An abatement is a reduction in a tax rate or tax liability. Property taxes are a common subject of abatement (though the term is often used when discussing overdue debt).
Ability-to-pay taxation is a tax that's assessed based on the taxpayer's ability to pay the tax. John Doe earns $40,000 a year.
An above-the-line deduction is a tax deduction that reduces adjusted gross income. For example, let's assume that John Doe had $100,000 of total income for 2012.
An abusive tax shelter is an investment strategy that illegally shields assets from tax liability. For example, let’s say John Doe and his wife have a child who begins college this year.
An ad valorem tax is a property tax levied based on the value of the property in question. Ad valorem (Latin for "according to the value") taxes are levied solely as a percentage of a property's market value without regard to quantity or intrinsic value.
Adjusted cost base (ACB) is an income tax term that refers to an adjustment in an asset's book value resulting from the cost of improvements, payouts, and similar improvements or dispositions. Let's assume Company XYZ buys a factory building for $1,000,000.
Adjusted gross income (AGI) is the figure used by the Internal Revenue Service to determine a taxpayer's eligibility for certain tax benefits. AGI is calculated by adding together all qualified income and subtracting all qualified deductions.
The alternative minimum tax (AMT) is income tax owed using a parallel tax code designed to ensure that every taxpayer, particularly rich ones and corporations, pay at least some income tax each year. Congress created the AMT in 1969 as a way to ensure that people with high incomes and corporations could not avoid taxes by using various tax shelters.
An amended return is a Form 1040X filed by a taxpayer to correct mistakes made on a Form 1040, Form 1040A, Form 1040EX, Form 1040NR or Form 1040NR-EZ (U.S.Individual Income Tax Return) filed in the previous three years.
The American Opportunity Tax Credit (formerly known as the Hope Tax Credit) is a tax credit available to college students or their parents to help pay for college expenses. Eligible taxpayers can qualify for up to $2,500 under the American Opportunity Tax Credit.
Antitrust refers to federal laws disallowing companies from monopolizing markets, engaging in price discrimination or price fixing, or otherwise restraining free trade. Antitrust laws apply universally to companies seeking profits, whether they're public or privately held.
Back taxes are state, federal, or local taxes that are past due. For example, let’s assume that John Doe forgets to file his tax return for 2011.
Backup withholding is a way for the Internal Revenue Service to withhold taxes from a taxpayer who does not provide or have a taxpayer identification number or Social Security number. In general, the employer or entity that is making payments to the payee must withhold a percentage in federal income taxes (about 28%) from their payments.
Basis refers to the original price of an asset.It is sometimes called cost basis or tax basis.
In the tax world, bracket creep occurs when inflation drives income up and into higher tax brackets. Let's say John Doe makes $100,000 a year and is in the 28% federal income tax bracket.
The Buffett Rule is a tax rule change included in President Barack Obama's 2013 budget proposal.If implemented, the rule would ensure that individuals who earn more than one million dollars per year pay a minimum effective tax rate of at least 30 percent.
A capital gains tax is a tax on the increase in the value of an investment. A capital gain is the difference between the purchase price (the basis) and the sale price of an asset.
Capital gains treatment refers to whether capital gains are taxed as short-term capital gains, long-term capital gains, or in another manner. Let's assume you purchase 100 shares of XYZ Company for $1 per share.
The child tax credit is a tax-bill reduction given to people with qualifying children under 17 years old. The Internal Revenue Service (IRS) allows taxpayers to reduce their federal income taxes by a fixed amount for each qualifying child.
Cost basis refers to the original price of an asset.Cost basis is sometimes called tax basis.
In the finance world, deductible is usually short for tax-deductible, which refers to an expense that reduces the amount of income that is subject to tax.In the insurance world, a deductible is a required payment from the insured to the insurer in order to trigger coverage.
A deduction is a reduction in taxable income, which thereby lowers the amount of taxes owed.Federal, state, and local tax codes determine what kinds of items or expenses are deductible and which taxpayers are eligible for deductions.
Deferred income tax refers to a portion of income earned by a company during a given year for which the associated income tax has not yet been paid. Certain accounting practices and tax laws often result in a portion of a company’s income being realized and accounted for in one accounting period, but not taxable until another.
A dependent relies on someone else for most or all of his or her financial support. In general, dependents are exemptions that reduce a taxpayer's taxable income.
A direct tax is any tax levied on companies or individuals that cannot be transferred to another party.It is the opposite of indirect tax.
The dividend tax credit generally refers to a Canadian tax program whereby Canadian residents receive a reduction in taxes owed on dividends received from Canadian corporations. In Canada, dividends are considered taxable income to investors.
Double taxation occurs when a tax is imposed more than once on the same asset, income stream, or transaction. The most well-known example of double taxation in the U.S.
In the tax and import/export world, a duty (or customs duty) is money collected under a tariff. A duty is a federal tax on imports or exports.
Earned income is an IRS term for income that is obtained by participating in a business or trade.Earned income typically includes salaries and bonuses, wages, commissions and tips.
The earned income tax credit (EIC) is a tax credit for low-income workers. Earned income is an IRS term for income obtained by participating in a business or trade -- typically, this means salaries, bonuses, wages, commissions, and tips.Union strike benefits are also considered earned income, as are long-term disability benefits received prior to minimum retirement age.
An education credit is a tax credit associated with the payment of education expenses during the tax year. Currently, there are three major education credits in the United States (amounts subject to change by the IRS).
The educator expenses deduction is an IRS deduction that allows teachers to exclude out-of-pocket teaching expenses from income. In order to qualify for the educator expenses deduction, a person must have worked at least 900 hours in an elementary or secondary school during a given school year.
The effective tax rate is the average rate at which an individual is taxed on earned income, or the average rate at which a corporation is taxed on pre-tax profits. The formulas for effective tax rate are as follows: Individual: Total Tax Expense / Taxable Income Corporation: Total Tax Expense / Earnings Before Taxes Effective tax rates simplify comparisons among companies or taxpayers.
Electronic filing, or e-File, is the online tax return filing system developed by the Internal Revenue Service (IRS) Individual taxpayers, businesses, large and mid-sized corporations, and non-profits can file their required tax returns, including quarterly filings, directly online with the IRS through its automated e-File system.The e-File system allows taxpayers to make payments from a credit or debit card, or through the U.S.
An employer identification number (EIN) is a number assigned to businesses by the IRS.It is also known as the Federal Employer Identification Number (FEIN) or the Federal Tax Identification Number.
An enrolled agent (EA) is person who is authorized to represent a taxpayer before the Internal Revenue Service (IRS). To become an EA, a person has to pass a three-part comprehensive IRS test of individual and business tax returns or be a former IRS employee with appropriate experience.
An estate tax is levied on assets inherited by the heirs to a deceased person's estate. The estate tax is applied differently according to U.S.Federal and state laws as well as international law.
Excise tax refers to an indirect type of taxation imposed on the manufacture, sale or use of certain types of goods and products. Excise taxes are commonly included in the price of a product, such as cigarettes or alcohol, as well as in the price of an activity, often gambling.
Federal income tax is a tax on a range of certain kinds of income.Taxpayers generally calculate and pay federal income tax by filing an IRS Form 1040 by April 15 of each year.
The Federal Insurance Contributions Act (FICA) is a US payroll tax used to fund the Social Security and Medicare programs.These programs are designed to support those without wage income: retirees, dependents of non-working adults, and those with disabilities.
A federal tax bracket is range of incomes for which a certain federal income tax rate applies. The United States has a progressive tax system, which means that different portions of a person's or company's income are taxed at increasing rates (that's why the rates are often referred to as marginal tax rates).
A flat tax is a system under which all taxpayers pay taxes at the same percentage rate of their total income. Let's assume that you had $100,000 of taxable income last year.
Mistakes happen, and the IRS understands that (though the jury is still out regarding how forgiving the IRS is about mistakes).For this reason, the IRS provides the Form 1040X, which requires a line-by-line description of any necessary adjustments, as well as supporting documentation and explanations.
Taxpayers must file a Form 1045 within one year after the end of the year in which the loss or unused credit occurred, and they will likely also have to file amended returns.It is important to note that using Form 1045 can trigger the Alternative Minimum Tax for filers, so it is important to seek qualified tax counsel.
Form 1065 is an IRS form used to report income, gains, losses, deductions and tax credits associated with partnerships. Let's say John Doe and Jane Smith operate a partnership that sells widgets.
Form 1078 is only for people who became resident aliens before 2001.In our example, that means John Doe would've filed a W-9 after 2001.
Form 1098 is an IRS form that reports how much mortgage interest a taxpayer paid during the tax year. Let's say John Doe borrows $100,000 for a house from Bank XYZ.
Form 1099-B is useful for reporting and calculating taxes that apply to capital gains.For instance, the form will disclose the proceeds of the sale and how much of those proceeds are capital gains, as well as whether those gains are long-term or short-term in nature (this affects the taxability of the gain).
Financial institutions must create Form 1099-DIV for dividends and distributions of at least $10 in a tax year.Taxable dividend distributions from life insurance contracts and employee stock ownership plans are not subject to 1099-DIV reporting (they are reported using Form 1099-R).
Interest is taxable income.The Form 1099-INT shows how much interest a person earned from an institution in a tax year.
According to the IRS, a Form 1099-Misc is appropriate for reporting the following: Payments of $600 or more for services performed for a trade or business by people not treated as its employees (such as subcontractors).Prizes or awards ($600 or more) State and federal tax withheld in conjunction with any of the other activities reportable on the form.
Gambling income is any money that is earned from games of chance. Income from gambling is taxable money earned from games such as lotteries and keno or from institutions such as casinos or racetracks. For example, someone plays a state lottery and wins $1 million.
A gambling loss is any money lost in lottery tickets, slot machines, table games (craps, poker, blackjack, etc.), bingo games, racing bets and keno. For example, let's say John Doe goes on a bender in Las Vegas and wins $12,000 the first night but loses $10,000 at the craps table in the Bellagio the next night.
The purpose of the gas guzzler tax is to discourage the manufacture of inefficient cars.The sticker on a new car should disclose the amount of gas guzzler tax that a manufacturer has paid on a car.
A gift tax is a federal tax on anything of value that one person gives to another. Let's say Jane Smith gives her son John $25,000 because John is going through a tough time and just lost his job.
A goods and services tax (GST) is simply a tax on goods and services for domestic consumption.This tax system is in place in about 160 countries, including Canada, India, Vietnam, Australia, United Kingdom, Spain, Italy, Brazil, and South Korea.
Head of household is a formal IRS filing status for people who are single but provide financial support to at least one other person in his or her home. Let's say Jane Doe is a single mother with three children.
Highly compensated employees are usually limited in the amount of money they can set aside in their 401(k) plans and other retirement plans.Specifically, the federal government limits the amount of money that the HCEs at a company can contribute to 125% of the average that the non-HCE's contribute to a plan.
Home office expenses are those costs incurred by working from a home-based office. These expenses are tax-deductible. In order to qualify as fully tax-deductible, home office expenses must go toward the consumption of utilities or the purchase and use of goods (e.g.
Imputed Interest refers to interest that is considered by the IRS to have been paid for tax purposes, even if no interest payment was made.The IRS uses imputed interest as a tool to collect tax revenues on loans that don't pay interest, or stated interest is very low.
Income tax refers to taxes imposed by the government on individuals and businesses based on annual income.In the US, income tax is collected on taxable income by the Internal Revenue Service (IRS).
The Internal Revenue Service (IRS) is a bureau of the Department of Treasury that is tasked with the enforcement of income tax laws and oversees the collection of federal income taxes.In addition, it is also the responsibility of the IRS to determine pension-plan qualification.
The IRS Form 1099 is used to report a variety of unique income payments to the IRS.This form is usually used when the taxpayer has received income from other sources besides a wage-paying job.
An itemized deduction is a reduction in taxable income that is dependent on calculations specific to the taxpayer's expenses or situation.Federal, state and local tax codes determine what is deductible and which taxpayers are eligible for itemized deductions.
A joint return is a tax return filed by two people based on their marital status at the end of the year or at the time of death of either one of the individuals. There are generally two ways for a married couple to file a federal tax return.
The joint return test is used by the IRS to determine whether or not a taxpayer may be validly claimed as a dependent by another taxpayer.This test also determines whether or not a married taxpayer may file a joint income tax return with his or her spouse.
Kiddie tax is the colloquial term for certain taxes owed on interest, dividends or other investment income earned by children under 17 years old. Let's say John Doe has a son, Jake Doe, who is 16 years old.
A land value tax (LVT) is a tax on undeveloped property. Local governments that impose an LVT specifically target pieces of property that someone owns but has not developed or modified for residential or commercial purposes.
A long-term capital gain or loss is the profit or loss on the sale of an investment that has been held for longer than a certain IRS-defined period of time. Let’s assume you purchase 100 shares of Company XYZ for $1 per share.
A loophole is an exception that allows a system to be circumvented or avoided. It usually refers to legal, taxation, or security strategies that are exploited for personal gain. Loopholes are failures of a system to account for all conditions, variables, or exceptions. To illustrate a legal loophole, consider a local development law that requires even an unoccupied building to pay real estate taxes so long as it receives a certificate of completion. In order to avoid paying taxes, a builder may exploit this loophole and choose not to "complete" the building.
The term "loss carryback" is where a company retroactively chooses to apply the net operating loss in the current year to the previous profitable year(s) to obtain a tax refund for monies already remitted or incurred on the profits earned in those years. For example, if a company has a net operating loss in the current year of $2,000,000, it can carry that backward to the previous year to offset its net operating income of $2,000,000.
The term "loss carryforward" refers to an accounting practice whereby companies utilize their current year's net operating loss against future year's net operating profit to reduce the taxes owed in those future profitable years.Also called tax loss carryforward, this can be utilized by individuals, corporations, or funds.
Marginal tax rate is the rate at which an additional dollar of taxable income would be taxed.It is part of a progressive tax system, which applies different tax rates to different levels of income.
The marital deduction refers to the deduction the IRS allows for a taxpayer to transfer some or all of his assets tax free to his spouse prior to the calculation of estate tax owed by his estate. The marital deduction is also known as the unlimited marital deduction.
The marriage tax, also known as the "marriage penalty," refers to the higher taxes a couple pays when they file a joint tax return versus the amount a couple pays when filing two separate tax returns. The marriage tax was created in 1969, when Congress attempted to give a tax advantage to married couples.
Deciding to file jointly or separately is a personal decision for couples, and deciding which one is optimal depends on the couple's income and deductions.It is important to note that from a legal perspective, filing jointly means each spouse is legally responsible for the content of the tax return.
The term mileage allowance refers to a variety of travel allowances allowed by the IRS at a specific rate per mile traveled while on business or for other purposes recognized by the IRS. For an individual, the allowances would be applicable for travel required for medical reasons, moving purposes, employee travel that was not reimbursed, or charity efforts.
Mortgage credit certificates (MCC) are issued by state or local governments and allow some taxpayers to receive a tax credit for the interest paid on a mortgage. A borrower pays a specific amount of interest over the course of a mortgage.
A mortgage interest deduction allows mortgage borrowers to reduce their income tax liability by listing the amount of mortgage interest paid as an itemized deduction. Each year, a mortgage borrower pays a combination of interest and principal to the lender.
A nanny tax is a colloquial term for the Social Security, Medicare and federal unemployment taxes due on the pay to caregivers. For example, let's say John and Jane Doe hire Sally Smith to take care of their two preschool-age children while they are at work.
Negative income tax refers to transfer payments given to families whose reported household income fall below a predetermined amount and qualifies them for a supplemental payment from the government. For families whose household income qualifies as insufficient to fulfill their needs, the government provides a subsidy to help ensure their welfare.
Net of tax simply means that the number in question is the amount left over after taxes. For example, let's say you win $1,000,000 on a game show.
In economics, net taxes are taxes on production less subsidies received.Alternatively, net taxes are taxes paid to the government less transfer payments.
A notice of seizure is a bad thing.During this time, the IRS takes physical custody of the taxpayer's assets, which could range from cash accounts to homes, cars and other assets.
An offer in compromise is an arrangement between a taxpayer and a taxing authority, whereby the taxing authority agrees to let a taxpayer settle a tax debt for less than the full amount. For example, let's say John owes the IRS $40,000 in back taxes.
An office audit is a type of audit by the IRS. For example, let's say John Doe gets a letter from the IRS saying that he is being audited.
In the tax world, a parsonage allowance is income earned by members of the clergy but excluded from gross income. Let's say John Doe is a pastor at the XYZ Church.
A pass-through entity (also known as flow-through entity) is a business structure in which business income is treated as personal income of the owners.It is used to avoid double taxation, when business income is subject to corporate tax and then to the owner’s personal income.
A progressive tax is one in which the tax rate increases as the amount being taxed increases.Most western countries use a progressive tax in one way or another.
Qualified adoption expenses (QAEs) are costs associated with adopting a child.They are generally tax-deductible and may even qualify for a tax credit.
A qualified appraisal is a document that formally describes and estimates the value of a piece of property. Assume that John wants to donate a painting to his favorite charity.
A qualified appraiser is a person authorized to produce a qualified appraisal. A qualified appraisal is a document that formally describes the value of a piece of property, usually exceeding $5,000.For example, let's imagine that John wants to donate a painting to his favorite charity.
A qualified charitable organization is a charity to which donations are tax-deductible. According to the IRS, only certain types of organizations can be qualified charitable organizations: Community chests, corporations, trusts, funds, or foundations devoted to religious, charitable, educational, scientific, or literary causes or to the prevention of cruelty to children or animals.
A qualified electric vehicle is powered by an electric motor that relies on rechargeable batteries or fuel cells. Specifically, and according to the IRS, a qualified electric vehicle must have a battery capacity of at least 2.5 kilowatt hours if the vehicle has 2-3 wheels, and it must have a battery capacity of at least 4 kilowatt hours if the vehicle has 4 wheels.
Generally, a qualified higher education expense is tuition or a tuition-related expense paid to a post-secondary institution. For example, let's assume that John pays $48,000 in tuition and fees for a year at State University.
Qualified production activities income (QPAI) is certain income related to manufacturing that qualifies to be taxed at a lower rate. For example, let's assume that Company XYZ generated $10,000,000 in widget sales last year.
Qualified widow (or widower) is a tax-filing status similar to filing single, married filing jointly, married filing separately, or head of household. For example, let's assume the John and Jane Doe have been married for 15 years and they have 2 minor children.
A qualifying relative is a person a taxpayer can claim as a dependent. For example, let's assume that John and Jane Doe took in Jane's mother because she ran out of retirement money and can no longer support herself.
Realized gains are increases in the value of an asset that has been sold.This concept is the opposite of paper profit -- a paper profit only turns into a realized gain when you actually sell the security.
A realized loss is a decrease in the value of an asset that has been sold.This concept is the opposite of paper loss or unrealized loss -- a paper loss only turns into a realized loss when you actually sell the security.
Refund can refer to the amount that the Internal Revenue Service will pay to a taxpayer based an overpayment of estimated tax or employer withholding taxes during the year. A refund also refers to the procedure where an issuer refinances outstanding bonds by issuing new bonds. During the year, a taxpayer is obligated to make estimated tax payments to the Internal Revenue Service.
A regressive tax is a tax that increases as a percentage of income as the amount of income declines. The United States has the opposite of a regressive tax system.
Sales tax is a consumption tax levied on goods and services purchased at the retail level, paid by the consumer and submitted by the retailer to the governing tax authority. In the United States, the sales tax is imposed on retail items.
The same property rule is an IRS rule stating that money taken from an Individual Retirement Account must be placed into a similar type of account if the account holder is less than 59.5 years old. Let's say John Doe has an IRA that he opened when he was 15.
The saver's tax credit, also called the savers credit, is a tax credit for making contributions to certain retirement accounts. The savers credit gives taxpayers a tax credit of up to $1,000 ($2,000 if filing jointly) for contributions to IRAs, 401(k)s and certain other retirement plans.
An Internal Revenue Service (IRS) Schedule K-1 is used to report a beneficiary's share of income, deductions, credits, and other items from pass-through entities.These generally include limited partnerships, S Corporations, income trusts, and limited liability companies.
The self-employment tax refers to the Social Security and Medicare taxes paid on income earned by people who work for themselves. People who are self-employed must pay both the employee and employer portion of the Federal Insurance Contributions Act (FICA) tax (a total of 12.4% rather than the 6.2% normally paid by employees) and both halves of the Medicare tax (2.9% rather than 1.45% normally paid by employees).
Short-term gain usually refers to the profit on the sale of an investment that has been held less than a certain IRS-defined period of time. Let’s assume you purchase 100 shares of Company XYZ for $1 per share.
Social Security tax is an employment tax that funds the Social Security program, a mandatory U.S.government program of retirement, disability, and life insurance.
A standard deduction is a reduction in taxable income.Federal, state and local tax codes determine what is deductible and which taxpayers are eligible for deductions.
A step-up in basis refers to an increase in the price at which an investment is considered to have been purchased. Let's assume that your uncle purchased 100 shares of Disney in 1970 for $1 per share.
A stock savings plan is a Canadian taxation system that offers tax benefits to Canadian residents who purchase the initial public offerings (IPOs) of local companies. Each Canadian province has its own stock savings plan.
A tax advisor is a person who advises clients about tax laws and strategies. For example, a tax advisor might help a client structure his assets such that his estate taxes are lower.
Used primarily in the United Kingdom, a tax and price index measures the amount that a consumer’s income would have to increase to compensate for increases in inflation and taxes. Assume John Doe has $50,000 in disposable income this year.
A tax anticipation note (TAN) is a short-term note that a state or local government issues and expects to repay with imminent tax receipts. Let's assume Town XYZ wants to purchase a new building to replace the old City Hall.
Tax arbitrage refers to a strategy or practice where individuals or corporations profit from the ways different kinds of capital gains, income, and financial transactions are treated for tax purposes. Tax code complexities offer opportunities for individuals or corporations to look for legal loopholes or organize their financial transactions to reduce their tax burden. Tax arbitrage works with any transactions that are intended to create a profit based on tax rates, tax systems, and tax treatments.
A tax attribute is a reduction that the IRS requires a taxpayer to make in a tax credit or tax loss when a lender cancels debt that the taxpayer owes.There are typically seven types of tax attributes: net operating losses, business credit carryovers, minimum tax credits, capital losses, property bases, passive activity loss and credit carryover, and foreign tax credit.
Tax avoidance is the legal act of minimizing one's taxes.It is not the same as tax evasion, which is illegal.
A tax base is the total amount of assets or revenue that a government can tax. Taxes can be based on any kind of asset or revenue stream.
A tax benefit is any tax advantage given by the IRS to a taxpayer that reduces his or her tax burden.It's also the name of an IRS rule requiring companies to pay taxes on income that was previously written off but is subsequently recovered.
A tax break is a tax deduction, tax credit or reduction in tax rate. For example, let's say John and his wife had a baby in 2011.
In a tax clawback agreement, a company or organization agrees to repay government benefits via higher taxes at a later date. Company XYZ agrees to take $40 million from the federal government to prevent the company from going bankrupt.
Tax court is a court of law in which administrative law judges manage disputes between taxpayers and the IRS. The tax court handles a wide variety of tax matters but does not have a jury system.
A tax credit is permission to reduce the amount of income that is subject to tax.A tax credit is not the same as a tax deduction.
A tax deduction reduces the amount of income that is subject to tax.A tax deduction is not the same as a tax credit.
In the investment world, "tax deferred" refers to investments on which applicable taxes (typically income taxes and capital gains taxes) are paid at a future date instead of in the period in which they are incurred. For example, consider the traditional Individual Retirement Account (IRA).
The tax differential view of dividend policy is the idea that capital gains are better than dividends because the tax rate on capital gains is lower than the tax rate on dividends. For example, let's assume that the capital gains tax is 15% and the tax rate on dividends is 28%.
Tax drag is the reduction in returns attributable to taxes. For example, let's assume that John owns 100 shares of Company XYZ stock.
Tax efficiency involves making investing choices that reduce one's tax bill. For example, let's assume that John owns 100 shares of Company XYZ stock, which he bought six months ago for $5 a share.
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) became law on September 3, 1982.The TEFRA made it more difficult for individuals and corporations to reduce their tax liability.
Tax fairness is the concept of having an equitable tax system. Tax fairness is a subjective term with no single hard-and-fast definition.
Tax free means not taxable. For example, many states and municipalities do not charge sales tax on food items.
Tax Freedom Day is the day of the year by which the average American has earned enough money to pay his or her tax bill for the year. The average American spends about one-third of his or her income on federal, state, and local taxes.
Tax gain/loss harvesting is a strategy for reducing taxes. John Doe made two major investment transactions this year: 1.
A tax haven is a country or jurisdiction known for generating little or no tax liability. Tax havens exist because countries are usually not obligated to provide customer information to foreign taxing authorities (though investigations of criminal activity, terrorism, or other behavior may require disclosure).
A tax holiday is a day or period of time during which a government does not tax certain transactions. Sales tax holidays are especially common.
A tax home is a taypayer's primary residence or place of business (if the taxpayer is an organization). Let's assume John lives in Montana during the summer and Arizona during the winter.
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was signed into law on May 17, 2006. TIPRA was passed to achieve five primary goals: Prevent a scheduled increase in the number of people subject to the alternative minimum tax (AMT) Preserve lower capital gains and dividends tax rates in effect through 2010 Preserve higher limits for expensing the purchase of certain assets Remove an income ceiling on certain IRA conversions Apply the so-called "kiddie tax" to more taxpayers under age 18 In general, TIPRA was a mishmash of tax changes, most of which benefited most taxpayers.
Tax indexing is method for adjusting tax rates to account for inflation-related increases in income. For example, let's say that John makes $100,000 a year and is in the 28% federal income tax bracket.
Tax liability refers to the amount legally owed to a taxing authority as the result of a taxable event. A tax liability might also be called a "tax obligation." A tax authority -- such as a local, state or national government -- imposes taxes upon individuals, organizations and corporations to fund social programs and administrative roles.
A tax lien is a claim placed on a piece of real estate by a tax authority due to a taxpayer's failure to pay taxes. When a taxpayer fails to pay either income taxes or property taxes, the taxing authority to whom the debt is owed may place a lien against the taxpayers property to ensure that the tax liability will eventually get paid.
A tax loss carryforward is a "negative profit" for tax purposes.It usually occurs when a company's expenses exceed revenues, making the company unprofitable.
Tax lot accounting is a method of record keeping that tracks the cost, purchase date, and sale date for every unit of every security in a portfolio. For example, let's assume that you purchase 50 shares of Company XYZ at $5 a share on January 1.
Tax planning is the process of forecasting one's tax liability and formulating ways to reduce it. Tax planning entails creating portfolios or circumstances that are as tax efficient as possible.
A tax preference item is income that subjects a taxpayer to alternative minimum tax (AMT).These items are treated differently for regular tax and AMT purposes.
A tax rate is the percentage of income a person or company pays in taxes. The United States has a progressive tax system, which means that different portions of a person's income are taxed at different rates (the rates are often referred to as "marginal tax rates").
The Tax Reform Act of 1986, signed by President Ronald Reagan, was one of the most significant changes to the American federal income tax system. The Tax Reform Act of 1986 had several noteworthy components, not the least of which was the reduction in the number of tax brackets (from a little over a dozen down to four) and the reduction in the top tax rate (from 50% to 28%).
A taxpayer gets a tax refund when he or she has overpaid taxes to the government. A tax refund is the difference between taxes paid and taxes owed.
Tax relief is a tax deduction, tax credit, reduction in tax rate or forgiveness of a tax lien. For example, let's say John and his wife had a baby in 2011.
A tax return is a set of forms that a taxpayer uses to calculate and report taxes owed to the Internal Revenue Service (IRS). April 15 is the annual deadline for filing a tax return, though some types of taxpayers must file tax returns quarterly.
A tax sale is a sale of property by a taxing authority. For example, let's say that John owns a home and he owes $4,000 in property taxes.
Tax season is from January 1 to April 15 of each year. Tax season is the busiest part of the year for tax accountants, because the filing deadline for individual taxpayers is April 15.
Tax selling is a strategy used to reduce tax liability. Let's assume that John sold two different stocks that he originally bought five years ago: 1) He sold 1,000 shares of Company XYZ at $25 a share.
A tax shelter is a means of minimizing one's tax liability.Tax shelters can be both legal and illegal.
A tax shield is a deduction, credit or other method used to reduce the amount of taxes owed. For example, let's say John and his wife have a baby in 2011.
A tax swap is a strategy that involves selling one investment with capital losses and replacing it with a similar, but not identical, investment. Let's assume that John owns 1,000 shares of Mutual Fund XYZ.
A tax table shows the tax due for different income ranges. For example, according to the IRS 2011 tax table, if John makes a salary between $76,150 and $76,200 and is single, he owes $15,169 in taxes. [Click here to see the 2011 IRS tax table.] There are also tax tables for state taxes.
A tax umbrella is a negative profit that reduces a company's tax liability.It usually occurs when a company's tax deductions exceed its taxable income (often because expenses exceeded revenues, making the company unprofitable).
A tax wedge is the difference between gross income and after-tax income.In economics, it refers to the broader financial effects of a tax on a sector of the market.
A tax year is the year for which a tax is calculated and paid. The United States has a January to December tax year for individual taxpayers.
Tax-advantaged means that some or all of an investor's income is sheltered from taxation, allowing a taxpayer to minimize his or her tax burden. One of the best examples of tax-advantaged investing is the 401(k) plan.
Tax-exempt commercial paper is short-term debt for which the interest payments are tax-exempt at the federal, state or local level. Universities are some of the most common issuers of tax-exempt commercial paper.
Tax-exempt interest is interest income that is exempt from federal and/or state taxes. For example, let's assume that John Doe purchases a municipal bond.
In investing, a tax-exempt sector is a group of financial instruments that pay tax-exempt interest.However, it also refers to nonprofit organizations, which are tax-exempt.
Generally, tax-exempt securities are those whose interest, dividends or gains are free from federal income taxation. For example, let's assume that John purchases $1,000 of municipal bonds.
A tax-free spinoff occurs when a company divests a portion of its business in a manner that qualifies as a tax-free transaction under Section 355 of the Internal Revenue Code and thus does not require the company to pay capital gains tax on the divestiture. Assume Company XYZ has three divisions: the automotive division, the food division and the furniture division.
A taxable estate is the portion of a person's net assets that are taxable upon his or her death. An estate tax is often levied on the assets that the deceased leaves to his or her heirs. Living spouses who inherit their husband/wife's assets can avoid estate taxes altogether.
A taxable event is any occurrence that creates a tax liability. Many day-to-day financial activities are taxable events, but in the investing world the most common are the receipt of income, interest or dividends, and the creation of capital gains (usually through selling assets for a profit).
A taxable gain is an increase in the value of an investment.It is the difference between the purchase price (known as the "cost basis") and the sale price of an asset. The formula for taxable gain is: Sale Price - Purchase Price = Taxable Gain Note that this formula assumes the sale price is higher than the purchase price.
At the beginning of every year, most individuals and families start collecting their annual pay statements and receipts in order to determine their taxable income.If you’ve ever done taxes on your own, you know how hard finding this number can be.
Taxable preferred securities are typically preferred stocks whose dividends are not tax-exempt. Preferred securities (usually called "preferred stocks") have characteristics of both stocks and bonds. Like shares of common stock, shares of preferred stock represent an ownership stake in a company.
A taxable wage base is the maximum annual wage on which a taxpayer must pay taxes. For example, let's assume that John earns $150,000 a year as CFO of Company XYZ.
Taxes are required payments from citizens to governments.The payments fund projects and expenditures that serve the public interest. Most taxes are legislated, meaning that representatives elected by the citizens of a country or region determine what activities to tax, how much to tax, when to collect those taxes, and how to administer the proceeds.
A taxpayer is a person or organization that must pay taxes to a federal, state, or local agency. For example, let's assume that Jane is an employee of Company XYZ.She earns $150,000 per year. In addition to paying federal income taxes, unemployment taxes, Social Security taxes, and Medicare taxes, Jane will likely owe state and local income taxes, all of which will be withheld from her paycheck.
The Taxpayer Advocate Service (TAS) is an organization within the Internal Revenue Service that is designed to help taxpayers resolve problems with the IRS. The TAS was first formed in 1978.Over time, it gained more responsibilities and authority, primarily as the result of the IRS Restructuring and Reform Act of 1998 and the passage of the Taxpayer Bill of Rights.
The Taxpayer Bill of Rights is a list of the protections available to all taxpayers when dealing with the Internal Revenue Service. In 1988, Congress passed the first Taxpayer Bill of Rights.
Also called an Individual Taxpayer Identification Number (ITIN), a taxpayer identification number (TIN) is a nine-digit number that the IRS uses to identify individuals who do not have and are not required to obtain a Social Security number. TINs always begin with the number 9.
Tele Tax is an automated phone service offered by the IRS. Tele Tax allows callers to select from a phone menu of 151 tax topics.
A transfer tax is a tax on the value of goods that one party gives to another. Individuals and organizations frequently give and accept property with no exchange of monetary payment.
Unearned income is an IRS term for income that is not obtained by participating in a business or trade (e.g., salaries and bonuses, wages, commissions and tips).It typically includes interest, dividends, pensions, social security, unemployment benefits, alimony and child support.
Unrelated business taxable income (UBTI) is the tax placed on the income derived from unrelated business activities of an otherwise tax-exempt entity. For example, if an investor uses his Individual Retirement Account (IRA) open a bakery, this is a business clearly not related to the primary purpose of an IRA.
VAT is the most common type of consumption tax and currently used in more than 160 countries, including each member of the EU.The notable exception to this rule is the US. For products or services, VAT is collected on a product’s value as it moves through production.
Vertical equity is the concept of increasing tax rates on higher incomes.Vertical equity is similar to the concept of progressive taxes.
A W-2 form is a tax form required from employers that reports wages paid and taxes withheld to the Internal Revenue Service (IRS), local state tax authorities and the Social Security Administration. Every calendar year, employers must fill out and deliver a W-2 form to every employee who worked for the company during the year.
A W-4 form is a standard IRS form an employee uses to report federal taxability status to an employer. An employer is required by law to withhold taxes from an employee's pay based on information reflected in the employee's W-4 form.
The W-8 form is a standard IRS form that exempts non-U.S.citizens from specific federal income taxes.
The W-9 form is a standard IRS form that certifies an individual's Social Security number and taxpayer identification number. Employers and all types of brokers (for example, securities dealers and real estate agents) are required to report details of transactions to the Internal Revenue Service (IRS).
A wealth tax is based on a person's net worth or the value of his or her assets. Let's say John Doe makes $100,000 a year.
Withholding tax, also sometimes referred to as simply "withholding," is an amount that employers withhold from an employee's paycheck and remit to local and federal taxing authorities on behalf of the employee. For example, let's say John Doe's salary is $72,000 a year.
A zero capital gains rate is a 0% tax on gains from the sale of assets and property sold in an enterprise zone. For example, downtown ABCTown has decayed over the last 10 years.