage Interest Deduction

Many homeowners qualify to claim a tax deduction for interest they pay on their home mortgages. Typically, both actual interest charges and mortgage insurance premiums may be included in this deduction. However, in order to claim the deduction, you must itemize deductions. Therefore, deducting mortgage interest will only lower your tax liability if your itemized deductions total more than your standard deduction. Often, a person's home mortgage interest deduction is largest during the early years of paying off a mortgage, when mortgage payments consist primarily of interest.

Mortgage Insurance Premiums

Many mortgage lenders require borrowers to have mortgage insurance, sometimes called private mortgage insurance or PMI. Generally, homeowners who itemize deductions can include PMI in their mortgage interest deduction.

MSA (Medical Savings Account)

This term refers to tax-advantaged accounts that people can use to set money aside for medical expenses. The two most common MSA types are Archer MSAs and Medicare Advantage MSAs.

Multiple Support Agreement

Generally, you must provide over half of a person's support in order to claim that person as your dependent. However, a situation may arise where you are one of several people who support an individual, with no one person providing half of the individual's support. Under those circumstances, all of the people who provide support can agree in writing which one (but only one) of them will claim the dependent. Such an arrangement is known as a multiple support agreement. The person designated to claim the dependent generally must provide details of the agreement to the IRS by filing Form 2120.

Munis / Muni Bonds - see Tax-Exempt Interest. Mutual Funds

A mutual fund is a regulated investment company that pools the funds of multiple investors, and invests those funds in stocks, bonds or other assets. The assets in the fund are called the portfolio, and each investor owns shares of the portfolio. Shareowners of mutual funds may get multiple 1099 forms at the end of each year, summarizing any unearned income they have received from the fund.

Nanny Tax - see Household Employment Taxes. Necessary Expense - see Business Expenses. Net Capital Gain or Net Capital Loss

The net capital gain received by a person or business for a year is found by adding up all capital gains, and then subtracting away any capital losses. If the result is negative, then the person or business has a net capital loss for the year. Generally, capital gains tax applies to net capital gains. Generally, a limited amount of a net capital loss may be used to offset other income, with any excess loss carrying forward to future tax years.

Net Profit

Also called net earnings or net income, the net profit of a business or self-employment venture is found by subtracting all deductible business expenses away from gross revenues. Generally, federal business taxes like corporate income tax and self-employment tax apply only to net profits.

Nominal Tax Rate - see Marginal Tax Rate. Nondeductible Traditional IRA Contributions

If you and your spouse do not have employer-sponsored retirement plans, then contributions you make to a traditional IRA will generally be tax-deductible (as long as you do not exceed the annual contribution limit). However, if you or your spouse is covered by a workplace retirement plan, then your deduction for traditional IRA contributions may be limited or disallowed. The specific rules that apply may depend on your filing status and modified adjusted gross income (MAGI). A contribution that does not qualify for a tax deduction is called a nondeductible traditional IRA contribution, and generally must be included in the gross income you report on your tax return.

Nonprofit Entity / Nonprofit Company / Nonprofit Organization

To be designated by the IRS as a nonprofit, an organization must be committed to a social cause or public benefit, rather than to generating profits for owners or shareholders. Common nonprofit entity types include religious and charitable organizations, scientific and public safety testing services, and societies devoted to literary or educational work. If these organizations meet additional IRS requirements related to management and oversight, then they may qualify for tax-exempt status, meaning that their earnings are not subject to federal income tax. Making donations to tax-exempt organizations may entitle you to claim a charitable contributions deduction.

Nonrefundable Credit / Nonrefundable Tax Credit

A nonrefundable tax credit can reduce or eliminate a person's tax liability, but cannot result in a tax refund. Suppose, for example, that a person's total tax before credits is $8,700, and the person qualifies for a $5,500 nonrefundable tax credit. The credit would generally reduce the person's tax bill down to $8,700 - $5,500 = $3,200, so the person would get the full benefit of the credit. Now suppose that a second person qualifies for the same nonrefundable $5,500 credit, but only owes $4,300 in tax. The credit could reduce the person's tax liability to $0, but the excess credit would simply go to waste. Compare with refundable tax credit and partially refundable tax credit.

Nonresident Alien

The IRS classifies people as nonresident aliens if they do not have legal status to live in the U.S. as immigrants (the green card test), and also do not meet the substantial presence test. Nonresident aliens generally must use Form 1040-NR to file their tax returns. With a few exceptions, nonresident aliens cannot claim the standard deduction, and cannot qualify for a number of other tax benefits.

Nontaxable Income

The term nontaxable income refers to types of income that are not subject to federal income tax. Examples include many gifts and inheritances, cash rebates from product purchases, child support, tax-exempt interest, rental income covered by the minimal rental use rule, and some alimony and government assistance payments. You generally do not need to include nontaxable income in the gross income you report on your tax return. However, you must report some types of nontaxable income elsewhere on your return, even though you will not owe tax on it. Also keep in mind that some nontaxable income for federal tax purposes may still be taxable at the state or local level.

Online IRS Account - see IRS Online Account. Operating Expense / Ordinary Business Expense / Business Operating Expense

The IRS primarily divides business expenses into two main categories: operating (or ordinary) expenses and capital expenses. In general, operating expenses are expenses that regularly occur in the course of pursuing a trade or business, and do not result in the acquisition of capital business assets. Common examples of business operating expenses include labor, advertising, insurance, travel, rent, utilities, and supplies that regularly get used up. In many cases, you can deduct an operating expense all at once, rather than needing to capitalize the expense. However, the timing of the deduction may depend on whether you use cash accounting or accrual accounting. Also see Twelve-Month Rule.

Ordinary Dividends

Many of the dividends that corporations distribute to shareholders get classified as ordinary dividends for tax purposes. Generally, these dividends are taxed as ordinary income, whereas qualified dividends may be taxed at different (often lower) rates.

Ordinary Income

The IRS uses this term to refer to all types of income that may be taxed at standard income tax rates. These income types may include wages, salaries, interest, royalties, commissions, ordinary dividends, tips, self-employment income, depreciation recaptures and many short-term capital gains. For examples of income that may not be treated as ordinary income for tax purposes, see Excludable Income, Gift and Estate Tax, Qualified Dividends, and long-term capital gain or loss under Capital Gain or Loss.

Overseas Housing Allowance (OHA)

Certain U.S. military personnel stationed outside the continental U.S. are permitted to secure private housing (for example, by renting an apartment). These military members may receive an overseas housing allowance (OHA) to cover the cost of rent and utilities. An OHA is usually excludable income.

Paid Preparer / Paid Tax Preparer / Paid Tax Return Preparer

A paid preparer is any person or agency that charges a fee to complete and/or file tax returns for others. By law, paid preparers must obtain a PTIN from the IRS, and must sign all returns that they prepare. They are legally liable for errors and knowing misrepresentations that they make on those returns (though generally not for issues resulting from being provided with inaccurate information by clients). Anyone who requests money to prepare your tax return, but either refuses to sign the return or does not have a valid PTIN, is breaking the law. Do not trust these "ghost preparers," and if possible, report them to the IRS.

Partially Refundable Credit / Partially Refundable Tax Credit

With a partially refundable tax credit, if your credit amount exceeds the tax you owe, then you may receive a portion (but not all) of the excess credit as an IRS refund. These credits occupy a middle ground between refundable credits and nonrefundable credits.

Partnership

A partnership is the default business entity type for an unincorporated venture with multiple owners. Typically, a partnership must file IRS Form 1065 to report income, expenses, deductions and credits, and attach Schedule K-1s showing how those figures are allocated to the partners. The partners then report their shares of partnership tax figures on their personal tax returns. Thus, partnerships are pass-through entities. Partnership earnings may be subject to both income tax and self-employment tax. Also see Limited Liability Partnership (LLP).

Passive Activity

This term most often refers to scenarios where a person receives income from a trade or business, without being involved in operations on a regular or substantial basis. Generally, the opposite of passive activity is material participation in an enterprise. Note, however, that the IRS classifies many rental operations as passive activities even if a person's involvement meets the usual standards for material participation, unless the person is a real estate professional. Losses from passive business or rental activities are typically subject to the passive activity loss rule. However, active participation in a rental operation, which is different from material participation, may qualify a person for a partial exemption from that rule known as the Special $25,000 Allowance.

Passive Activity Rule / Passive Activity Loss Rule / Passive Loss Rule

If the IRS classifies a person's involvement in a rental operation or trade or business as a passive activity, then special tax rules apply to losses resulting from that activity. In most cases, the passive activity loss rule states that a person can only deduct expenses from passive activities up to the amount of their total passive activity income that year. In other words, passive activity losses typically cannot be used to offset other income. However, excess losses may generally be carried forward to future tax years.

Passive Income

Any income that a person derives from a passive activity, such as ownership of a business without playing a significant role in operations, is classified as passive income. The IRS also considers rents and real estate royalties to be passive income in most cases, although different rules may apply for real estate professionals. Passive income is generally subject to the passive activity loss rule.

Pass-Through Entity / Pass-Through Business Taxation

Rather than paying federal income tax at the enterprise level, many businesses allocate income and expenses to shareowners or beneficiaries, who then report their shares of these figures on their personal tax returns. This process, known as pass-through taxation, also applies for many trusts and estates. As an example, if five partners own equal shares of a business, then the partners would each report one-fifth of the company's income, deductions and credits on their personal tax returns. The most common pass-through business entities are partnerships, limited liability partnerships (LLPs), limited liability companies (LLCs) and S corporations.

Pay-As-You-Go Rule

The IRS requires people and businesses to make regular tax payments throughout the year, as they receive income. Most people meet their pay-as-you-go tax obligations through paycheck withholding, but those with significant self-employment earnings or rental or investment income may need to make estimated tax payments. The IRS Withholding Estimator Tool can help you determine whether your withholding is staying on track. Failing to pay a sufficient amount of tax over the course of a year may trigger tax penalties and IRS interest fees.

Paycheck Withholding - see Withholding. Payment Plan - see Installment Agreement. Payroll Taxes

This term usually refers to the Social Security and Medicare (FICA) taxes that an employer must withhold from each employee's pay, and/or to the employer share of those taxes. It may also refer to federal and/or state unemployment taxes. Also see Employment Taxes.

Pension

The term pension generally refers to an employee retirement plan funded by contributions from the employer. Traditionally, pensions have taken the form of defined benefit plans, meaning that covered employees are guaranteed a specific, regular (usually monthly) payment amount in retirement. Some pensions today instead take the form of defined contribution plans, which specify how much the employer will contribute to the account, with future payment amounts depending on how the account performs over time. In some cases, employees may elect to receive their pension benefits as a lump-sum payment upon retiring. Generally, pension payments are taxable income.

Period of Stay

This term refers to the amount of time that a U.S. citizen or resident spends in a foreign country, which may determine whether the person can claim the foreign earned income exclusion. The IRS evaluates a person's period of stay based on the bona fide residency test and/or the physical presence test.

Personal Exemption

Depending on current tax laws, a person may qualify to claim income adjustments called exemptions in addition to tax deductions like the standard deduction or itemized deductions. When they are allowed, exemptions work similarly to deductions, reducing a person's tax liability by lowering their taxable income. A personal exemption is an exemption you claim for yourself, or in some cases, for your spouse. Also see Dependent Exemptions.

Personally Procured Move (Military)

If a member of the U.S. military pays moving expenses due to a change of station, the government generally reimburses those expenses. In these situations, known as personally procured moves, the military member generally does not have to report the reimbursement as taxable income, unless the reimbursement payments exceed the actual cost of the move.

Personal Property / Personal Use Property

For tax purposes, personal use property (or just personal property) is any property that you own but do not use in the pursuit of a trade or business, or for other income-generating purposes. A home that you rent out some of the time may be classified as personal property based on the 14-day / 10% test. If you operate a small business, work as an independent contractor or have other self-employment income, then you may have property that you use for both business and personal purposes. Special IRS rules apply to deducting business expenses related to such dual-use property.

Phaseout Range

Many tax benefits have income limits. These income limits sometimes have a phaseout range, which is a range of incomes where people may still claim the benefit in a reduced amount. Suppose, for example, that the maximum amount of a certain credit is $4,000. For couples whose filing status is married filing jointly, the phaseout range for adjusted gross income (AGI) is $100,000 to $125,000. In this case, eligible couples with an AGI of up to $100,000 could claim the full credit amount. Eligible couples with an AGI between $100,000 and $125,000 could still claim the credit, but their maximum credit amount would be less than $4,000. Couples with an AGI of $125,000 or more could not claim the credit in any amount.

Physical Presence Test

The physical presence test is one of the two main criteria that the IRS uses to determine a person's period of stay in a foreign country, and thus whether the person qualifies for the foreign earned income exclusion. Generally, this test requires that a person be physically present in a foreign country for 330 full days out of a period of 12 consecutive months. Also see Bona Fide Residence Test.

Plug-In Vehicle Credit - see Qualified Plug-In Electric Drive Motor Vehicle Credit. PMI (Private Mortgage Insurance) - see Mortgage Insurance Premiums. Premium Tax Credit (PTC)

The Affordable Care Act (ACA) created this refundable tax credit for individuals and families who purchase private health insurance coverage. You may be eligible for the Premium Tax Credit (PTC) if your modified adjusted gross income (MAGI) is below the limit set by the IRS for your filing status, and you cannot get affordable health insurance through your or your spouse's employer. To qualify for the credit, you must purchase coverage through the official Health Insurance Marketplace (Exchanges). Additional eligibility restrictions may apply. If you qualify, you may elect to receive the PTC as a reduction in your monthly health insurance premiums, called the Advance Premium Tax Credit (APTC).

Preparer Tax ID Number - see PTIN. Pre-Tax Contributions (Retirement, Health, Cafeteria & Other Benefit Plans)

Contributions that people make to retirement arrangements or other tax-advantaged accounts like FSAs and HSAs may be treated in two different ways by the IRS. If a contribution you make to a plan or account can be deducted from your gross income for tax purposes (in other words, it is tax-deductible), then that money is called a pre-tax contribution. Some plans funded with pre-tax contributions also allow tax-free withdrawals for eligible purposes (such as qualified medical expenses). However, withdrawals and distributions from retirement plans funded on a pre-tax basis are generally taxable income, and may also be subject to the early withdrawal penalty. Also see after-tax contributions.

Primary Home - see Main Home. Primary Home Sale Exclusion - see Home Sale Capital Gain Exclusion. Profit

This term generally refers to income received by a company, partnership, sole proprietorship, or individual with self-employment income. Profit may mean gross profit, net profit or some other figure, depending on which business expenses have been taken into account.

Property Tax

This term refers to any tax assessment based on ownership of real estate or, in some cases, other types of property. There are no federal property taxes in the U.S., so property tax matters do not involve the IRS. Instead, they are overseen by state and local taxing authorities.

PTIN (Preparer Tax Identification Number)

IRS rules require anyone who charges money to prepare or help prepare federal tax returns to have a valid preparer tax identification number, or PTIN. Paid tax preparers must renew their PTINs annually, and must sign and include their PTIN on every return that they prepare. Anyone who offers to file your tax return for a fee, but does not have a current PTIN, is violating federal law. Also see Ghost Preparer.

Public Ledger / Distributed Ledger (Cryptocurrency and other Virtual Currencies)

Many Cryptocurrencies and other virtual currencies have public ledgers (also called distributed ledgers), which are records of sales, purchases and exchanges of the currency. The anonymity of transaction participants is protected by digital encryption. In some cases, the ledger can be used to determine the fair market value (FMV) of a virtual currency.

QBI Deduction / Qualified Business Income Deduction

When allowed under IRS rules, the qualified business income (QBI) deduction enables many people with business or real estate royalty earnings to deduct a portion of those earning from their adjusted gross income (AGI). The deduction amount depends on a number of factors, but can range as high as 20% of the person's net income from business or real estate activities. People with many different forms of business income may be eligible to claim the QBI deduction, including small business owners, independent contractors and other self-employed people. Eligible people generally do not have to itemize deductions in order to claim the QBI deduction.

Qualified Business Income - see QBI Deduction. Qualified Charitable Distribution from an IRA (QCD)

A QCD is a distribution from a person's IRA that is paid directly to a charitable organization. The organization that receives the distribution must be a tax-exempt nonprofit, and must be designated as a "qualified charity" by the IRS. QCDs are generally not taxable income. Therefore, making a QCD can enable a person to satisfy required minimum distribution (RMD) rules without increasing their tax liability.

Qualified Dividends

Certain dividends that companies distribute to shareholders may be classified as qualified dividends for tax purposes. In some cases, these dividends are taxed at lower rates than ordinary dividends. Recipients of qualified dividends should receive a Form 1099-DIV from the company paying the dividends, showing the total value of their qualified dividends for the year.

Qualified Intermediary (QI)

A qualified intermediary (QI) is a person or agency that facilitates certain transactions with potential tax impacts. Most commonly, the term QI refers to someone who facilitates real estate Section 1031 exchanges. However, there are many other types of QIs, such as foreign intermediaries who handle issues related to taxes on worldwide income.

Qualified Medical Expenses

In order for a withdrawal from an HSA, MSA, health FSA or other tax-advantaged account designated for medical costs to be exempt from tax, the funds must be used for qualified medical expenses. The list of products, medicines, treatments and procedures that the IRS classifies as qualified expenses varies somewhat from year to year, and may also depend on which type of account you have. If you are unsure whether a specific cost is a qualifying medical expense, check with your plan provider before withdrawing funds from your account.

Qualified Plug-In Electric Drive Motor Vehicle Credit (IRC 30D Credit)

The qualified plug-in electric drive motor vehicle credit (also called the Electric Vehicle Credit or Clean Vehicle Credit) is a nonrefundable tax credit for those who purchase electric or plug-in hybrid vehicles for business or personal use. This program was created by Congress as an extension of the alternative fuel motor vehicle credit that was first introduced in 2006. In some cases, a vehicle buyer can assign the Electric Vehicle Credit to the seller, in exchange for a reduction in the vehicle purchase or lease price.

Qualified Retirement Plans

This term refers to various tax-advantaged accounts that allow people to defer paying tax on income until they retire. Generally, these accounts may be funded with pre-tax contributions from employees, their employers or both. Common qualified retirement plans include 401(k) plans, 403(b) plans and SIMPLE IRAs.

Qualified Tuition Program (Section 529 Plan)

A QTP enables people to pay or set aside money for higher education expenses for a beneficiary student in advance. With a state-sponsored QTP, also called a section 529 plan, people, businesses, estates or trusts can make after-tax contributions to a tax-advantaged account to help cover the designated beneficiary's future tuition costs. The account's value can then grow tax-free over time. Withdrawals from a QTP account may be taken tax-free, as long as the funds are used for qualifying education expenses for the beneficiary (or, in some cases, the beneficiary's sibling). Overall, these accounts work similarly to a Coverdell ESA.

Qualifying Child

To be eligible for various tax benefits, such as the Child Tax Credit (CTC) and child and dependent care credit, a person must have at least one qualifying child dependent. The IRS uses a number of tests to determine whether someone is a person's qualifying child, including the relationship test, support test, joint return test, age test and citizen or resident test. The exact requirements for qualifying children vary between programs, so a child could be your qualifying child for one tax benefit but not for another.

Qualifying Child of More than One Person Tests

Sometimes, the same child could be claimed as a qualifying child by two or more people. In these situations, the IRS applies various "tiebreaker" tests to determine which person may claim the qualifying child for tax purposes. In some cases, the people involved can instead decide for themselves who will claim the qualifying child, by submitting a multiple support declaration or other written notice to the IRS.

Qualifying Child or Other Relative of Divorced, Separated, or Never Married Parents

When a child's parents are divorced or separated, or were never married, special rules apply to determine which parent may claim the child as a dependent and/or qualifying child. The IRS generally assigns this right to whichever parent the child lives with most of the time (that is, the parent with sole or primary custody). However, in some cases, the parent with primary custody may agree to allow the noncustodial parent to claim the child as a dependent. In either situation, the child must meet all the other IRS tests to be a qualifying child for the Child Tax Credit (CTC), Earned Income Tax Credit or other tax benefits.

Qualifying Dependent

To be eligible for certain tax benefits, like the child and dependent care credit, you must have at least one qualifying dependent. Generally, this dependent must be either your qualifying child or qualifying other relative according to IRS rules. In some cases, the category of other relatives may include an unrelated member of your household if you support that person financially. Also see Relationship or Member of Household Test.

Qualifying Reason for Roth IRA Withdrawal

Because Roth IRAs are funded with after-tax contributions, they have more flexible early withdrawal penalty rules than traditional IRAs. For example, people may generally take withdrawals from their Roth IRA accounts before they turn 59 1/2 without penalty if they use the funds for certain purposes, referred to as qualifying reasons for a Roth IRA withdrawal. Examples of qualifying reasons include certain medical and education expenses, along with first-time home purchases. Note, however, that even if no penalties apply, these withdrawals may still be taxed if the withdrawn funds have not been in the Roth IRA for at least five years, or include account earnings. Also see Roth IRA Early Withdrawal Rules.

Qualifying Relative / Qualifying Other Relative

The terms qualifying relative and qualifying other relative refer to someone that a person may claim as a dependent, but who is not the person's son or daughter (including adopted children), foster child, sibling, niece, nephew or grandchild. In addition to family members like parents, step siblings, step parents and in-laws, the qualifying relative category could also include unrelated members of your household who depend on you for support. To determine whether a person is your qualifying relative, the IRS uses tests like the relationship or member of household test, support test, joint return test and citizen or resident test. Also see Qualifying Child.

Qualifying Surviving Spouse (QSS)

A person who does not remarry during the year when their spouse passes away may generally file a joint return with their deceased spouse for that tax year. For the next two years after that, the person may be able to use qualifying surviving spouse (QSS) filing status, which offers many of the same benefits as joint filing. To be eligible for this status, the person must not remarry during the two years following the year when their spouse passed away. The person generally must also have a qualifying child or other qualifying dependent, and pay more than half the cost of maintaining the home.

Railroad Retirement Act (RRA)

This 1935 law lays out the Railroad Retirement Benefits (RRB) that rail industry employees receive. It governs both the distribution of benefits and the withholding of employee pay to fund the program.

Railroad Retirement Benefits (RRB)

The Railroad Retirement Act provides for retired railroad employees to receive two types of benefits, known together as railroad retirement benefits (RRB). Tier 1 benefits essentially replace Social Security benefits, while Tier 2 benefits are more similar to a traditional employee pension plan. Some railroad retirees may receive other benefits, such as annuity payments. Depending on a variety of circumstances, RRBs may be either taxable income or nontaxable income.

Real Estate Professional / Real Estate Professional Passive Activity Exemption

The IRS classifies some people with rental or other real estate income as real estate professionals. Generally, to qualify for this designation, a person must meet two tests. First, over 50% of the personal services they provide must be performed in connection with a real estate business in which they materially participate. Second, they must work at least 750 hours during the year in a retail estate trade or business. Special tax rules may apply for real estate professionals, including an exemption from standard passive activity loss rules.

Recharacterization / IRA Recharacterization

Historically, people were allowed under certain circumstances to reverse an IRA conversion, changing a Roth IRA back into a traditional IRA. However, these transactions, known as IRA recharacterizations, are no longer allowed under federal law. Therefore, Roth IRA conversions are irreversible.

Recovery Period - see Depreciation Period Refundable Credit / Refundable Tax Credit

Certain tax credits, like the Earned Income Tax Credit (EITC) and Premium Tax Credit (PTC), are called refundable because they can not only reduce tax liability to zero, but also generate a tax refund. For example, if your total tax bill for a year is $4,000 but you are entitled to refundable credits totaling $6,500, then you will generally owe no tax, and may qualify for a refund of $6,500 - $4,000 = $2,500. Also see Nonrefundable Credit and Partially Refundable Credit.

Relationship Test

When determining whether someone can be claimed as another person's dependent, the IRS looks at how the two people are related. As part of this relationship test, the IRS considers whether the potential dependent is the person's son or daughter (including adopted children), stepchild, grandchild, sibling, step sibling, parent, or niece or nephew. Other relatives like foster children and in-laws may meet the requirements of the relationship test under certain circumstances. This test is one of many used to identify dependents, such as qualifying children and qualifying other relatives. Note that some non-relatives may also qualify as your dependents. Also see Relationship or Member of Household Test.

Relationship or Member of Household Test

This test is one of many used by the IRS to determine whether someone qualifies as a person's dependent. The test covers many of the same scenarios as the standard relationship test, but also encompasses situations where a non-relative lives as a member of a household for an entire year, and requires substantial financial support. Note that an adult roommate, housemate or boarder who pays rent is generally not considered a member of a person's household for tax purposes.

Relative

For the purpose of identifying dependents, the IRS defines a relative as someone related to you by blood, marriage or adoption. Examples of relatives according to IRS rules include your son or daughter (including adopted children), grandchild, great grandchild, stepchild, stepbrother, stepsister, brother, sister, half-brother, half-sister, parent, grandparent or other direct ancestor, step parent (but not foster parent), aunt, uncle, niece, nephew and various in-laws.

Rental Expenses

People with rental income may generally deduct rental expenses on their tax returns. The IRS defines rental expenses as costs that are ordinary and necessary for the production of rental income and maintenance of rental properties. Common rental expenses include advertising, repairs, insurance premiums, and fees paid to a property manager or property management firm. Note that those who qualify for the minimal rental use exception generally should not report either rental income or expenses.

Rental Income

For tax purposes, the term rental income refers to a wide range of payments received from tenants. Examples of rental income include regular rents, advance rent payments, fees for breaking a lease and any repair costs that a tenant pays. The fair market value (FMV) of any property or services that a renter provides in exchange for a reduction in rent should also be included in rental income. In most cases, the IRS classifies rental income as passive income. Many people with rental income may deduct rental expenses on their tax returns.

Report of Foreign Bank and Financial Accounts - see FBAR. Reporting Threshold

Certain potentially taxable events only have to be reported to the IRS if the transaction value exceeds a specific limit, known as a reporting threshold. For example, gifts, estate transfers, Form 8938 and many versions of Form 1099 all have reporting thresholds. It is important to remember, though, that some transactions may have tax impacts even if their value falls below a particular reporting threshold.

Required Minimum Distribution (RMD)

Many qualified retirement plans, including traditional IRAs, SIMPLE IRAs, and 401(k) plans, require the account holder to withdraw funds from the plan on an annual basis after reaching a specified age. The amount of a person's RMD is determined by their age and the amount of money in the account. With rare exceptions, RMDs are taxable income. In general, original owners of Roth IRAs do not have to take RMDs. However, inherited Roth IRAs lose their Roth status, so beneficiaries generally must withdraw funds from the account either annually or within a specified timeframe. Also see Ten-Year Rule.

Residency Test

The residency test is one of many factors that the IRS analyzes to determine whether you may claim someone as your dependent (qualifying child or qualifying other relative). Generally, this test requires that the potential dependent live with you for more than half of the year, except for temporary absences like vacations or school attendance. In some cases, the residency requirement extends to the entire year. However, certain potential dependents like your parents may not need to live with you, and the IRS may waive the residency test in other situations as well.

Resident Alien

The IRS designates individuals as U.S. resident aliens if they meet either the green card test or the substantial presence test. Resident aliens who spend the entire year in the U.S. generally use the standard Form 1040 to file their tax returns, and may claim the standard deduction for their filing status. They may also qualify for certain tax benefits that are not available to nonresident aliens.

Residential Energy and Energy Efficiency Credits

The IRS offers various energy-related tax credits for residential (non-business) properties. These credits cover two types of expenses. The first type is costs related to conversions to renewable ("green") energy sources. Examples include installing solar panels, a solar water heater or wind power generating equipment. The second type is costs related to energy efficiency improvements. Examples include adding insulation, installing a metal roof, or installing doors and windows that meet certain energy rating standards. In order to claim these credits, you must keep detailed records of all qualifying expenses. In general, IRS energy credits for residential property are nonrefundable tax credits.

Retirement Savings Contributions Credit (Saver's Credit)

This nonrefundable tax credit is available to many low- and middle-income individuals who contribute to an IRA, employer-sponsored qualified retirement plan or, in some cases, ABLE plan. To be eligible for the credit, you must be at least 18 years of age and not a student (IRS definition). You also cannot be claimed by any other person as a dependent. Depending on your adjusted gross income (AGI), you may be able to claim a credit of 10%, 20% or 50% of your retirement plan contributions for the year. This credit is separate from tax deductions for retirement plan contributions.

Revenue (for a Business) - see Gross Revenue. Revenue Code - see Tax Code. Rollover (IRAs and Other Tax-Advantaged Accounts)

The term rollover generally refers to any transfer of funds from one tax-advantaged account to another. For example, a person might move funds from an employer-sponsored qualified retirement plan like a 401(k) to a traditional IRA. Rollovers between accounts with the same tax structure (for example, two accounts funded with pre-tax contributions), are generally not taxable events. However, a rollover between accounts with different tax structures, such as a traditional IRA and a Roth IRA, typically has tax impacts. Some rollovers can be completed through direct transfers, while others require withdrawing funds from the first account and manually depositing them into a second account, usually within 60 days.

Roth Conversion - see IRA Conversion. Roth IRA

A Roth IRA is a retirement account funded with after-tax contributions. Only people with modified adjusted gross incomes (MAGIs) below the limit set by the IRS may directly contribute to a Roth IRA. However, people who do not qualify to make direct contributions may be able to fund a Roth IRA through an IRA conversion. Tax benefits of a Roth IRA include tax-free growth, tax-free withdrawals and no required minimum distributions (RMDs) for the original account holder. Also see Traditional IRA.

Roth IRA Early Withdrawal Rules

Because Roth IRAs are funded with after-tax contributions, they have less stringent early withdrawal penalty rules than traditional IRAs. For example, if you are under age 59 1/2, you may be able to take penalty-free and tax-free withdrawals of funds that have been in your Roth IRA for five years or more. However, withdrawals before age 59 1/2 that include account earnings (instead of just contributed funds) may be taxable even if no penalties apply. Also see Qualifying Reason for Roth IRA Withdrawal.

Sale of Main Home

To qualify for the home sale capital gain exclusion, the residence you sell must be your main home according to IRS rules. Generally, those rules required that you owned the home and used it as your primary residence for at least two of the five years preceding the sale.

Salvage Value (for Depreciation)

The salvage value of capital property is the amount that the owner could reasonably expect to sell it for at the end of its useful life. The difference between the property's acquisition cost and its salvage value is the depreciable cost (or depreciable amount), which in turn is used to calculate depreciation deductions. A reported salvage value of $0 is allowed for many assets, as long as required taxes are paid on any depreciation recaptures that occur when those assets are sold.

SALT Deduction - see State and Local Tax Deduction. Saver's Credit - see Retirement Savings Contributions Credit. S Corporation

Like a C corporation, an S corporation is treated as a separate entity from its owners or shareholders for many legal purposes. However, an S corporation does not pay corporate income tax. Instead, the company's earnings, expenses, deductions and credits are allocated to shareholders based on their ownership percentages. The shareholders report these allocated figures on their personal tax returns, and pay tax on their shares of net profits. This process is known as pass-through taxation, and it may lower the company's overall tax liability by eliminating double taxation. Some LLCs may elect to be taxed as S corporations, instead of as partnerships.

Scrip Dividend - see Stock Dividend. Section 529 Plan - see Qualified Tuition Program. Section 179 / Section 179 Expense / Section 179 Deduction

The IRS allows businesses and self-employed people to deduct the entire cost of certain capital expenses during the year they are incurred, instead of claiming depreciation deductions over multiple years. Only certain types of tangible property and fixed assets qualify for these one-time deductions, which are called Section 179 expenses in reference to the relevant provision of the Tax Code. In general, Section 179 expense deductions cannot be greater than the taxable income of the trade or business, and a variety of other limitations may apply.

Section 1031 Exchange (Real Estate) / Like-Kind Exchange / Starker Exchange

Named for the provision of the federal Tax Code that governs them, Section 1031 exchanges allow businesses and real estate professionals to defer capital gains tax on some real estate sales. To qualify for this tax deferral, any gain from the sale of a parcel of property must be used to purchase other real property, known as "like-kind" property. The rules for Section 1031 exchanges are complex, and any deviation from those rules could result in a loss of tax benefits. Therefore, these transactions should only be undertaken with expert guidance, which usually includes the assistance of a qualified intermediary (QI). Some Section 1031 exchanges are known as Starker exchanges, after a family whose federal court case had a major impact on how the rules for such transactions get applied today.

Self-Employed / Self-Employed Person

This general term describes anyone who receives payments for goods or services outside the context of working as an employee. Common examples of self-employed people include small business owners, independent contractors, freelancers, online craft sellers and many gig economy workers. Also see Self-Employment / Self-Employment Income.

Self-Employed Health Insurance Deduction

If you have self-employment income and purchase your own health insurance, then you may qualify for a tax deduction for the cost of your insurance premiums. This self-employed health insurance deduction is an above-the-line deduction, so you do not need to itemize deductions in order to claim it. However, if you purchase healthcare through the Health Insurance Marketplace and qualify for the Premium Tax Credit (PTC), you may generally only use the self-employed health insurance deduction for a portion of your premiums. In such cases, the calculations can grow quite complicated since the deduction affects the PTC, and vice versa. The IRS allows several different methods to resolve this issue.

Self-Employment / Self-Employment Income

Generally, the IRS considers you self-employed if you earn income by conducting a trade or business, or by pursuing any other activity for pay without being classified as an employee. Common examples of self-employment include operating a business as a sole proprietor or partner, freelancing, working as an independent contractor, selling crafts online or participating in the gig economy. For instance, if you offer dog walking services as your "side gig," then the IRS will typically classify your earnings from that activity as self-employment income. You may need to pay self-employment tax in addition to income tax on earnings from self-employment activities. Also see Employee vs. Independent Contractor.

Self-Employment Tax (SE Tax)

Individuals with $400 or more of self-employment income during a year generally must pay federal self-employment (SE) tax. SE tax is made up of the Social Security and Medicare (FICA) taxes that traditional employees pay through a combination of paycheck withholding and employer contributions. Because the IRS views a self-employed person as both the employee and the employer, SE tax includes both shares of FICA taxes. Those who pay SE tax may usually claim the deduction for one half of self-employment tax as an above-the-line deduction. If you owe SE tax, you may need to make quarterly estimated tax payments to comply with the IRS pay-as-you-go rule and avoid tax penalties.

Short-Term Capital Gain or Capital Loss - see Capital Gain or Capital Loss and Capital Gains Tax. SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match PLan for Employees) is a type of employer-sponsored retirement plan designed for small businesses and self-employed individuals. Most businesses with 100 or fewer employees are eligible to establish and maintain SIMPLE IRAs. To create the plan, the employer first sets up a traditional IRA for each eligible employee. Both the employer and employee can then make pre-tax contributions to the IRA. Managing a SIMPLE IRA plan is generally easier and less costly than establishing other qualified retirement plans for employees. Self-employed people with no employees other than themselves (such as independent contractors and freelancers) can also set up SIMPLE IRAs.

Simplified Home Office Deduction Method

Eligible self-employed people may use this method to calculate their home office deduction. To use the simplified method, you generally just multiply the area of your qualifying home workspace in square feet by a fixed dollar amount set by the IRS. Calculating the deduction in this way greatly reduces recordkeeping and computational burdens, but it may also result in a smaller deduction than tracking actual expenses.

Single Filing Status

This is the default filing status for a person who is not married as of the end of the tax year. However, if you are unmarried but have a qualifying child or other dependent, then you may be eligible for head of household (HoH) or qualifying surviving spouse (QSS) status, potentially lowering your tax liability.

Small Business Inventory Exception

In general, businesses that sell goods must compute their cost of goods sold (COGS) by using a standard inventory accounting method, such as FIFO, LIFO, weighted average cost (WAC) or specific identification. However, small businesses and self-employed people with revenues below a limit set by the IRS may qualify to use a simplified method to track and report inventory costs. Under this exception, costs associated with acquiring or producing inventory items may be reported as expenses for non-incidental materials and supplies. However, these expenses must be reported only when inventory items are sold, used or disposed of - NOT when they are originally incurred or paid. This rule applies even if a cash accounting system is used.

Social Security

Social Security is a federal government insurance program that provides benefits to eligible American workers. Primarily, these benefits consist of retirement payments, disability payments and/or a death benefit for the spouse or children of a person who passes away. People may begin receiving retirement benefits at age 62, but in most cases, waiting until age 70 to claim Social Security benefits results in a significantly higher monthly payment. The Social Security program is funded by the Social Security tax portion of FICA taxes and self-employment tax, and overseen by the Social Security Administration.

Social Security Administration (SSA)

The federal Social Security Administration (SSA) oversees the U.S. Social Security program. The agency's duties include calculating and distributing retirement, disability and death benefits to eligible people and their beneficiaries, and issuing Social Security numbers. The SSA also works with the IRS to ensure that all employers, employees and self-employed individuals pay the appropriate amount of Social Security tax.

Social Security Benefits

This term refers to retirement, disability or death benefits, along with any other payments made to people under the Social Security program. The Social Security Administration (SSA) calculates and distributes these payments. Depending on a variety of circumstances, Social Security benefits may be either taxable income or nontaxable income.

Social Security Card

This official federal government document shows a person's legal name and Social Security number (SSN). It is sometimes requested as a form of identification, or as proof of legal status to work in the U.S.

Social Security Number (SSN)

Issued by the Social Security Administration (SSA), a Social Security number (SSN) is the most common form of taxpayer identification number (TIN). When displayed on an official Social Security card, an SSN confirms a person's eligibility to work in the U.S. Most parents apply for SSNs for their children when they request an official birth certificate. If you are a natural-born U.S. citizen but did not receive an SSN as a child, you may apply for one at any SSA office. Others can apply for an SSN when they become citizens or receive legal authorization to work in the U.S. If you are not eligible for an SSN (for instance, because you are a nonresident alien), then you may instead be able to apply for an ITIN to handle tax matters.

Social Security Tax

Social Security tax is one of two components of the FICA taxes or self-employment tax that nearly all workers in the U.S. must pay (the other component being Medicare tax). Paying this tax is critical to qualify for Social Security benefits. Social Security tax is subject to a wage base limit, meaning that once a person's earnings for a year cross a threshold set by the IRS, the person does not owe Social Security tax on their remaining income for the year.

Sole Proprietor

This term refers to any person who owns and operates a sole proprietorship - that is, someone with exclusive ownership of an unincorporated trade or business.

Sole Proprietorship

Sole proprietorship is the default business entity type for an unincorporated enterprise with one owner. The category of sole proprietors includes not only small business owners, but also a wide range of people with self-employment income from independent contract, freelance or gig economy work. Sole proprietors usually report their business income and expenses on Schedule C of their personal tax returns. Any net profit shown on Schedule C may be subject to both income tax and self-employment tax.

Special $25,000 Allowance (Exception to Passive Activity Loss Rule)

People who actively participate in an operation that generates rental income may be eligible to use up to $25,000 in losses from that activity to offset other (nonpassive) income, even if they are not real estate professionals. This special exception to the passive activity loss rule can only be claimed by individuals (not partnerships, LLCs, trusts, etc.) and is subject to income limits. Note that active participation is a different (usually lower) standard than material participation.

Specific Identification

Instead of using the common FIFO, LIFO or weighted average cost (WAC) methods of inventory accounting, some businesses choose to track individual items kept in stock for sale. With this method, known as specific identification, the production or acquisition cost of each item of merchandise is computed and recorded. The cost of goods sold (COGS) is then calculated by adding up the costs of all  the specific items that were sold, used or disposed of during the year. This accounting method generally only makes sense for sellers with small inventories, or inventories made up of rare, unique or custom-made items.

SSA - see Social Security Administration. SSN - see Social Security Number. Standard Deduction

Rather than itemizing deductions, eligible people may choose the standard deduction for their filing status. By reducing taxable income, deductions lower a person's tax liability. People who are blind and/or 65 or older, or whose spouse is blind and/or 65 or older if they are married filing jointly, generally receive an enhanced standard deduction. However, standard deduction amounts are reduced for people who can be claimed by someone else as a dependent. Also note that certain people are not eligible to use a standard deduction, including many nonresident aliens and dual-status aliens, along with people who use married filing separately status and have a spouse who itemizes.

Standard Mileage Rate Method (For Vehicle Expense Deduction)

Business owners and other self-employed people may generally claim a business expense deduction for vehicle use. In most cases, the deduction may be calculated either by tracking actual expenses or by using the standard business mileage rate set annually by the IRS. To use the standard rate, track the miles you drive for business purposes (separate from any miles you drive while commuting or for personal reasons). Then just multiply the number of business miles by the standard mileage rate, and add in tolls and parking fees to get your total vehicle expense deduction. NOTE: If you report actual expenses for the first year when you use your vehicle for business, then you generally cannot use the standard mileage rate in future years. Also see Actual Expense Method.

Starker Exchange

This term refers to a Section 1031 exchange in which a business or real estate professional sells a property, and then later acquires a replacement property to complete the exchange. Generally, the replacement property must be acquired within 180 days after the sale of the original property. The term "Starker exchange" refers to a family whose lengthy federal court case ultimately led to standardization of the rules for these types of delayed exchanges.

State and Local Tax (SALT) Deduction

People who itemize deductions may claim a federal tax deduction for taxes they pay to state and local governments, including property taxes and either sales taxes or state and local income taxes. This deduction may be subject to a limit set by Congress and the IRS.

Statutory Employee

By law, certain workers must be classified as employees for tax purposes, even if their working arrangements would normally make them independent contractors. These statutory employees include some salespeople, insurance agents, delivery drivers and people who work at home on materials or goods supplied by a company. Statutory employees should have taxes withheld from their pay, including FICA taxes, and generally do not owe self-employment tax on their earnings. They should receive a Form W-2 from their employers, with a box checked indicating their status as statutory employees. Also see Employee vs. Independent Contractor.

Stock Dividends / Scrip Dividends / Dividends Paid in Stock

Sometimes, instead of distributing traditional cash dividends to shareholders, a company distributes additional shares of stock to them. These stock dividends (also called scrip dividends) are generally taxable income, unless the stock is held in an IRA or other qualified retirement plan. The new stock shares issued under these plans may also affect a shareholder's basis in their stock.

Stock Split

Corporations sometimes use a stock split to lower the market price of individual shares of their stock. The split is accomplished by increasing the number of shares each stockholder has, without changing the total value of those shares. The most common form of stock split is a two-for-one split, which doubles the number of shares each stockholder owns, while reducing the value of each share by half. Stock splits are not taxable events, because they do not change the overall value of the shareholder's assets. A stock split also does not change the total basis of a shareholder's stock in a company, but it does reduce the basis per share.

Straight-Line Method (of Depreciation)

A commonly used technique to calculate depreciation deductions, the straight-line method generally involves distributing the cost of a capital asset equally over the years of its useful life. Suppose, for example, that a machine costs $10,000 to acquire, has a useful life of five years, and will have a $0 salvage value. The straight-line depreciation method would give an annual depreciation deduction amount of $10,000 ÷ 5 = $2,000. The primary advantage of the straight-line method is mathematical simplicity. However, for eligible property, computing depreciation by the alternative MACRS method typically results in larger deductions during the early years of the depreciation period. Also see Bonus Depreciation and Section 179 Expenses.

Student (IRS definition)

For a variety of tax matters, the IRS looks at whether a person, or the person's potential dependent, is a full-time student. The IRS definition of a student generally states that the person must be enrolled at a qualifying educational institution, and must be taking enough courses to qualify for full-time status according to that institution's rules. In most cases, the person must meet these qualifications for some part of at least five calendar months of the year.

Student Loan Interest Deduction

Many people may claim a tax deduction for interest they pay on qualified student loans. To claim this deduction, you generally must have a modified adjusted gross income (MAGI) below a limit set by the IRS, and your filing status cannot be married filing separately. The student loan interest deduction is an above-the-line deduction, so you may claim it even if you do not itemize deductions.

Substantial Presence Test

The substantial presence test is one of the methods that the IRS uses to determine if a person should be treated as a U.S. resident (such as a resident alien) for tax purposes. The test looks at the number of days that the person spent within the U.S. during a specific tax year, as well as during the two previous years. Some temporary activities, such as brief layovers in the U.S. during international travel, do not count toward the substantial presence test. Also see Green Card Test.

Support Test

The IRS applies this test as part of the process of determining whether a person may claim someone as a dependent, such as a qualifying child or qualifying other relative. In most cases, the support test requires that the person provide over half of the potential dependent's support. Also see Multiple Support Agreement. For additional information on dependent tests, see Age Test, Citizen or Resident Test, Relationship or Member of Household Test and Joint Return Test.

Tangible Property / Tangible Asset

These terms generally refer to property with a physical form, like buildings, machinery, tools and product inventory. By contrast, intangible property consists of non-physical assets like ideas and concepts. Also see Fixed Assets and Financial Assets.

TANF - see Temporary Assistance for Needy Families. Taxable Event

The IRS uses this general term to refer to any activity that may affect a person's tax liability. Common examples of taxable events include selling property (such as artwork or virtual currencies) at a gain, or receiving a payment for goods or services. Typically, people or businesses involved in a taxable event must report any resulting income on their tax returns. However, some events fall under IRS exemptions or exclusions, such as the lifetime gift and estate tax exclusion, the minimal rental use exemption or the home sale capital gain exclusion. These special rules may eliminate the need to report a transaction that would ordinarily be a taxable event.

Taxable Income (Definition 1)

The term taxable income may refer to any income that is potentially subject to federal income tax. Examples include earned income like wages, tips and self-employment income, along with unearned income like interest, dividends, capital gains, gambling winnings or passive activity income. Also see nontaxable income.

Taxable Income (Definition 2)

On a federal tax return, the term taxable income refers to the portion of a person's income that is actually subject to IRS income tax rates. You generally compute your taxable income by first figuring your adjusted gross income (AGI), and then subtracting away your standard deduction or itemized deductions.

Tax-Advantaged Account / Tax-Advantaged Savings Plan

These terms refer to any account structured in a way that makes it possible to get the benefit of tax-deferral and/or reduced tax liability. For example, it may be possible to fund the account with pre-tax contributions, and/or to take withdrawals from the account tax-free.

Tax Benefit

This term refers to a wide range of opportunities for people and businesses to reduce their tax liability. Common tax benefits include tax deductions, tax credits, income exclusions and tax deferrals.

Tax Bracket

Each marginal tax rate in the federal income tax system applies to a specific range of incomes, known as a tax bracket. The IRS adjusts tax brackets annually for inflation, and may make further adjustments based on new laws passed by Congress. Also see Marginal Tax Rate and Effective Tax Rate.

Tax Code

Officially titled the U.S. Revenue Code, the federal Tax Code is the collection of laws governing the assessment and collection of federal taxes.

Tax Credit

A tax credit can reduce a person's tax liability on a dollar-for-dollar basis. In most cases, tax credits have a greater impact on someone's tax bill than tax deductions. For example, while a $3,200 credit can yield tax savings up to that amount, a $3,200 deduction would typically only reduce a person's total tax by around $300-$1,000. Common tax credits include the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), the Child and Dependent Care Credit, the Credit for the Elderly or Disabled, the health insurance Premium Tax Credit, and higher education credits like the Lifetime Learning Credit and American Opportunity Tax Credit (AOTC). A tax credit may be refundable, partially refundable or nonrefundable.

Tax Deadline - see Filing Deadline. Tax-Deductible

A transaction is tax-deductible if its value (or some portion of its value) could be claimed as a tax deduction. Tax deductions can lower your taxable income, resulting in reduced tax liability. Some tax-deductible transactions qualify for above-the-line deductions, which means that people who use the standard deduction can still get the tax benefit. Other transactions are only deductible for those who itemize deductions.

Tax Deduction

This term refers to various amounts that people may subtract away from their gross income on their tax returns. For example, many people may claim tax deductions for traditional IRA contributions, while self-employed people can take deductions for business expenses. Unlike tax credits, deductions do not lower tax liability on a dollar-for-dollar basis. Instead, they reduce taxable income, which in turn results in less tax. For example, a $2,000 tax deduction would reduce most people's total tax by around $200-$700. The three main types of deductions are above-the-line deductions, standard deductions and itemized deductions.

Tax-Deferred / Tax Deferral

These phrases refer to situations where people can delay, but not permanently avoid, paying tax on income or capital gains. For example, by making pre-tax contributions to a traditional IRA or other qualified retirement plan, people can delay paying tax on both their contributions and any growth in the account's value until they withdraw funds.

Tax-Exempt Interest

While most interest that accumulates on financial accounts is classified as taxable income, some types of interest are exempt from federal taxes. The most common example of tax-exempt interest is interest on bonds issued by a state, district or local government (sometimes called municipal or "muni" bonds).

Tax Forgiveness for Military Personnel

For U.S. military personnel who pass away as a result of wounds, disease, or injury incurred while serving in a combat zone, any unpaid tax liability gets waived by the IRS. Therefore, relatives and heirs do not need to pay any tax that the deceased service member owed. If the service member previously paid tax that becomes eligible for forgiveness due to a combat-related death, the IRS will generally refund those tax payments to the service member's family or heirs.

Tax Home

To determine who may owe U.S. federal taxes, and who may qualify for the foreign earned income exclusion, the IRS identifies each person's tax home. In most cases, your tax home is the state, region or country where you permanently or indefinitely work as an employee, earn self-employment income or operate a business. Note that this location might not be the same as the place where you and/or your family maintain a home. However, if you do not have a principal business location or workplace, then your tax home may be wherever you regularly live, even if you work elsewhere (including overseas) much of the time. Also see Domicile.

Tax Liability / Total Tax

Tax liability is the total amount of tax that a person or business owes for a year. To meet the IRS pay-as-you-go requirement, individuals generally must make tax payments throughout the year that add up to at least 90% of their tax liability, or 100% of their tax liability from the previous year, whichever is less. (The standard shifts to 90% / 110% at higher income levels.) You may make these payments through paycheck withholding and/or by paying estimated tax. Any remaining tax that you owe generally must be paid by the IRS filing deadline to avoid tax penalties and IRS interest charges.

Tax Offset

The term tax offset refers to anything that may reduce the tax liability of a person or business. For example, the term might refer to a tax credit, tax deduction, business loss or certain capital losses.

Taxpayer Identification Number (TIN)

Generally, people and businesses must include a taxpayer identification number (TIN) on any forms they file with the IRS. The three main types of TINs are a Social Security Number (SSN), an Individual Taxpayer Identification Number (ITIN) and an Employer Identification Number (EIN).

Taxpayer PIN - see Identity Protection PIN. Tax Penalty (IRS Penalty)

A tax penalty is a fee that the IRS charges a person or business for underpaying in tax, violating tax reporting rules or failing to make timely payments. Tax penalties get added to any tax and IRS interest that the person or business already owes. The most common reasons for IRS penalties include failing to file a tax return as required, late payments, underreporting income, improperly claiming tax benefits, and not paying enough tax throughout the year through withholding or estimated tax payments. The best ways to avoid IRS penalties are to pay tax steadily throughout the year, accurately report all your potentially taxable income and pay any remaining tax you owe by the filing deadline. If you miss a deadline or make an error on your return, you can minimize penalties by fixing the mistake and/or submitting a payment as soon as possible.

Tax Preparer - see Paid Preparer. Tax Refund / IRS Refund

If your tax payments (generally withholding and/or estimated tax) and refundable credits add up to more than your tax liability, you will generally be entitled to a tax refund. In most cases, the IRS issues a refund within 45 days of accepting a correctly filed tax return for processing. However, the IRS sometimes reduces or withholds a refund because of federal debts like past due taxes, child support or unpaid student loans. The fastest way to receive an IRS refund is to e-file your return and provide banking information for direct deposit.

Tax Return

A tax return is an annual report of income, tax deductions and tax credits filed by a person, couple, business, trust or estate. Most U.S. citizens and residents are required to file a return each year. Typically, a return consists of a summary page like Form 1040, Form 1041, Form 1065 or Form 1120, along with accompanying schedules and forms that detail specific transactions, deductions, credits, etc. Tax returns generally must be filed by the appropriate filing deadline, or up to six months after that date if the filer requests an automatic filing extension.

Tax Withholding - see Withholding. Tax Worksheet

Many IRS forms have accompanying tax worksheets, which are used to calculate the figures that must be reported on the form itself. In some cases, a worksheet must be filed with a person's tax return. Often, however, worksheets are just used to make calculations, and do not have to be submitted to the IRS.

Temporary Assistance for Needy Families (TANF)

Sometimes called welfare, this program provides financial assistance and other support to households with very low income. The program is funded by the federal government but administered by state, district and territorial agencies. In general, TANF payments are excludable income, and therefore do not affect a person's gross income, adjusted gross income (AGI), or taxable income.

Ten-Year Rule for Inherited IRAs

This rule applies to many inherited IRAs and qualified retirement accounts. Under the ten-year rule, a beneficiary of an inherited account generally must withdraw all funds from the account within 10 years after the original account holder passes away. When it applies, the ten-year rule generally replaces any requirement for account beneficiaries to take annual RMDs.

Third Party Designee

People have the option of authorizing another person to discuss their tax returns with the IRS. Such discussions may include providing the IRS with additional information about a return, or responding to a notice about a potential issue with the return. A representative that someone authorizes to talk to the IRS on their behalf is called a third party designee. You can name a third party designee by providing the person's name and phone number on your tax return, along with a personal identification number (PIN) chosen by the designee. If you use a paid preparer, then the preparer can usually serve as your third party designee.

Thrift Savings Plan (TSP)

A thrift savings plan, or TSP, is a special type of employer-sponsored retirement plan available to federal government employees and military service members. A TSP functions similarly to the qualified retirement plans offered by many employers, such as 401(k) plans.

TIN - see Taxpayer Identification Number. Tip Income

Many workers in service businesses, including food servers, delivery drivers, baggage handlers and hair stylists, regularly receive tips from customers. In most cases, tips are taxable income. IRS rules generally require employees to report tip income to their employers, or to report tips directly to the IRS by submitting Form 4137 with their tax returns. Tips may be subject to both federal income tax and FICA taxes. Self-employed people who receive tips (that is, voluntary payments above their stated fees) should generally report these tips as part of their self-employment income.

Total Income - see Gross Income. Total Tax - see Tax Liability. Trade or Business

The IRS uses the phrase "trade or business" to describe a wide range of activities that people engage in to earn income or a profit. For example, IRS publications refer to earnings from self-employment endeavors like freelancing, independent contract work, sole proprietorship or gig economy activities as income from "pursuing a trade or business." In everyday use, the word "trade" often refers specifically to pursuits requiring specialized training, such as carpentry or plumbing. However, for tax purposes, there is no meaningful distinction between what constitutes a trade and what constitutes a business.

Traditional IRA

A traditional IRA is a tax-advantaged personal retirement account that may generally be funded with pre-tax contributions. (Note that if a person or their spouse participates in a workplace-sponsored retirement plan, then their contributions to a traditional IRA may not be tax-deductible.) Distributions from a traditional IRA are typically taxed as ordinary income, so the account's primary advantage usually lies in tax deferral. However, withdrawals from a traditional IRA taken before the age of 59 1/2 may be subject to an early withdrawal penalty. Traditional IRA owners generally must withdraw a certain amount from their accounts each year once they reach a specified age. These mandatory withdrawals are known as required minimum distributions (RMDs). Also see Roth IRA.

Transportation and Travel Expenses (Military Service)

In certain cases, members of the U.S. military service, including National Guard members and reservists, may claim tax deductions for transportation or travel expenses related to their service. They may also receive travel and transportation allowances that qualify as excludable income. The specific rules for these deductions and exclusions depend on the nature of duty, the travel distance, and other factors.

TRICARE

The U.S. Department of Defense offers health insurance called TRICARE to active and retired members of the military and other uniformed services, and to their families. As with private health insurance, enrolling in TRICARE generally requires paying monthly premiums. However, enrollees who also qualify for Medicare may receive coverage premium-free. TRICARE plans may be purchased through the Health Insurance Marketplace, and so may qualify for the Premium Tax Credit (PTC).

TSP - see Thrift Savings Plan. Twelve-Month Rule for Cash Accounting / 12-Month Advance Payment Rule

In general, businesses and self-employed people who use cash accounting report expenses whenever those expenses are paid. However, the IRS limits how far in advance business taxpayers may pay expenses and still deduct the full cost. The 12-month rule states that in order for an entire advance payment to be deductible, the benefit received must not extend for more than 12 months after it begins, or beyond the end of the next tax year, whichever comes first. If the benefit (such as insurance coverage) does not satisfy the 12-month rule, then portions of the expense must be allocated to different tax years. This dividing up of an expense over multiple years is an example of capitalization of an expense.

U.S. Citizen or Resident Test - see Citizen or Resident Test. Unearned Income

This term describes any income that is not received as a payment for work performed. Common forms of unearned income include rents, gambling winnings, and investment returns like interest, dividends and capital gains. In some contexts, the IRS also classifies passive activity income as unearned. Also see Earned Income.

Unemployment Benefits / Unemployment Compensation (Tax Treatment)

In most cases, unemployment benefits received from a state, local or federal government agency are taxable income that must be reported on the recipient's tax return. Recipients of taxable payments will generally receive Form 1099-G in late January or early February, summarizing their benefit payments from the previous year. Unemployment compensation is considered unearned income for purposes like determining a person's eligibility for the Earned Income Tax Credit, or to make pre-tax contributions to a traditional IRA.

Unemployment Tax

In general, employers must pay unemployment taxes for their employees, including many household employees. These taxes typically consist of both Federal Unemployment Tax (FUTA) and state unemployment taxes. Note that it is often possible to claim a federal tax credit for state unemployment taxes paid, reducing the total amount of unemployment tax that a business must pay. Unlike FICA taxes, unemployment taxes do not have an employee share; only employers pay them. However, because these taxes are subject to a wage base limit, employers only have to pay them on a portion of each employee's earnings (typically, the first $7,000 that the employee earns each year).

Units of Production Method (for Depreciation)

For certain assets, businesses may use this depreciation technique instead of the more common MACRS or straight-line method. With the units of production method, depreciation deductions are based on how much an asset is used, with larger deductions for years of heavy use and smaller deductions for other years. Therefore, this method makes the most sense for equipment that loses value primarily due to wear and tear rather than age. If you wish to use the units of production method, first check IRS guidelines to make sure alternative depreciation methods are allowed for the asset in question. If so, include a statement with your tax return explaining the method used and your justification for using it.

"Use It or Lose It" Rule

For some workplace cafeteria benefit plans that allow pre-tax contributions, employees must use up all of their account funds on qualifying expenses by the end of the calendar year. Any funds left in the account after the year ends get forfeited to the employer. This sort of use-it-or-lose-it rule commonly applies to Flexible Spending Arrangements (FSAs). However, health FSA plans may allow a limited carryover of funds from one year to the next, or have a 2 1/2 month "grace period" during which employees can use up account funds from the previous year.

Useful Life / Useful Lifetime

Calculations for depreciation deductions are typically based on an asset's useful life. Theoretically, this time period represents how long the property will retain substantial value and continue to serve its intended purpose. The declared value of the property at the end of its useful life may be either $0 or some other salvage value. Note that many tangible assets hold value and remain productive long after the useful lifetimes specified for them in IRS guidelines. For example, a kitchen appliance may have a useful life of five years for depreciation purposes, but may actually last for decades. Selling an asset after its useful life ends for more than its salvage value may create the need to report a depreciation recapture.

VA - see Department of Veterans Affairs. VA Disability Compensation

Many veterans who are disabled because of an injury or disease incurred or aggravated during active military service receive VA disability compensation. These payments from the Department of Veterans Affairs (VA) are generally excludable income, and therefore are not taxed. They also do not typically count as earned income for purposes like determining eligibility for the Earned Income Tax Credit.

Vehicle Expense Deduction - see Business Vehicle Expense Deduction. Virtual Currency Tax Rules

The IRS uses the term virtual currency to describe all traded currencies that exist only in digital forms. In other words, virtual currencies are a type of digital asset. The most widely used virtual currencies are cryptocurrencies ("crypto" for short). The IRS treats virtual currencies as property, not as money. As a result, many virtual currency transactions are taxable events, including some that would have no tax impacts if they were conducted in cash. Most commonly, crypto transactions may result in taxable capital gains. The IRS requires people to disclose a wide range of virtual currency activities on their tax returns.

Wage Base Limit

A wage base limit is an earnings threshold that makes a worker (or the worker's employer) exempt from paying a tax. Once a worker's earnings for a particular year exceed the wage base limit, then the tax in question does not apply to the worker's pay for the remainder of that year. The two most common examples of taxes with a wage base limit are Social Security Tax and federal Unemployment Tax (FUTA). People with multiple jobs may be at risk of overpaying in Social Security tax, because each employer must withhold the tax until the person's earnings from that specific job rise above the wage base limit. If you find yourself in that situation, you can apply for a refund of excess Social Security tax withheld when you file your tax return.

Weighted Average Cost (WAC) Method

One of four common methods used in inventory accounting to determine the cost of goods sold, the WAC method assumes that items sold represent a blend of old and new stock, in proportion to existing inventory quantities. Alternatively, a business may track inventory using the FIFO, LIFO, or specific identification method.

Welfare - see Temporary Assistance for Needy Families (TANF). Withholding / Withheld Taxes / Tax Withholding

Withholding refers to the process of reducing a payment amount to cover taxes that must be remitted to the IRS or another taxing authority. The most common type of withholding is employee paycheck withholding. For example, if an employee earns $100, but $7.65 in federal taxes apply to those wages, then the employer would reduce the employee's pay to $100 - $7.65 = $92.35. The employer would then remit the withheld $7.65 to the IRS. Taxes may also be withheld from other payments like gambling winnings, pensions, annuities, and unemployment compensation.

Withholding Estimator Tool

The IRS online Withholding Estimator tool helps people check whether the proper amount of federal tax is being withheld from their pay. To use the tool, you will need to enter information about your income, as well as circumstances that may influence your eligibility for tax benefits. Based on the information you provide, the tool will estimate the amount of federal income tax that should be withheld from each of your paychecks. If your current withholding amount appears to be incorrect, you can submit a new Form W-4 to your employer to request an adjustment. Note that the Withholding Estimator only calculates federal income tax withholding, not withholding for state, local or FICA taxes.

Worldwide Income

In general, U.S. citizens and residents who are required to file a federal tax return must report income they receive from anywhere in the world. However, the IRS may not treat all of a person's worldwide income as taxable income. For example, some foreign earnings may be protected by the foreign earned income exclusion. The IRS also may waive certain taxes on income that was already taxed by another country, by allowing the person to claim the foreign tax credit.

Worksheet - see Tax Worksheet.