Freese, Peralez & Associates, The Woodlands, CPA Firm | FAQ
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Freese, Peralez & Associates, LLC.
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“They are very detail-oriented, and excellent partners in handing tax matters ranging from simple to very complex. We refer clients to them regularly, and their team has always been adept at handling anything the situation requires. Highly recommended!”
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Managing Attorney at The Wilson Firm, PLLC.
The Woodlands, Tx
We work with Tim on several clients and he is always professional, & knowledgeable. We have and will continue to recommend his services.”
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Operations Manager at Flashpoint Advisors
Spring, Tx
Who We Are
Freese, Peralez, & Associates, LLC is a leading CPA firm in The Woodlands, Texas, providing expert tax planning, preparation, and consulting services. Our dedicated team of certified professionals offers personalized financial solutions to help businesses and individuals achieve their financial goals. Contact us for exceptional service and trusted expertise.
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Tax Glossary
At Freese, Peralez & Associates, we understand how complicated taxes can be, especially for fast growing, local small business owners in Conroe and The Woodlands, Texas. Tax laws and regulations are constantly evolving, and keeping up with the ever-changing terminology can be challenging and sometimes frustrating. That's why we've created a comprehensive glossary to help you understand the tax jargon and provide you with a valuable resource.
Our tax glossary is designed to be a user-friendly reference tool, offering clear and concise definitions of common tax terms. Whether you're grappling with the complexities of the Corporate Transparency Act, exploring deductions and credits, or simply seeking to enhance your understanding of tax-related concepts, our glossary has got you covered.
We believe that knowledge is power, and by equipping you with a solid grasp of tax terminology, we empower you to make informed decisions for your business. So, take a moment to explore our glossary, and if you have any questions or require further assistance, our team of experienced tax professionals located right here in, The Woodlands is just a phone call away. Don't hesitate to reach out to us for personalized guidance tailored to your unique needs.
Scroll through the list of terms below or click a letter to jump directly to that section of the glossary.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
AARP
American Association of Retired Persons.
Accrual Method
The accrual method is an accounting technique where income is recorded when earned (regardless of when payment is received) and expenses are recorded when incurred (regardless of when actually paid). This differs from the cash method which records income/expenses only when money changes hands.
Example: If a business provides services to a client in December but doesn't get paid until January, under accrual accounting the income would be counted in December when earned, not January when payment arrived.
Active Participation
Active participation refers to when a taxpayer is significantly involved in management decisions related to their rental property or business operations. This could include approving rental terms, repairs, expenditures, screening new tenants, etc. Simply using a property manager doesn't negate active status if the taxpayer retains final decision rights.
Example: A landlord who analyzes profit/loss reports, signs off on major repair estimates, and interviews/approves new tenants would likely qualify as an active participant in that rental activity.
Active Pay
For military members, active pay (or active duty pay) is the taxable income earned while serving on active military duty status. This is separate from other types of military compensation like retirement pay or retainer pay reserves may receive. [active-duty military pay taxes]
Actual Expense Method
This method allows business owners to deduct their actual out-of-pocket costs for operating a vehicle for business purposes. Eligible expenses include gas, maintenance, auto loan interest, parking, tolls, etc. The actual expense method requires detailed recordkeeping of business vs. personal use.
In contrast, the standard mileage method simply multiplies total business miles driven by an IRS rate without tracking actual costs. The actual expense method is more complex but can maximize deductions.
Additional Child Tax Credit
The Additional Child Tax Credit is a refundable tax credit that can help taxpayers get money back if they couldn't fully benefit from the regular Child Tax Credit. This commonly happens when the Child Tax Credit exceeds the taxpayer's total federal income tax liability for the year.
Example: If a family qualifies for a $2,500 Child Tax Credit but only owes $1,800 in taxes, they can claim the remaining $700 as the Additional Child Tax Credit to increase their refund amount.
Adjusted Basis
A homeowner's adjusted basis tracks the true cost basis of their home after accounting for any capital improvements that add value and extend the home's useful life. The initial purchase price is the starting basis, which is then increased by qualifying improvements like a new roof, addition, landscaping, etc. However, routine repairs that simply maintain the property don't adjust the basis.
Example: If you bought a home for $250,000 and later added a $50,000 addition, your adjusted basis would be $300,000 ($250,000 + $50,000).
Adjusted Gross Income (AGI)
Your total adjusted gross income (AGI) is the amount that is used to compute some limitations, such as the medical and dental deduction on Schedule A and the credit for child and dependent care expenses. This is after deductions like retirement plan contributions and student loan interest.
Adoption Taxpayer Identification Number
The Adoption Taxpayer Identification Number (ATIN) is a temporary 9-digit number assigned by the IRS for adoptive children who don't yet have a Social Security number. It allows adoptive parents to claim the child as a dependent and take credits/deductions related to the adoption process.
Advance EIC Payments/AEIC
The Advance Earned Income Credit allows eligible workers to receive a portion of their projected Earned Income Tax Credit throughout the year with their regular paychecks rather than waiting until filing a tax return. Taxpayers can choose to receive Advance EIC payments from their employer.
AEIC
Advance Earned Income Credit.
After-tax Contributions
After-tax means the employee paid taxes on the money when it was contributed, i.e., the taxpayer has a cost basis in the plan.
Age Test
The age test is one of the requirements to claim a child as a qualifying child for tax credits and deductions.
It has three parts:
- The child must be under age 19 at the end of the tax year and younger than the taxpayer, OR
- The child must be under age 24, a full-time student for at least 5 months of the year, and younger than the taxpayer, OR
- The child can be any age if they are permanently and totally disabled.
This prevents taxpayers from claiming children over a certain age unless they were a student or had a disability.
AICPA
The American Institute of Certified Public Accountants (AICPA) is a non-profit professional organization that represents certified public accountants (CPAs) in the United States.
Alimony
Alimony refers to payments made to a spouse or former spouse under a divorce or separation instrument. It is generally taxable income to the recipient and tax deductible for the payer if certain requirements are met. Alimony aims to help the lower-earning spouse maintain their standard of living after a divorce.
Allocated Tips
Allocated tips are tips that an employer assigns to an employee, in addition to whatever direct tips the employee reported to their employer. Employers must allocate tips to employees if the total tips reported are less than 8% of total food and drink sales.
Alternative Motor Vehicle Credit
The Alternative Motor Vehicle Credit is a tax credit for purchasing certain new alternative fuel vehicles for business or personal use that meet strict emissions and fuel efficiency standards set by the IRS. The credit amount varies based on the vehicle's fuel type, technology, and weight class.
American Opportunity Tax Credit
The American Opportunity Tax Credit is a partially refundable tax credit that helps offset qualified education expenses like tuition, fees, and course materials. It expands on the previous Hope Credit by allowing higher income taxpayers to claim it and providing benefits for all 4 years of post-secondary education.
Amount Realized
The amount realized refers to the total amount a seller receives from the sale of an asset or property after deducting certain expenses related to the sale. This includes deducting costs like commission fees paid to agents, advertising costs, legal fees, and loan charges like points paid by the seller.
Example: If you sell your home for $300,000 but paid $15,000 in realtor commissions and $2,000 in legal fees, your amount realized would be $283,000 ($300,000 sale price - $17,000 in expenses).
Annuity
An annuity is a financial product that provides a stream of periodic payments over more than one year in exchange for an upfront lump sum investment. The payments come at regular intervals like monthly or annually. Annuities can be purchased from insurance companies, individuals, trusts, etc.
ARRA
ARRA stands for the American Recovery and Reinvestment Act of 2009. It was an economic stimulus package issued by the federal government in response to the late 2000s recession. ARRA included tax incentives, expansion of unemployment benefits, and funding for job creation.
ATIN
The Adoption Taxpayer Identification Number (ATIN) is a 9-digit number issued by the IRS for use by families in the process of adopting a child who does not yet have a Social Security number. It allows them to claim the child as a dependent and take applicable tax credits during the adoption process.
At-Risk Rule
The at-risk rule limits how much passive activity loss a taxpayer can deduct in a given year. The loss cannot exceed the total amount the taxpayer has "at-risk" financially in that business activity. Their deductible loss is capped at their actual investment amount to prevent claiming losses greater than their true economic risk.
B
BAH
Basic allowance for housing, a type of excludable military income.
BAS (Basic Allowance for Subsistence)
This is a non-taxable allowance for U.S. military personnel stationed overseas to cover the cost of meals.
Example: If a soldier is stationed abroad and receives BAS, this amount does not need to be reported as taxable income on their tax returns.
Basis
Basis is the total investment in a property and is used to calculate capital gains or losses when you sell that property. The basis in a home is determined by how the taxpayer obtained the home. If a taxpayer bought or built a home, the basis is what it cost the taxpayer to buy or build that home. If the taxpayer inherited the home, generally the basis is its fair market value on the date of the decedent's death, or on the later alternate valuation date chosen by the representative for the estate.
Example: If you bought a house for $200,000 and spent another $50,000 on renovations, your basis in the house would be $250,000. If you later sell the house for $400,000, your capital gain would be $150,000.
Before-Tax Contributions
These are contributions made to certain retirement plans like a 401(k), where the contributions are deducted from your gross income, reducing your taxable income.
Example: If your gross salary is $50,000 and you contribute $5,000 to your 401(k), your taxable income would be reduced to $45,000.
Blocked income
Income that cannot be transferred from one country to another due to foreign government restrictions.
Example: If you work in a country that restricts fund transfers to the U.S., your earnings remain in that foreign country, qualifying as blocked income until you can transfer them.
Bona Fide Residence Test
A test used to qualify for the foreign earned income exclusion by demonstrating you have lived in a foreign country for an entire tax year without interruption.
Example: If you move to Germany on January 1st and live there through December 31st of the same year, you meet the bona fide residence test.
Business Expenses
Costs that are ordinary and necessary for operating a business.
Example: If you own a bakery, costs such as flour, sugar, rent, and utilities are considered business expenses.
Business Income
Income received from engaging in business activities.
Example: If you are a freelance graphic designer, the fees clients pay you for designing graphics are considered business income.
Business Travel Expenses
Costs incurred while traveling for business, which can be deductible if they are ordinary and necessary.
Example: If you travel from New York to Los Angeles for a business conference, your airfare, hotel, and meals can be deducted as business travel expenses.
Cancellation of Debt For Principal Residence
Under the Mortgage Forgiveness Debt Relief Act, homeowners may exclude from gross income certain debt that was forgiven or canceled on their principal residence. This applies to qualified principal residence indebtedness discharged in 2007-2025. Any excluded debt amount may require reduction of tax attributes like credits, losses, or asset basis.
Capital Gain or Loss
A capital gain or loss refers to the difference between the purchase price (basis) and sale price of an investment asset or property held for personal use. Calculating the correct gain/loss is important as it impacts the tax liability owed on the transaction. The difference between the sale price of an asset and its original purchase price (basis). Capital gains or losses impact your tax liability when you sell an investment or property.
Example:
If you buy a stock for $1,000 and sell it for $1,500, you have a capital gain of $500.
Capital Gain Distributions
Distributions made to shareholders of mutual funds or real estate investment trusts (REITs) from profits earned on the sale of the fund's investments. These distributions are taxed as capital gains.
Example: If a mutual fund sells a stock at a profit, that profit is distributed to the fund's shareholders and taxed accordingly.
Capital Gains
Capital gains are profits from the sale of an asset like stocks, bonds, or real estate that exceed the purchase price. The tax rate on capital gains can be lower than regular income, depending on how long the asset was held.
Example: Selling a house that has appreciated in value since purchase, resulting in a profit.
Capital Loss Carryover
If your net capital losses in one year exceed $3,000, you can carry over the excess to future years to offset future gains or income.
Example: If you have a $5,000 net capital loss, you can deduct $3,000 this year and carry over the remaining $2,000 to the next tax year.
Cash Method
An accounting method where income is reported when received, and expenses are recorded when paid, unlike the accrual method where income and expenses are recorded when earned or incurred.
Example: If you invoice a client in December but don't receive payment until January, you report this income in January under the cash method.
Child and Dependent Care Credit
A nonrefundable tax credit for expenses incurred to care for a qualifying dependent under 13, or a disabled spouse or dependent, allowing 20% to 35% of expenses to be credited.
Example: If you spend $3,000 on child care, you could claim up to $1,050 (35%) as a credit, depending on your income.
Child Tax Credit
A credit that reduces your tax liability by up to $1,000 for each qualifying child under the age of 17.
Example: If you have two qualifying children, you could reduce your tax bill by $2,000.
Citizen or Resident Test
This is a test to determine if someone can be claimed as a dependent, requiring the person to be a U.S. citizen, or resident, or resident of Canada or Mexico for some part of the year.
Example: You can claim a Canadian-born parent as a dependent if they lived with you in the U.S. for part of the year.
Combat Zone
Designated areas by Presidential order or Department of Defense certification where U.S. Armed Forces members engaged in combat can exclude their military pay from taxable income.
Example: If a service member serves in a declared combat zone, their earned income during that period is exempt from federal taxes.
Compensation
All forms of income received from employment, including wages, salaries, commissions, bonuses, and tips, as well as earnings from self-employment and alimony.
Example: A freelancer’s income from various projects is considered compensation and is subject to income tax.
Constructively Received
This is income that is available to a taxpayer even if not physically in hand, making it taxable.
So, If a paycheck is mailed to you on December 31st but you receive it on January 2nd, it is still considered income for the previous year.
Cost basis
The original value or purchase price of an asset for tax purposes, used to determine capital gains or losses upon sale.
Example: If you buy stock at $5,000 and sell it later for $7,000, your cost basis is $5,000, and your taxable gain is $2,000.
ESA (Education Savings Account, specifically a Coverdell ESA)
A Coverdell ESA is a trust or custodial account created or organized in the United States for the purpose of paying the qualified education expenses of the designated beneficiary of the account. This is a savings account that allows money to grow tax-free when used for qualified educational expenses at elementary, secondary, and post-secondary institutions.
Example: Contributions to a Coverdell ESA can be used tax-free for tuition, books, and other educational expenses.
Credit
A tax credit directly reduces your total tax liability dollar-for-dollar, providing significant tax savings. Common credits are available for expenses like [child care costs], education costs like the [American Opportunity Tax Credit], having [qualifying children or dependents] with the Child Tax Credit, or for [low-income workers] through the Earned Income Tax Credit.
Example: If you owed $5,000 in taxes but qualified for a $2,000 tax credit, your final tax bill would be reduced to just $3,000 ($5,000 - $2,000 credit).
Credit for the Elderly or Disabled
The Credit for the Elderly or Disabled allows qualified taxpayers age 65 or older, or those officially disabled under certain rules, to take a nonrefundable tax credit. The amount is calculated on Schedule R and applied to reduce tax liability reported on Form 1040.
Example: A retired 70-year-old woman with $25,000 in annual retirement income from Social Security and a pension could potentially qualify for a credit of around $1,000 to offset her taxes owed.
This credit helps provide tax relief for elderly or disabled individuals with relatively low incomes. Calculating it properly requires completing Schedule R, so consult a tax professional if claiming this credit.
D
Date of Transaction
The specific date when a financial transaction takes place. For tax purposes, it's the date a check is issued or funds are credited to an account. When dealing with foreign currency, it determines the exchange rate applicable.
Example: If you receive a payment via direct deposit on April 10, that is the date of the transaction for tax reporting.
Deduction
Deductions are specific expenses subtracted from gross income to reduce taxable income, potentially lowering overall tax liability.
Example: Mortgage interest and charitable donations are common deductions that can reduce your taxable income.
Dependency Exemptions
A reduction in taxable income for each qualifying dependent, such as children or certain relatives, recognized by the IRS.
Example: If you have two qualifying children, you can claim two dependency exemptions, reducing your taxable income accordingly.
Dependency Tests
Criteria used to determine if someone can be claimed as a dependent on your tax return, assessing relationship, residency, age, and financial support.
Example: To claim a child as a dependent, they must live with you for more than half the year and not provide more than half of their own financial support.
Dependent
A person who qualifies to be claimed on another’s tax return, which can offer tax benefits like exemptions and credits.
Example: A 15-year-old child who lives with you and for whom you provide primary financial support typically qualifies as a dependent.
Dependent Care Benefits
Benefits provided by an employer or directly to a care provider to assist with child care expenses, which can affect your taxable income.
Example: If your employer pays directly to your child care provider or reimburses you for child care, these payments are considered dependent care benefits.
Dependent Taxpayer Test
A criterion used to determine if someone can claim the taxpayer or their spouse as a dependent on their tax return.
Example: If you are financially supported by your parents and meet other dependency criteria, you may not claim personal exemptions for yourself.
Depreciation
The process of deducting the cost of business or investment property over its useful life to account for wear and tear.
Example: If you buy equipment for your business costing $10,000 and it has a useful life of 10 years, you might depreciate $1,000 annually.
Disability Income
Payments received under an employer’s disability insurance plan, replacing wages lost due to disability.
Example: If you're unable to work due to an injury and receive payments from your employer’s disability plan, this is considered disability income.
Disability Pension
Regular payments made to a retired worker who retires early due to disability, treated as regular income once the taxpayer reaches minimum retirement age.
Example: If you retire at 50 due to a disability and receive a pension, it transitions from disability to regular pension income when you reach the set minimum retirement age.
DITY Move
A "do-it-yourself" move where military personnel are reimbursed for moving expenses when they relocate for service reasons.
Example: If you're in the military and opt to move your belongings yourself, you may receive a DITY payment which must be reported as income if it exceeds your actual moving expenses.
Dividends
Dividends are distributions of a company's profits paid out to its shareholders. When a corporation earns profits, it can choose to reinvest those earnings into the business or pay a portion out to stockholders as dividends. Qualified dividends are taxed at preferential capital gains rates, rather than as ordinary income. [tax rates on qualified dividends]
Example: If you own 100 shares of XYZ Company stock, and XYZ declares a dividend of $0.50 per share, you would receive $50 in dividend income that must be reported on your tax return.
Divorced, Separated, or Never Married Parents
There are special tax rules for claiming a dependent child when the parents are divorced, legally separated, or were never married. Generally, the child is treated as a dependent of the custodial parent (whom the child lived with for the greater number of nights during the year). However, the custodial parent can release the exemption to the noncustodial parent by filing Form 8332 or a written declaration. [tax rules divorced parents child exemption]
Example: If divorced parents alternate years claiming their child, the custodial parent would need to sign Form 8332 allowing the noncustodial parent to claim the child in alternating years.
Domicile
Your domicile is your permanent legal place of residence for tax purposes. This may be different than where you currently reside temporarily for work, school, or other reasons. Your domicile determines which state has the right to tax your personal income. [how to determine domicile for tax purposes]
Example: A military member's domicile remains their home of record state, even if stationed elsewhere, unless they take steps to establish domicile in a new state.
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DRIP Accounts (Dividend Reinvestment Plan)
DRIP accounts automatically reinvest cash dividends received from stocks into purchasing more shares of the same company. Each new share purchased through reinvested dividends has its own cost basis, which could differ from that of the originally purchased shares.
Example: If you own shares in a company that pays dividends, instead of receiving those dividends in cash, they can be automatically used to buy more shares of the same company through a DRIP account.
Dual Status Alien
An individual who is both a nonresident and a resident alien in the U.S. during the same tax year, typically in the years they arrive in or depart from the U.S.
Example: If you moved to the U.S. in June and met the substantial presence test by year-end, you would be considered a dual status alien for that tax year, with part of the year as a nonresident and part as a resident.
E
Earned Income
Any income received from performing work, including wages, salaries, tips, and net earnings from self-employment.
Example: If you work as a freelance graphic designer, the fees you charge for your services constitute earned income.
Earned Income Credit (EIC)
EIC is a tax credit for low to moderate-income working individuals and families, particularly those with children, which can reduce the amount of tax owed and may result in a refund.
Example: A single parent earning $30,000 a year with two children might qualify for the EIC, which could significantly lower their tax bill or increase their refund.
Education Credits
Tax credits such as the American Opportunity Credit and Lifetime Learning Credit that are based on qualified education expenses paid during the tax year.
Example: Paying college tuition for yourself or a dependent can qualify you for education credits, reducing the amount of tax you owe.
EIC
Earned income credit.
EITC
Earned Income Tax Credit.
Electronic Filing (e-file)
Submitting tax returns online directly to the IRS, which is faster and more secure than paper filing.
Example: Using an IRS-approved tax preparation software to file your taxes qualifies as electronic filing.
Employee
An individual who performs services for you where you control what will be done and how it will be done.
Example: If you hire someone to manage your office and specify their daily tasks and how they should perform them, they are considered an employee.
Energy Community Bonus Credit
The Energy Community Bonus Credit is an incentive provided under the Inflation Reduction Act of 2022. It aims to encourage renewable energy projects in communities affected by the decline of fossil fuel industries. This bonus credit offers additional tax benefits to projects located in areas with high unemployment rates due to the closure of coal mines, power plants, or other fossil fuel industries.
Example: Imagine a solar energy company planning a new project. If they choose to build their solar farm in a former coal mining town with high unemployment, they can qualify for the Energy Community Bonus Credit. This credit provides additional tax benefits on top of existing federal tax incentives for renewable energy projects. For instance, if the standard tax credit for a solar project is 26%, the bonus credit might increase it to 30%, making the investment more attractive and financially viable.
ESA (Education Savings Account)
A savings account that allows funds to grow tax-free when used for qualified educational expenses.
Example: Contributing to a Coverdell ESA for a child’s education expenses allows the money to grow tax-free and withdrawals are tax-free if used for educational purposes.
Excludable Income
Types of income that can be excluded from gross income, meaning they are not subject to federal income tax.
Example: Certain types of scholarships or fellowship grants that are used for tuition and educational fees are considered excludable income.
Exempt (from withholding)
Conditions under which an employee is exempt from federal income tax withholding based on past and expected future tax liability.
Example: If you had no tax liability last year and expect none this year, you can claim exemption from withholding on your W-4 form.
Exemption
Amount that can be deducted from AGI based on number of dependents.
Exemption and Exemption Amount
A deduction allowed by the IRS on your tax return that reduces your taxable income. There's a set amount for each exemption claimed, such as for oneself, a spouse, or dependents.
Example: Claiming personal and dependency exemptions can lower your taxable income, thereby reducing your tax liability.
F
FBAR (FinCEN Form 114)
The FBAR (Report of Foreign Bank and Financial Accounts), formally known as FinCEN Form 114, is used to report a financial interest in or signature authority over foreign financial accounts if the aggregate value exceeds $10,000 at any time during the calendar year.
Example: Sarah has bank accounts in Canada and Germany with a combined value of $15,000. She must file the FBAR electronically with the Financial Crimes Enforcement Network (FinCEN) to report these foreign accounts.
Filing Statuses
Categories that determine the tax rates and brackets applicable to a taxpayer, including Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er).
Impact: Each status affects how much tax is owed and which credits can be claimed, optimizing tax liability based on personal circumstances.
First-time Homebuyer Credit
A refundable credit of up to $8,000 for eligible first-time homebuyers, which can be received even if no tax is owed. If the home is sold within three years, the credit may need to be repaid.
Example: A first-time homebuyer who purchases a home and qualifies could receive this credit and must adhere to the residency requirements to avoid repayment.
Five-Year Test Period Suspension
A provision that allows certain taxpayers (e.g., military personnel, foreign service, intelligence community members) to suspend the typical five-year test period for homeowner tax benefits during official duty periods.
Example: A service member who is deployed for three years can still qualify for the capital gains exclusion on their home sale without meeting the typical residency requirements.
Filing statuses
Determines the tax bracket and rate, includes single, married filing jointly, married filing separately, head of household, and qualifying widow(er). There are five taxpayer categories that determine the amount of tax and/or tax credits that apply to different taxpayers.
First-time Homebuyer Credit
The first-time homebuyer credit is a maximum of $8,000 ($4,000 for Married Filing Separately). This is a refundable credit which means that even if the taxpayer does not owe any tax, the money will be refunded to the taxpayer. There are payback provisions if the home was sold within a 36 month period.
Five-Year Test Period Suspension
Taxpayers can choose to have the five-year test period for ownership and use suspended during any period the homeowner (either spouse if married) served on qualified official extended duty as a member of the uniformed services or Foreign Service of the United States, as an employee of the intelligence community, or as an employee or volunteer of the Peace Corps. This means that the taxpayer may be able to meet the two-year use test even if the taxpayer and/or spouse did not actually live in the home during the normal five-year period required of other taxpayers.
Foreign Earned Income Exclusion
Allows U.S. taxpayers earning income abroad to exclude a portion of that income from U.S. tax, subject to certain conditions.
Example: An expatriate working in Germany earning $105,000 can exclude up to the IRS limit ($107,600 for 2020) from their U.S. taxable income.
Foreign Tax Credit
A credit that reduces the U.S. tax liability for taxes paid to a foreign government on income that is also subject to U.S. taxation.
Example: If you paid $5,000 in taxes to a foreign country and owe $8,000 in U.S. taxes on the same income, you can reduce your U.S. tax by the amount of the foreign taxes paid.
Form 1040
The standard IRS form used by individuals to file their annual income tax returns. It covers various types of income, deductions, and credits.
Use: Reports wages, salaries, taxable scholarships, and other forms of compensation.
Form 1040 Schedule A
Itemized Deductions.
Form 1040 Schedule B
Interest and Ordinary Dividends.
Form 1040 Schedule C-EZ
Net Profit from Business.
Form 1040 Schedule D
Capital Gains and Losses.
Form 1040 Schedule E
Supplemental Income and Loss.
Form 1040 Schedule L
Standard Deduction for Certain Filers.
Form 1040 Schedule M
Making Work Pay and Government Retiree Credits.
Form 1040 Schedule SE
Self-Employment Tax.
Form 1040A
Tax return used to report all Form 1040A items, plus all other forms of income.
Form 1040ES
Estimated Tax for Individuals.
Form 1040EZ
Tax Return for Single and Joint Filers with No Dependents, used to report income from wages, salaries, and tips, plus income from dividends and interest greater than $1,500; capital gain distributions; IRA, pension, and annuity income; and social security and railroad retirement benefits.
Form 1040NR
U.S. Nonresident Alien Income Tax Return.
Form 1040NR-EZ
U.S. Nonresident Alien Income Tax Return.
Form 1040X
Amended U.S. Individual Income Tax Return, used to modify a previously filed tax return.
Form 1041 Schedule K-1
Beneficiary's Share of Income, Deductions, Credits, etc. Used by the fiduciary of a domestic decedent's estate, trust, or bankruptcy estate to report income, gains, losses, etc., of the estate or trust.
Form 1042-S
Foreign person's U.S. source income subject to withholding.
Form 1065 Schedule K-1
Partner's Share of Income, Deductions, Credits, etc. Used by partnerships to report the taxpayers' share of the partnership's income, deductions, credits, etc.
Form 1098
Statement showing Mortgage Interest.
Form 1098-E
Statement showing Student Loan Interest.
Form 1098-MA
Form 1098-MA, Mortgage Assistance Payments, is a new information return. The form is used to report to the IRS and homeowners the total amounts of certain mortgage assistance payments made to mortgage servicers. Although, mortgage assistance payments are not included in income, taxpayers cannot deduct interest that is paid for them.
Form 1099-A
Acquisition or Abandonment of Secured Property.
Form 1099-B
Proceeds From Broker and Barter Exchange Transactions.
Form 1099-C
Cancellation of Debt.
Form 1099-DIV
Statement showing Dividends and Distributions.
Form 1099-G
Statement showing certain government payments. (such as Unemployment Compensation Income)
Form 1099-INT
Statement showing Interest Income.
Form 1099-K
Form 1099-K is used to report the proceeds of payment card and third party network transactions made to taxpayers under Internal Revenue Code section 6050W. Merchant card and third party network payers, as payment settlement entities (PSE), must report the proceeds of payment card and third party network transactions made to taxpayers on Form 1099-K.
Form 1099-LTC
Long-term Care and Accelerated Death Benefits.
Form 1099-MISC
Statement showing miscellaneous income. (Such as rents, royalties, fishing boat proceeds, non-employee compensation, medical and healthcare payments, substitute payments in lieu of dividends or interest, crop insurance proceeds, gross proceeds paid to an attorney, excess golden parachute payments, and other miscellaneous income).
Form 1099-OID
Statement showing Original Issue Discount.
Form 1099-R
Statement showing Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.
Form 1099-S
Proceeds From Real Estate Transactions.
Form 1116
Foreign Tax Credit. (Individual, Estate or Trust)
Form 1120S Schedule K-1
Shareholder's Share of Income , Deductions, Credits, etc. Used by S corporations to report the taxpayers' share of the corporation's income (reduced by any tax the corporation paid on the income), as well as any deductions, credits, etc.
Form 13614-C
Intake/Interview & Quality Review Sheet.
Form 2106
Employee Business Expenses.
Form 2106-EZ
Unreimbursed Employee Business Expenses.
Form 2120
Multiple Support Declaration, allows taxpayers to identify other eligible individuals who paid over 10% of the support of another person.
Form 2210
Underpayment of Estimated Tax by Individual, Estates and Trusts. While completion of the Form 2210 is out of scope, volunteers need to caution taxpayers they will receive a notice of an estimated tax penalty if it is applicable.
Form 2441
Child and Dependent Care Expenses.
Form 2555
Foreign Earned Income Exclusion.
Form 2555-EZ
Foreign Earned Income Exclusion.
Form 2848
Power of Attorney and Declaration of Representative.
Form 3903
Moving Expenses.
Form 4137
Social Security and Medicare Tax on Unreported Tip Income, is used to report unreported tip income.
Form 4506
Request for Copy or Transcript of Tax Form.
Form 4852
Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA's, Insurance Contracts, Etc., used by taxpayers who have been unable to obtain (or have received incorrect) wage or distribution statements.
Form 4868
Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Form 4952
Investment Interest Expense Deduction.
Form 5329
Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts.
Form 5405
First-Time Homebuyer Credit.
Form 5695
Residential Energy Efficient Property Credit.
Form 8233
Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual.
Form 8316
Information Regarding Request for Refund of Social Security Tax.
Form 8332
Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. This form allows a taxpayer who is a custodial parent (and who was married to his or her child's noncustodial parent) to release his or her claim on the child's exemption.
Form 8379
Injured Spouse Claim and Allocation, allows taxpayers to request relief from a spouse's past due federal debts, including back child support and past due taxes.
Form 843
Claim for Refund and Request for Abatement.
Form 8453-OL
Income tax declaration used for e-filing.
Form 8582
Passive Activity Loss Limitations.
Form 8606
Nondeductible IRAs, reports nondeductible contributions to traditional IRAs and/or distributions taken from certain IRAs. Part I explains in detail when this form is used.
Form 8812
Additional Child Tax Credit.
Form 8822
Change of Address.
Form 8840
Closer Connection Exception Statement for Aliens.
Form 8843
Statement for Exempt Individuals and Individuals with a Medical Condition.
Form 8857
Request for Innocent Spouse Relief. This form explains various forms of relief and who may qualify.
Form 8863
Education Credits may be used instead of Form 2106, Employee Business Expenses, if education expenses were the only business expenses.
Form 8879
IRS e-file Signature Authorization.
Form 8880
Credit for Qualified Retirement Savings Contributions.
Form 8888
Direct Deposit of Refund to More Than One Account.
Form 8901
Information on Qualifying Children Who Are Not Dependents (For Child Tax Credit).
Form 8938
Form 8938, Statement of Specified Foreign Financial Assets, is an IRS form used to report certain foreign financial assets to the IRS. It is part of the FATCA (Foreign Account Tax Compliance Act) requirements and is used to ensure U.S. taxpayers with foreign assets are complying with tax laws.
Example: John, a U.S. citizen, holds foreign bank accounts and investments worth $250,000. He must file Form 8938 with his federal tax return to report these foreign financial assets to the IRS.
Form 8949
Sales and Other Dispositions of Capital Assets. This form is new in 2010 and used to report capital gains or losses.
Form 9452
Filing Assistance Program, helps taxpayers determine whether they are required to file a federal income tax return.
Form 9465
Installment Agreement Request, used to request a monthly installment plan for taxes owed.
Form 982
Reduction of Tax Attributes Due to Discharge of Indebtedness.
Form RRB-1099
Payments by the Railroad Retirement Board.
Form RRB-1099-R
Annuities or Pensions by the Railroad Retirement Board.
Form SS-5
Application for a Social Security Card.
Form SSA-1099
Social Security Benefit Statement.
Form W-2
Wages and Tax Statement, issued by employers to report their employees' earned income for the year. Generally, employers should issue Form W-2 to every employee and a copy to the Social Security Administration.
Form W-2c
Corrected Wage and Tax Statement, used to correct information issued on a W-2.
Form W-4
Employee's Withholding Allowance Certificate is completed by the employee and used by an employer to determine how much to withhold from an employee's paycheck for federal income tax purposes.
Form W-4P
Withholding Certificate for Pension or Annuity Payments. The form allows taxpayers to tell payers the correct amount of federal income tax to withhold from payments.
Form W-4V
Voluntary Withholding Request, filed by taxpayers (or estates) who are recipients of social security benefits and want to request withholding from their payments from the Social Security Administration.
Form W-5
Earned Income Credit Advance Payment Certificate, used by taxpayers who have a qualifying child, may be eligible for the earned income credit, and choose to get advance EIC payments.
Form W-7
Application for IRS Individual Taxpayer Identification Number.
Form W-8BEN
Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.
G
Green Card Test
A standard used to determine if an individual is considered a permanent resident of the U.S. for tax purposes, based on the possession of a "green card" issued by the USCIS.
Example: If you have a green card, you pass the Green Card Test and are treated as a resident alien for U.S. tax purposes.
Gross Income
The total income you receive in a year before any deductions or taxes, from all sources including money, goods, property, and services that aren't exempt from tax.
Example: This includes your salary, dividends, rental income, and any income from services.
Gross Income Test
A criterion used to determine if someone can be claimed as a dependent, based on whether their gross income exceeds the personal exemption amount for the year.
Example: If the personal exemption amount is $4,000, and a relative earns $4,500, they fail the gross income test for dependency.
H
Head of Household Filing Status
A tax filing status for unmarried taxpayers who provide more than half of the financial support for their household and have a qualifying dependent.
Example: If you're unmarried and pay more than half the costs of maintaining a home for your dependent child, you may qualify as Head of Household.
High Taxed Income
Income that has been taxed by a foreign government at a rate exceeding the highest U.S. tax rate and may qualify for the foreign tax credit.
Example: If you earn income in a country with a higher tax rate than the U.S., this income can be considered high taxed and eligible for foreign tax credit relief.
Hobby Loss Rule
IRS rules that limit the deductibility of expenses from a hobby to the amount of income the hobby generates.
Example: If your hobby of photography earns you $1,000 but you spent $2,000, you can only deduct $1,000.
Holding Period
The length of time an investment is held, from purchase to sale, which affects the taxation of any capital gains.
Example: If you buy stock on January 1 and sell it on December 31 of the same year, your holding period is one year.
I
Identity Protection PIN (IP PIN)
A six-digit number assigned to eligible taxpayers to help prevent the misuse of their Social Security number on fraudulent federal income tax returns.
Example: If you've experienced tax-related identity theft, you'll receive an IP PIN from the IRS which must be used to confirm your identity on all future tax returns.
Income Taxes
Income taxes are levied on both earned and unearned income. Earned income includes wages, salaries, tips, and commissions, while unearned income covers sources like interest and dividends. These taxes apply to both individuals and businesses, encompassing personal income taxes for individuals and corporate taxes for businesses. This dual application ensures that all forms of income are subject to taxation, aiming to support governmental financial obligations and services.
Example: If you earn $50,000 from your job and $2,000 from investments, you owe income taxes on $52,000.
Independent Contractor
An individual in business for themselves who provides services to others without having the payer control how the work is done, only the result.
Example: A freelance graphic designer who works under contract for various companies, controlling how they complete their work, is an independent contractor.
Individual Retirement Arrangement (IRA)
A tax-sheltered retirement savings plan set up by the taxpayer. This is a retirement savings account that offers tax advantages for individuals to set aside money for retirement.
Example: You can contribute up to a certain amount annually to an IRA, which may be deductible from your taxes depending on your income and other factors.
Individual Taxpayer Identification Number (ITIN)
A tax processing number issued by the IRS to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, a Social Security number (SSN).
Example: ITINs are used by foreign nationals and others who have tax filing or payment obligations under U.S. law.
Inflation Reduction Act of 2022
The Inflation Reduction Act of 2022 is a comprehensive legislation aimed at reducing inflation and addressing key economic issues in the United States. It focuses on various sectors, including healthcare, energy, and taxation. The Act includes measures to lower prescription drug costs, extend healthcare subsidies, promote clean energy, and implement corporate tax reforms.
Example: A key provision of the Act allows Medicare to negotiate prices for certain high-cost prescription drugs, potentially lowering costs for seniors. For instance, if a medication costs $1,000 per month, Medicare's negotiation could reduce this to $700, making it more affordable for beneficiaries.

Impact: The Act aims to reduce overall healthcare costs, promote clean energy usage, and increase tax revenues from corporations, contributing to economic stability and lower inflation rates.
Injured Spouse Relief
A tax relief option that allows a taxpayer to regain their share of a joint tax refund that was used to cover the past-due obligations of a spouse.
Example: If your joint tax refund was applied to your spouse's past-due student loans, you can file for injured spouse relief to recover your portion of the refund.
Innocent Spouse Relief
This allows one spouse to be relieved of joint liability for a tax bill if it was solely the result of the other spouse's erroneous item inclusion or omission.
Example: If your spouse omitted income from a joint tax return without your knowledge, you might qualify for innocent spouse relief.
Intake and Interview sheet
Form 13614-C used to conduct the initial interview and screen the taxpayer. This is a form used by tax preparers to gather necessary information from a taxpayer at the beginning of the tax preparation process.
Example: When you visit a tax preparer, they may use Form 13614-C to interview you and collect details about your income, expenses, and previous tax filings.
Interest Income
Any income earned from depositing funds in interest-bearing accounts, holding bonds, or other loans where you receive payments.
Example: If you have a savings account that accumulates interest over the year, this interest is considered taxable interest income and must be reported on your tax return.
Investment Income
Investment Income is Income earned from investments, including taxable interest, dividends, capital gains, rental income (not from a business), and income from passive activities.
Example: Receiving $500 in dividends from stock investments and $1,200 from rental properties.
IRA (Individual Retirement Arrangement)
Individual Retirement Arrangement - A tax-sheltered savings plan set up by the taxpayer, generally for retirement income.
Example: Contributing $6,000 to a Traditional IRA, which may be tax-deductible, reducing your taxable income for the year.
Itemized Deductions
Expenses listed on Schedule A that can be subtracted from AGI, such as medical expenses, taxes paid, interest, and donations. Itemized deductions allow taxpayers to reduce their taxable income based on specific personal expenses. If the total itemized deductions are greater than the standard deduction, it will result in a lower taxable income and lower tax.
Example: If your total itemized deductions for the year are $15,000 and the standard deduction is $12,000, you should itemize to reduce your taxable income by the greater amount.
ITIN
Individual taxpayer identification number, issued by the IRS to individuals who are not eligible for a social security number.
Example: An international student working in the U.S. who is not eligible for an SSN will use an ITIN to file their tax return.
J
Janitorial Expenses
Costs associated with cleaning services for business properties, which are deductible business expenses.
Example: A law firm spends $2,000 annually on janitorial services to clean its offices. This amount can be deducted as a business expense.
Job Expenses
Work-related expenses that are deductible if you itemize deductions, such as union dues and work-related travel.
Example: Mark, a traveling salesperson, deducts $1,000 in travel expenses and $200 in union dues from his taxable income by itemizing his deductions.
Jock Tax
A colloquial term for the income tax levied on athletes who earn income in multiple states.
Example: An NBA player earns a portion of his salary in California, Texas, and New York, and must file and pay state income taxes in each of these states based on the income earned there.
Joint and Several Liability
A legal concept meaning that each spouse is individually responsible for the entire tax liability on a joint tax return.
Example: If John and Jane owe $5,000 in taxes on their joint return, both are individually liable for the full amount, meaning the IRS can collect the $5,000 from either John or Jane.
Joint Return
A tax return filed by a married couple together.
Example: John and Jane file a joint return, combining their incomes of $50,000 and $60,000, respectively, for a total taxable income of $110,000.
Joint Return Test
One of the tests for identifying a qualifying child or qualifying relative as a dependent. Generally, a married person cannot be claimed as a dependent if he or she files a joint return.
Jury Duty Pay
Compensation received by an individual for serving on a jury, which is taxable income.
Example: Sarah receives $300 for serving on a jury for two weeks. She must report this amount as income on her tax return.
K
K-1
An IRS form used to report income, losses, and dividends of partners/shareholders in partnerships, S-corps, and some trusts. [how to read k-1 tax form]
Example: A partner in a law firm receives a K-1 form detailing their share of the firm's income, which they must report on their personal tax return.
Keogh Plan
A tax-deferred retirement plan for self-employed individuals or unincorporated businesses.
Example: A freelance graphic designer contributes to a Keogh Plan to save for retirement, reducing their taxable income for the year.
Key Employee
An employee who plays a crucial role in the success and operations of a business, often subject to special tax rules.
Example: The chief technology officer (CTO) of a tech startup is considered a key employee due to their essential role in the company's success.
Keyman Insurance
A life insurance policy taken out by a company on a key executive's life to protect against financial losses resulting from their death.
Example: A company purchases keyman insurance for its CEO to cover potential financial losses if the CEO unexpectedly passes away.
Kickout Clause
A provision in a real estate contract allowing a seller to cancel the contract if a better offer is received by a specified date.
Example: A home seller includes a kickout clause in their contract, enabling them to accept a higher offer before closing with the original buyer.
Kiddie Tax
A tax on a child's unearned income, such as investment income, over a certain amount, taxed at the parent's tax rate.
Example: A child with $5,000 in investment income may be subject to the kiddie tax on the amount exceeding the threshold.
Kicker
An additional payment or bonus, which may be considered taxable income.
Example: An employee receives a $1,000 kicker as a bonus for exceptional performance, which must be reported as income on their tax return.
Kindle Royalties
Income earned from publishing and selling e-books on Amazon's Kindle platform, subject to self-employment tax.
Example: An author earns $10,000 in Kindle royalties from their e-book sales, which is subject to self-employment tax.
Kinetic Activity
One of the requirements to claim the home office deduction is that the space be used regularly for business activities.
Example: A consultant uses a room exclusively for meeting clients and conducting business activities, qualifying for the home office deduction under the kinetic activity requirement.
Kingdom Allocation
A transfer pricing method used to divide profits from integrated operations between associated entities.
Example: A multinational corporation uses kingdom allocation to fairly allocate profits between its U.S. and foreign subsidiaries based on their respective contributions to the business.
L
Landlord
An individual or entity that rents out property to a tenant in exchange for rental income.
Example: A person who owns and rents out an apartment building is a landlord and must report the rental income on their tax return.
Lease
A contractual agreement where one party (lessee) pays the other (lessor) for the use of an asset, typically real estate or equipment, for a specified period.
Example: A business signs a lease to rent office space for three years and deducts the lease payments as a business expense.
Leasehold Improvement
Enhancements made to rental property by a tenant or landlord to improve the property's usability.
Example: A tenant renovates the interior of a rented store, and the cost of these improvements can be depreciated over the lease term.
Letter of Determination
Document from the Department of Veterans Affairs (VA) sent to discharged service members who qualify for severance pay subject to medical disability, which is nontaxable.
Life Insurance Proceeds
The payout from a life insurance policy received by the beneficiary upon the insured's death, typically tax-free.
Example: A beneficiary receives $100,000 from a life insurance policy after the policyholder's death, and this amount is generally not subject to income tax.
Lifetime Learning Credit
One of two tax credits available to offset costs of higher education by reducing the amount of income tax. The Lifetime Learning credit is a nonrefundable credit of up to $2,000 for qualified education expenses for students enrolled in eligible educational institutions. It is available to students for all years of postsecondary education and for courses to acquire or improve job skills.
Example: A taxpayer pays $2,000 for a college course and claims the Lifetime Learning Credit to reduce their tax liability.
Like-Kind Exchange
A tax-deferred exchange of similar property used in business or for investment, allowing the deferral of capital gains tax.
Example: A real estate investor swaps one rental property for another without recognizing capital gains at the time of the exchange.
Limited Liability Company (LLC)
A business structure that offers limited liability protection to its owners while allowing profits and losses to be passed through to individual tax returns.
Example: A small business forms an LLC to protect the owners' personal assets from business liabilities while reporting income on their personal tax returns.
Long-Term Capital Gain
The profit from the sale of an asset held for more than one year, subject to preferential tax rates.
Example: Selling stock after holding it for two years results in a long-term capital gain, taxed at a lower rate than short-term gains.
Loss Carryforward
A tax provision that allows taxpayers to apply a net operating loss to future tax years to offset future income.
Example: A business incurs a loss of $10,000 in one year and uses the loss carryforward provision to reduce taxable income in subsequent years.
Lump-sum Distribution
A lump-sum distribution is the distribution or payment within one tax year of an employee's entire balance from all qualified pension, stock bonus, or profit-sharing plans that the employer maintains.
Luxury Automobile Limit
The maximum depreciation deduction allowed for luxury cars used for business purposes.
Example: A business buys a high-end vehicle and can only claim depreciation up to the luxury automobile limit set by the IRS.
M
MACRS (Modified Accelerated Cost Recovery System)
A method for calculating a taxpayer's depreciation deduction using the property's placed-in-service date, recovery period, and depreciable basis.
Example: A business purchases machinery for $10,000 and uses MACRS to depreciate the cost over its useful life.
Main Home
The primary residence where a taxpayer lives most of the time, which must include cooking, sleeping, and bathroom facilities.
Example: John lives in a mobile home year-round, making it his main home for tax purposes.
Making Work Pay Tax Credit
A refundable tax credit of up to $400 for individuals ($800 for married filing jointly), calculated at 6.2% of earned income, phased out for higher incomes.
Example: An individual earning $50,000 may qualify for a $400 credit, while a couple earning $160,000 would not qualify.
Married Filing Jointly
A filing status for married couples who combine their income and deductions on the same tax return.
Example: Sarah and Mike file their taxes jointly, combining their incomes and deductions to potentially lower their tax bill.
Married Filing Separately
A filing status for married couples who report their own incomes and deductions on separate tax returns.
Example: Anna and Tom file separately to keep their finances distinct, each reporting their own income and expenses.
Medical Severance Pay
Includable military income given to service members who have been separated from service for medical reasons.
Example: A soldier receives medical severance pay after being medically discharged from the military, which is taxable.
Member of Household or Relationship Test
A test to determine if a person qualifies as a dependent based on their relationship to the taxpayer or if they lived with the taxpayer all year.
Example: Jane's niece lives with her all year, meeting the household test for dependency.
Modified Adjusted Gross Income (MAGI)
Adjusted Gross Income (AGI) with certain modifications used to determine eligibility for certain tax benefits.
Example: MAGI is used to calculate eligibility for Roth IRA contributions and certain education credits.
Mortgage Interest Credit
A nonrefundable credit for mortgage interest paid by holders of qualified mortgage credit certificates.
Example: A homeowner with a mortgage credit certificate claims a credit for the interest paid on their mortgage.
Mortgage Insurance Premiums
Premiums paid for mortgage insurance provided by the VA, FHA, RHS, or private companies, deductible as home mortgage interest.
Example: A homeowner pays $1,200 in PMI and deducts it on Schedule A as home mortgage interest.
Multiple Support Agreements
An agreement among multiple people providing more than half of a dependent's support, allowing one to claim the dependency exemption.
Example: Three siblings support their elderly parent, and one sibling claims the exemption through a multiple support agreement.
Mutual Funds
Investment companies pooling funds from investors to invest in a diversified portfolio, with earnings reported on Form 1099-DIV and Form 1099-B.
Example: An investor holds shares in a mutual fund and receives dividends and capital gains distributions, reported on their tax return.
N
Net Investment Income
Income from investments such as interest, dividends, capital gains, rental income, and royalties, minus related expenses.
Example: If you earn $5,000 in dividends and $2,000 in rental income but have $1,000 in investment expenses, your net investment income is $6,000.
Net Operating Loss (NOL)
When a business's allowable tax deductions exceed its taxable income within a tax year, resulting in a negative taxable income.
Example: A business incurs a $50,000 loss in 2023, which it can carry forward to offset future taxable income.
Nonbusiness Energy Property Credit
A credit available to taxpayers for certain energy-efficient property or improvements made to their home.
Example: Jane installs energy-efficient windows in her home and qualifies for a nonbusiness energy property credit on her tax return.
Nondeductible Traditional IRA Contributions
Contributions to a traditional IRA that cannot be deducted from the taxpayer's total income because the requirements are not met, including contributions that exceed the deductible limit.
Example: John contributes $7,000 to his IRA, but only $6,000 is deductible. The remaining $1,000 is a nondeductible contribution.
Nonrecourse Debt
A type of loan where the borrower is not personally liable, and the lender can only claim the secured property in case of default, regardless of its value.
Example: If Mark defaults on his mortgage, the lender can only take the house, not pursue Mark personally for any remaining debt.
Nonrefundable Credit
A tax credit that can reduce the tax liability to zero but does not result in a refund if the credit amount exceeds the tax owed.
Example: Maria's tax liability is $500, and she has a nonrefundable credit of $800. Her tax liability is reduced to zero, but she does not receive the remaining $300.
Nonresident Alien
An individual who does not meet the Green Card Test or the Substantial Presence Test for residency status in the U.S.
Example: A foreign student living in the U.S. for a short period may be classified as a nonresident alien.
Nontaxable Income
Income that is exempt from federal income tax and does not increase the amount of taxable income.
Example: Gifts and inheritances are considered nontaxable income and are not included in taxable income calculations.
Nonqualified Stock Options (NSOs)
Stock options that do not qualify for special tax treatments available for incentive stock options and are taxed as ordinary income when exercised.
Example: An employee exercises NSOs and must report the difference between the market price and the exercise price as ordinary income.
Nonqualified Deferred Compensation (NQDC)
Compensation that has been earned by an employee but is paid out at a later date, usually to defer taxes.
Example: An executive defers a portion of their salary to be paid after retirement, and the deferred amount is taxed when received.
O
Offer in Compromise (OIC)
An agreement between a taxpayer and the IRS that settles the taxpayer's tax liabilities for less than the full amount owed.
Example: John owes $50,000 in taxes but cannot pay the full amount. He submits an OIC and settles his tax debt for $20,000.
OHA
Overseas housing allowance, a type of excludable military income.
Example: A U.S. Army officer stationed in Germany receives an Overseas Housing Allowance to help pay for their apartment rental, which is not included in their taxable income.
Ordinary Dividends
Corporate distributions paid out of the earnings and profits of the corporation.
Example: Maria owns shares in a company and receives $500 in ordinary dividends for the year, which she reports as ordinary income on her tax return.
Ordinary Income
Income earned from providing services and the sale of goods, including wages, salaries, commissions, and interest income.
Example: Lisa earns $60,000 in salary and $1,000 in bank interest. Both are considered ordinary income and taxed at regular income tax rates.
Original Issue Discount (OID)
The difference between the redemption price at maturity and the issue price of a bond or other debt instrument, which is treated as interest income.
Example: Sarah buys a bond for $900 that will mature at $1,000 in five years. The $100 difference is OID and must be reported as interest income over the bond's life.
Out-of-Pocket Expenses
Expenses that an individual pays directly, rather than having them covered by an insurance policy or reimbursed by an employer.
Example: Jane pays $500 for a medical procedure not covered by insurance. This amount is her out-of-pocket expense and may be deductible if it exceeds a certain threshold.
Overpayment
When a taxpayer pays more taxes than they owe, resulting in a refund or credit.
Example: Mark's tax liability is $3,000, but he pays $3,500 throughout the year. The $500 overpayment is refunded to him.
Owner-Occupied Property
Real estate property that is occupied by the owner as their primary residence.
Example: Emily lives in the house she owns, making it owner-occupied property, and she may qualify for certain tax benefits such as the mortgage interest deduction.
P
Paid Preparers
Professionals who prepare tax returns for compensation and are legally liable for the accuracy of the returns they prepare.
Example: A certified public accountant (CPA) prepares a client's tax return and must sign it as the paid preparer, assuming responsibility for any errors.
Passive Activity
Income-generating activities where the taxpayer does not materially participate, such as rental properties or limited partnerships. Losses from passive activities are typically only deductible against passive income.
Example: Jane owns a rental property but hires a property manager, so her involvement is minimal, making it a passive activity.
Passive Income
Taxable income derived from passive activities, such as dividends, interest, royalties, rents, and annuities.
Example: John earns $3,000 in passive income from his rental property and $1,000 in dividends from stocks.
Payroll Tax
Taxes withheld from employees' paychecks by employers, including Social Security, Medicare, and federal income taxes.
Example: Maria sees deductions on her paycheck for payroll taxes that contribute to Social Security and Medicare.
PCS (Permanent Change of Station)
A relocation of a military service member to a different duty station, often involving reimbursement for moving expenses.
Example: A soldier is assigned a PCS from Texas to Germany, and the military covers the cost of the move.
Pension
Regular payments made to a retired employee or their beneficiary, typically from an employer-sponsored retirement plan.
Example: After retiring, Bob receives a monthly pension payment from his former employer.
Period of Stay
The length of time a taxpayer stays in a foreign country, used to determine eligibility for the foreign earned income exclusion through the Bona Fide Residency or Physical Presence test.
Example: Sarah works abroad for 340 days in a year, meeting the period of stay requirement for the foreign earned income exclusion.
Personal Exemption
A deduction that taxpayers can claim for themselves and their dependents to reduce taxable income. Note: Personal exemptions were suspended from 2018 to 2025 under the Tax Cuts and Jobs Act.
Example: Before 2018, Mark could claim a personal exemption for himself and each of his children on his tax return.
Physical Presence Test
A requirement for the foreign earned income exclusion, stating that a taxpayer must be physically present in a foreign country for at least 330 full days during a 12-month period.
Example: Emma works in Japan for 335 days within a year, qualifying for the foreign earned income exclusion through the Physical Presence Test.
Property Taxes
Taxes levied on real estate and sometimes personal property, such as boats or cars, based on the property's value.
Example: Tom pays annual property taxes on his house and car, which are determined by their assessed values.
Publication 3
The Armed Forces' Tax Guide, providing tax information for members of the military.
Example: A military service member uses Publication 3 to understand their specific tax benefits and obligations.
Publication 17
The IRS Tax Guide for Individuals, offering comprehensive information on tax rules and procedures for individual taxpayers.
Example: Jane refers to Publication 17 to help prepare her individual tax return and understand allowable deductions and credits
Publication 54
The Tax Guide for U.S. Citizens and Resident Aliens Abroad, detailing tax rules and benefits for Americans living overseas.
Example: An expatriate uses Publication 54 to understand how to file taxes while living abroad.
Publication 463
A guide covering the tax rules for travel, entertainment, gift, and car expenses.
Example: A business owner consults Publication 463 to determine which travel and entertainment expenses are deductible.
Publication 519
The U.S. Tax Guide for Aliens, explaining tax rules for nonresident and resident aliens.
Example: A foreign student reads Publication 519 to understand their tax obligations while studying in the U.S.
Publication 521
A guide on the tax rules for moving expenses.
Example: An employee moving for a new job consults Publication 521 to see if their moving expenses are deductible.
Publication 523
A guide to the tax implications of selling your home.
Example: A homeowner uses Publication 523 to understand the tax effects of selling their house and potential exclusion of gain.
Publication 527
A guide for tax rules on residential rental property.
Example: A landlord consults Publication 527 to understand how to report rental income and expenses.
Publication 551
A guide on determining the basis of assets for tax purposes.
Example: An investor uses Publication 551 to figure out the basis of stocks they sold during the year.
Publication 552
A guide on recordkeeping for individuals.
Example: A taxpayer consults Publication 552 to understand which financial records to keep and for how long.
Publication 555
A guide on the tax rules for community property.
Example: A couple living in a community property state reads Publication 555 to understand how to report their income and deductions.
Publication 575
A guide on the tax rules for pension and annuity income.
Example: A retiree uses Publication 575 to understand how their pension payments are taxed.
Publication 590
A guide on Individual Retirement Arrangements (IRAs).
Example: A taxpayer consults Publication 590 to understand the contribution limits and tax benefits of their IRA.
Publication 594
The IRS Collection Process.
Example: A taxpayer reads Publication 594 to learn about the steps the IRS takes to collect unpaid taxes and the options available for resolving tax debt.
Publication 915
Social Security and Equivalent Railroad Retirement Benefits.
Example: A retiree uses Publication 915 to determine how much of their Social Security benefits are taxable.
Publication 925
Passive Activity and At-Risk Rules.
Example: An investor consults Publication 925 to understand the limitations on deducting losses from passive activities and at-risk investments.
Publication 939
General Rules for Pensions and Annuities.
Example: A taxpayer nearing retirement reads Publication 939 to learn about the tax treatment of their pension and annuity income.
Publication 946
How to Depreciate Property.
Example: A business owner uses Publication 946 to figure out how to depreciate their newly purchased equipment for tax purposes.
Publication 947
Practice Before the IRS and Power of Attorney.
Example: An individual seeking representation before the IRS consults Publication 947 to understand the rules for granting power of attorney to a tax professional.
Publication 970
Tax Benefits for Education.
Example: A parent pays for their child's college tuition and uses Publication 970 to explore available education tax credits and deductions.
Publication 971
Innocent Spouse Relief, addresses how one spouse may request relief from past taxes due solely based on the other spouse's debt.
Example: A taxpayer applies for innocent spouse relief using the guidance in Publication 971 to be relieved of tax debt caused by their spouse’s erroneous tax reporting.
Q
Qualified Adoption Expenses
Expenses that qualify for the adoption tax credit, including adoption fees, court costs, attorney fees, and travel expenses.
Example: Sarah and Mike spend $10,000 on adoption fees and attorney costs and claim the adoption tax credit for these qualified expenses.
Qualified Charitable Distributions (QCD)
A QCD is a distribution from an IRA made to an organization eligible to receive tax-deductible contributions. If all requirements are met, this will exclude any part of the distribution that would otherwise be taxable.
Example: John, who is over 70½, donates $5,000 from his IRA to a charity through a QCD, avoiding taxes on the distribution.
Qualified Dividends
Dividends that meet certain criteria to be taxed at the lower long-term capital gains tax rates rather than ordinary income tax rates.
Example: Jane receives $2,000 in qualified dividends from her stock investments, which are taxed at a lower rate than her regular income.
Qualified Education Expenses
Expenses required for enrollment or attendance at an eligible educational institution, including tuition, fees, books, supplies, and equipment.
Example: Mark pays $15,000 in tuition and $1,000 for books for his college education, which are considered qualified education expenses for the American Opportunity Credit.
Qualified Health Plan
A health insurance plan that meets the Affordable Care Act's requirements for coverage, benefits, and consumer protections.
Example: Emma enrolls in a qualified health plan through the Health Insurance Marketplace, ensuring she meets the individual mandate.
Qualified Medical Expenses
Medical expenses that can be deducted as itemized deductions if they exceed a certain percentage of adjusted gross income (AGI).
Example: Lisa incurs $10,000 in medical expenses, which exceed 7.5% of her AGI, allowing her to deduct the excess amount.
Qualified Principal Residence Indebtedness
Qualified principal residence indebtedness is any debt incurred in acquiring, constructing, or substantially improving a principal residence and which is secured by the principal residence. Qualified principal residence indebtedness also includes any debt secured by the principal residence resulting from the refinancing of debt incurred to acquire, construct, or substantially improve a principal residence but only to the extent the amount of the debt does not exceed the amount of the refinanced debt.
Qualified Tuition Program (QTP)
A program set up to allow taxpayers to either prepay, or contribute to an account established for paying a student's qualified expenses at an eligible educational institution. The program must meet certain requirements set by the state. Also known as a 529 program.
Example: Bill contributes to a 529 plan for his daughter's college education, benefiting from tax-free growth and tax-free withdrawals for qualified education expenses.
Qualifying Child
To be identified as a qualifying child, a person must meet certain basic tests. In addition, there may be other requirements to claim various tax benefits for that qualifying child.
Qualifying Child of More than One Person Test
One of the tests for identifying a qualifying child or qualifying relative as a dependent: Is the person the qualified child of any other person?
Qualified Medical Expenses
For HSA, MSA, FSA, and HRA purposes, a medicine or drug will be a qualified medical expense only if the medicine or drug requires a prescription, is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it or it is insulin.
Qualified Retirement Plan
A retirement plan that meets the requirements of the Internal Revenue Code, offering tax advantages like deferred taxes on contributions and earnings.
Example: A 401(k) plan is a qualified retirement plan that allows employees to contribute pre-tax income, reducing their taxable income for the year.
Qualified Small Business Stock (QSBS)
Stock in a qualified small business that meets specific IRS requirements, allowing for potential tax exclusions on gains from its sale.
Example: Laura invests in a startup and later sells her QSBS for a significant gain, excluding part of the gain from her taxable income under Section 1202.
Qualified Widow(er) with Dependent Child
A filing status that provides the same tax benefits as Married Filing Jointly for two years following the death of a spouse, for taxpayers with a dependent child.
Example: After her husband's death, Mary files as a qualified widow(er) with a dependent child for the next two tax years, benefiting from higher standard deductions and favorable tax rates.
Qualifying Relative
To be identified as a qualifying relative, a person must meet seven tests: Member of household or relationship test, Qualifying child of another taxpayer test, Citizen or resident test, Gross income test, Support test, Joint return test, and Dependent taxpayer test.
Qualifying Widow(er) With Dependent Child
Filing status is for widow or widower with one or more dependent children.
R
R&D Tax Credit
A credit for businesses that incur expenses related to research and development activities, intended to encourage innovation.
Example: A tech company invests $100,000 in developing new software and claims the R&D tax credit to offset part of their tax liability.
Railroad Retirement Benefits (RRBs)
Benefits paid to railroad retirees covered by the Railroad Retirement Act. The RRA has two components. Tier 1 is the equivalent of social security benefits and Tier 2 is like an employer's pension plan.
Example:
John, a retired railroad worker, receives monthly RRBs. His Tier 1 benefit is similar to social security, while his Tier 2 benefit resembles a pension from his former employer.
Real Estate Investment Trust (REIT)
A company that owns, operates, or finances income-producing real estate and allows investors to purchase shares.
Example: Jane buys shares in a REIT, which pays her dividends from the rental income of commercial properties it owns.
Recapture
The process of reclaiming tax benefits when a property is sold or ceases to be used for its original purpose.
Example: John takes depreciation deductions on a rental property, but when he sells it, he must recapture the depreciation and pay taxes on it.
Recourse Debt
Debt that holds the borrower personally liable for any amount not covered by the surrender of secured property. If a lender forecloses on property subject to recourse debt and cancels the excess debt over the property's FMV, the canceled portion is treated as ordinary income unless exceptions apply.
Example:
Sarah defaults on a $200,000 mortgage (recourse debt), and the house is sold for $150,000. She is liable for the $50,000 difference, which may be treated as ordinary income if canceled by the lender.
Refundable Credit
Refundable Credit is a tax credit that can reduce the tax liability to below zero, resulting in a refund to the taxpayer.
This occurs when the amount of a credit is greater than the tax owed. Taxpayers not only can have their tax reduced to zero; they can also receive a "refund" of excess credit.
Example:
Maria qualifies for the Earned Income Tax Credit (EITC) of $2,000. Her tax liability is $1,000, so she receives a $1,000 refund (the excess credit).
Registered Retirement Savings Plan (RRSP)
A retirement savings plan available in Canada that allows for tax-deferred growth of investments.
Example: A Canadian taxpayer contributes to their RRSP, reducing their taxable income and deferring taxes until withdrawal during retirement.
Regular Method
Most common method for computing self-employment tax. Under the regular method, the net self-employment income entered on Schedule SE is the sum of net self-employment earnings from the taxpayer's Schedules C, C-EZ, and F. (Taxpayers should consult a professional tax preparer or a military legal assistance officer if they use a different method or require Schedule F.
Example:
Mark reports his net earnings from his consulting business on Schedule C and uses the regular method on Schedule SE to compute his self-employment tax.
Relationship Test
One of the tests for identifying a qualifying child as a dependent: Was the person the taxpayer's son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (i.e., the taxpayer's grandchild, niece, or nephew).
Example: Jane claims her granddaughter as a dependent, meeting the relationship test.
Relative
Someone related to the taxpayer by blood, marriage, or adoption, including the following:
- Child, grandchild, great grandchild
- Stepchild, stepbrother, stepsister
- Brother, sister
- Half-brother, half sister
- Parent, grandparent, or other direct ancestor (but not foster parent)
- Stepmother or stepfather
- Brother or sister of one's father or mother
- Son or daughter of one's brother or sister
- Father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law.
Example: Alex supports his elderly mother and claims her as a dependent relative on his tax return.
Rental Expenses
Ordinary and necessary expenses attributable to the production of rental income and maintenance of the rental property, such as advertising, cleaning and repairs, insurance premiums, and property management fees.
Example: Tom deducts $3,000 in rental expenses for advertising, maintenance, and insurance on his rental property.
Rental Income
Payments received by a taxpayer from tenants who rent the taxpayer's property, including regular and advanced rent, payments for breaking a lease, expenses paid by the tenant, and the fair market value of property or services received in lieu of monetary rental payments.
Example:
Emma receives $1,200 per month in rental income from her tenant, plus an additional $500 for breaking the lease.
Required Minimum Distribution (RMD)
The minimum amount that must be withdrawn from a retirement account annually, starting at age 72.
Example: At age 72, Tom must take an RMD from his traditional IRA, which is included in his taxable income for the year.
Residence Test
One of the tests for identifying a qualifying child as a dependent: Did the potential dependent live with the taxpayer as a member of the taxpayer's household for more than half of the year?
Example: Lily claims her son as a dependent because he lived with her for nine months of the year.
Resident Alien
A foreign national who meets either the Green Card Test or the Substantial Presence Test and is taxed as a U.S. resident.
Example: A foreign worker living in the U.S. for several years meets the Substantial Presence Test and is considered a resident alien for tax purposes.
Residential Energy Efficient Property Credit
Taxpayers may qualify for an energy credit for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. This credit is claimed on Part II of Form 5695. This information is out of scope for the VITA/TCE programs and is included for your awareness only.
Retirement Savings Contributions Credit
The retirement savings contributions credit is a nonrefundable credit a qualifying taxpayer may claim if they made a contribution to a qualified plan.
Retirement Tax Act (RTTA)
Tier I Railroad Retirement Tax is the railroad retirement equivalent of social security wages and benefit amounts.
Revenue Ruling
An official interpretation by the IRS that clarifies how tax laws apply to specific situations.
Example: A business consults a revenue ruling to determine how to report a unique transaction on their tax return.
Rollover
Generally, a rollover is a tax-free distribution to the taxpayer from one retirement account (traditional IRA or employer's pension plan) that rolls over into a similar retirement account within 60 days.
Example: Sarah rolls over her 401(k) funds from her old job to an IRA, maintaining the tax-deferred status of her retirement savings.
Roth IRA
A type of individual retirement account where contributions are made with after-tax dollars, and qualified withdrawals are tax-free.
Example: Emily contributes to her Roth IRA, knowing she won’t pay taxes on the withdrawals during retirement.
S
S Corporation
A corporation that elects to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes.
Example: Alex's business is an S corporation, so the income flows through to his personal tax return.
Safe Harbor
A provision in the tax code that allows taxpayers to avoid penalties if they meet certain conditions.
Example: John makes estimated tax payments equal to 100% of his previous year's tax liability to qualify for the safe harbor and avoid underpayment penalties.
Sale of Main Home
Only a gain from the sale of a taxpayer's main home may be excluded from the taxpayer's income; a gain from a sale of a home that is not the taxpayer's main home will generally have to be reported as income.
Sales Tax
A tax imposed on the sale of goods and services, collected by the retailer at the point of sale.
Example: When John buys a television for $500 and the sales tax rate is 6%, he pays an additional $30 in sales tax.
Sales Tax Deduction
An itemized deduction for state and local sales taxes paid during the year, as an alternative to deducting state and local income taxes.
Example: Jane opts to deduct her state and local sales taxes instead of her state income taxes because she made large purchases during the year.
Schedule A
An IRS form used by taxpayers to report itemized deductions, such as medical expenses, taxes paid, mortgage interest, and charitable contributions.
Example: Jane uses Schedule A to itemize her deductions, including $5,000 in mortgage interest and $2,000 in charitable donations.
Schedule B
Schedule B is an IRS form used to report interest and ordinary dividends when filing your federal income tax return. It is required if the total amount of interest and dividends you receive exceeds $1,500, or if you received interest or dividends as a nominee.

Example: Jane received $2,000 in interest from her savings account and $800 in dividends from her stock investments in the tax year. She must file Schedule B to report these amounts when filing her federal tax return.
Schedule C
An IRS form used by sole proprietors to report income and expenses from a business.
Example: Mark files Schedule C to report his income and expenses from his freelance graphic design business.
Schedule D
An IRS form used to report capital gains and losses from the sale of investments.
Example: Sarah uses Schedule D to report her stock sales and calculate her capital gains tax.
Schedule E
An IRS form used to report supplemental income or loss from rental real estate, royalties, partnerships, S-corporations, estates, and trusts.
Example: Tom uses Schedule E to report rental income from his property and income from his partnership.
Self-employment Income
Earned income from a trade, business, farming or profession that is not paid by an employer. For example, hair stylists and lawncare workers who work for themselves (and not for someone else) are considered self-employed.
Self-employment Tax
Self-employment (SE) tax is social security and Medicare taxes collected primarily from individuals who work for themselves, similar to the social security and Medicare taxes withheld from the pay of most wage earners.
Example: Emma, a self-employed consultant, pays self-employment tax on her net earnings from self-employment.
Short-Term Capital Gain
A gain on the sale of an asset held for one year or less, taxed at ordinary income tax rates.
Example: John buys stock and sells it six months later for a profit, resulting in a short-term capital gain taxed at his regular income tax rate.
SIMPLE IRA
A retirement plan for small businesses that allows employees and employers to contribute to traditional IRAs.
Example: Lisa's small business offers a SIMPLE IRA plan, enabling her and her employees to save for retirement with tax advantages.
Simplified Employee Pension (SEP) IRA
A retirement plan that allows employers to make contributions to IRAs set up for employees, including the self-employed.
Example:
Lisa's small business contributes to a SEP IRA for her employees, providing them with retirement savings.
Single Filing Status
Filing status that applies to a taxpayer who (1) has never married, or (2) is legally separated or divorced.
Social Security Benefits
Monthly payments to eligible retirees, disabled individuals, and survivors based on their earnings history.
Example: After retiring, Tom receives Social Security benefits based on his years of work and contributions.
Social Security Tax
A payroll tax that funds Social Security benefits, typically split between the employer and the employee.
Example: Emily sees a portion of her paycheck withheld for Social Security tax.
SSA
Social Security Administration.
SSB
Special separation benefits, a type of military severance payment that affects the amount of VA compensation paid.
SSN
Social Security Number.
Standard Deduction
An amount, provided by law and based on filing status, age, blindness, and dependency that taxpayers can deduct from their adjusted gross income before tax is determined.
Example: For 2023, the standard deduction for a single filer is $13,850.
Standard Mileage Method
One of two methods for calculating business automobile expenses. For the standard mileage method, the taxpayer multiplies the business miles by the mileage rate for that tax year. (The other method is the actual expense method).
Example: For 2023, the standard mileage rate for business use is 65.5 cents per mile.
Statute of Limitations
The time period during which the IRS can audit a tax return or a taxpayer can amend a return.
Example: The IRS generally has three years from the date a return is filed to audit that return.
Statutory employee
If workers are independent contractors, such workers may nevertheless be treated as employees by statute (a statutory employee) for certain employment tax purposes.
Stock dividends
Stock dividends merely increase the taxpayer's number of shares in the company and generally are not taxable.
Stock split
A stock split is a method used by corporations to lower the market price of stock. A two-for-one stock split will decrease the basis per share by half. The original basis of $200 for 100 shares becomes $200 for 200 shares.
Student Loan Interest
The interest paid during the year on a loan for qualified higher education expenses that were for the taxpayer, the taxpayer's spouse, or a person who was the taxpayer's dependent when the loan was obtained.
Example:
Mike deducts $2,500 in student loan interest from his taxable income.
Substantial Presence Test
A test used to determine if an individual qualifies as a U.S. resident for tax purposes based on the number of days spent in the U.S. during a three-year period.
Example: If Sarah spends 183 days in the U.S. in a calendar year, she meets the substantial presence test and is considered a resident for tax purposes.
Supplemental Security Income (SSI)
A federal program that provides monthly payments to low-income individuals who are elderly, blind, or disabled.
Example: Jane receives SSI benefits because she is unable to work due to a disability.
Support Test
One of the tests for identifying a qualifying child or a qualifying relative as a dependent: Did the taxpayer provide over half of the potential dependent's total support for the year?
Surviving Spouse
A taxpayer whose spouse has died and who has not remarried, potentially qualifying for certain tax benefits.
Example: After her husband's death, Mary qualifies as a surviving spouse and may use the married filing jointly status for the two years following his death.
Surtax
An additional tax on income that exceeds a specified threshold.
Example: High-income earners may be subject to a surtax on their investment income if it exceeds a certain amount.
Section 179 Deduction
A tax deduction that allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year.
Example: A business buys a $10,000 piece of equipment and deducts the full amount using the Section 179 deduction.
T
TAD
Temporary additional duty for military service members.
TANF
Temporary Assistance for Needy Families (previously known as AFDC), a state benefit also known as welfare.
Tax Credit
A dollar-for-dollar reduction in the tax owed, directly reducing the amount of tax payable.
Example: Jane qualifies for a $1,000 Child Tax Credit, reducing her tax liability from $3,000 to $2,000.
Tax Deduction
An amount that reduces taxable income, thus lowering the overall tax liability.
Example: John claims a $10,000 mortgage interest deduction, reducing his taxable income from $60,000 to $50,000.
Tax Deferral
The postponement of tax liability to a future period, often used in retirement accounts.
Example: Contributions to a traditional IRA are tax-deferred, meaning taxes are paid upon withdrawal in retirement.
Tax Evasion
The illegal act of not paying taxes owed, typically by misrepresenting or concealing income.
Example: A business owner underreports their income to evade paying higher taxes, which is illegal.
Tax-Exempt Interest
Interest that is exempt from federal income tax such as bonds issued by state and political subdivisions (county or city), District of Columbia, and U.S. possessions and political subdivisions.
Tax Exemption
An amount allowed by the IRS to be subtracted from income for a specific reason, reducing taxable income.
Example: Nonprofit organizations often qualify for tax exemptions on income related to their charitable activities.
Tax Forgiveness
For U.S. military personnel who die while serving in a combat zone or as a result of wounds, disease, or injury incurred while so serving, any unpaid tax liability is waived and any forgiven tax liability that has already been paid is refunded.
Tax Home
The country in which the taxpayer is permanently or indefinitely engaged to work as an employee or self-employed individual, regardless of where the taxpayer maintains his or her family home. For taxpayers who work abroad, but do not have a regular place of business because of the nature of the work, their tax home is the place where they regularly live.
Taxable Income
Any income subject to federal income tax.
Tax Liability
The total amount of tax owed to the IRS or state taxing authority.
Example: After calculating all income, deductions, and credits, Mark's tax liability for the year is $5,000.
Tax Lien
A legal claim by the government against a taxpayer's property when the taxpayer fails to pay a tax debt.
Example: The IRS places a tax lien on Sarah's property due to unpaid taxes from previous years.
Tax Rate
The percentage at which income or profits are taxed.
Example: The federal income tax rate for individuals earning between $40,526 and $86,375 is 22%.
Tax Refund
A reimbursement to a taxpayer of any excess amount paid to the federal or state government.
Example: Jane overpaid her taxes throughout the year and receives a $500 tax refund after filing her return.
Tax Shelter
A financial arrangement made to minimize or decrease taxable income.
Example: Investing in a retirement account such as a 401(k) serves as a tax shelter by deferring taxes on earnings until withdrawal.
Taxable Income
The portion of income subject to taxes after deductions and exemptions.
Example: After claiming deductions and exemptions, John's taxable income is $45,000.
Taxpayer Identification Number (TIN)
A nine-digit number used by the IRS for tracking tax obligations.
Example: Businesses use an Employer Identification Number (EIN), which is a type of TIN, for filing taxes.
TCE
Tax Counseling for the Elderly.
TDY
Temporary duty for military service members.
Temporary Work Location
A work location is considered temporary if the service member's employment is realistically expected to last (and in fact does last) for one year or less. Service members assigned to temporary work locations can deduct travel expenses.
Third-Party Designee
Person authorized by a taxpayer to discuss the taxpayer's return with the IRS, give the IRS information missing from the return, request copies of notices or transcripts related to the return, and respond to certain IRS notices. The taxpayer designates third party by checking the Yes box and entering the person's name, phone number, and personal identification number (PIN) in the "Third party designee" section of the return.
TIN see ITIN
Taxpayer Identification Number, same as Individual Taxpayer Identification Number.
Tip Income
Money and goods received for services performed by food servers, baggage handlers, hairdressers, and others. Tips go beyond the stated amount of the bill and are given voluntarily.
Traditional IRA
An individual retirement account allowing contributions to be tax-deferred until withdrawals in retirement.
Example: Jane contributes $5,000 to her traditional IRA, which is tax-deferred until she withdraws it during retirement.
Transportation Expenses
Expenses service members incur when traveling to locations within their city or general area that is their tax home or post of duty (versus travel expenses).
Travel Expenses
Expenses service members incur when traveling away from their tax home or post of duty (versus transportation expenses).
Trust Fund Recovery Penalty (TFRP)
A penalty imposed on individuals responsible for collecting, accounting for, and paying withheld income and employment taxes if these taxes are not remitted to the IRS.
Example: A business owner who fails to pay employment taxes withheld from employee wages may be assessed a TFRP.
TSP
Thrift Savings Account, a retirement savings and investment plan that has been available to civilian employees of the federal government since 1987, and was made available to U.S. service personnel in 2002.
Tuition and Fees Deduction
A deduction for qualified education expenses paid for higher education, reducing taxable income.
Example: Mark deducts $4,000 for tuition and fees paid for his college courses, lowering his taxable income.
Tax Year
The 12-month period for which tax is calculated and reported.
Example: Most individuals use the calendar year (January 1 to December 31) as their tax year.
U
Underpayment Penalty
A penalty imposed by the IRS on taxpayers who do not pay enough taxes throughout the year, either through withholding or estimated tax payments.
Example: Sarah did not pay enough estimated taxes on her freelance income and was charged an underpayment penalty by the IRS.
Unearned Income
Income from sources other than employment, such as interest, dividends, and capital gains.
Example: John earns $2,000 in interest from his savings account and $1,500 in dividends from his investments, which are considered unearned income.
Unemployment Compensation
Payments received by individuals who are temporarily out of work, typically funded by the government.
Example: When Jane lost her job, she received unemployment compensation to help cover her living expenses until she found new employment.
Unreported Income
Income that is not reported on a tax return, either intentionally or unintentionally.
Example: Mark earned additional income from freelance work but failed to report it on his tax return, resulting in unreported income.
U.S. Source Income
Income derived from sources within the United States, which is subject to U.S. tax laws.
Example: Maria, a nonresident alien, earns rental income from a property located in the U.S., which is considered U.S. source income and subject to U.S. taxes.
Unreimbursed Employee Expenses
Work-related expenses incurred by an employee that are not reimbursed by the employer and may be deductible.
Example: Emily, a traveling salesperson, incurs mileage and lodging expenses that her employer does not reimburse, which she can deduct as unreimbursed employee expenses.
Useful Life
The estimated period over which an asset is expected to be used in a trade or business.
Example: The useful life of a commercial building is estimated to be 39 years for depreciation purposes.
Utility Expenses
Costs incurred for services such as electricity, water, gas, and internet, which may be deductible for businesses and rental properties.
Example:
Tom deducts utility expenses for his rental property, including electricity and water bills.
V
VA Disability Compensation
VA disability compensation is a monetary benefit paid to veterans who are disabled because of injury or disease incurred or aggravated during active military service.
Value-Added Tax (VAT)
A consumption tax placed on a product whenever value is added at each stage of production and at the point of sale.
Example: A manufacturer sells a product for $100, including a VAT of 10%. The manufacturer then pays $10 to the government, representing the value added tax.
Vested Interest
The portion of a retirement plan or other benefits that an employee owns and has the right to keep, even if employment ends.
Example: John has a vested interest in 40% of his company's 401(k) contributions, meaning he will keep that portion even if he leaves the company.
VITA
Volunteer Income Tax Assistance.
Voluntary Compliance
The principle that taxpayers will cooperate with the tax system by filing accurate returns and paying taxes on time.
Example: The IRS relies on voluntary compliance, where individuals and businesses report their income and deductions accurately and file tax returns without direct oversight.
Voluntary Withholding Agreement
An agreement between an employer and employee to withhold federal income tax from non-wage payments, such as pensions or annuities.
Example: Mark enters into a voluntary withholding agreement with his pension plan to ensure federal income tax is withheld from his monthly pension payments.
W
W-2 Form
An IRS form that employers must send to employees and the IRS at the end of the year, reporting an employee's annual wages and the amount of taxes withheld from their paycheck.
Example: Jane receives her W-2 form from her employer in January, showing her total earnings and the taxes withheld during the previous year.
W-4 Form
An IRS form that employees complete to indicate their tax situation to their employer, determining the amount of federal income tax to withhold from their paycheck.
Example: Mark updates his W-4 form to reflect his recent marriage, adjusting his withholding allowances accordingly.
Wash sale
A wash sale occurs when a taxpayer sells or otherwise disposes of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, the taxpayer buys, acquires, or enters into a contract or option to acquire substantially identical stock or securities.
Withholding Allowance
A claim on a W-4 form that reduces the amount of tax withheld from an employee's paycheck.
Example: Sarah claims two withholding allowances on her W-4 form, resulting in less federal income tax being withheld from her paycheck.
Withholding Tax
The amount of an employee's pay withheld by the employer and sent directly to the government as partial payment of income tax.
Example: John notices that a portion of his salary is withheld each month for federal and state income taxes, which are remitted to the IRS and state tax authority.
Widow(er) with Dependent Child Filing Status
A filing status available for two years following the year of a spouse's death, providing the same tax benefits as Married Filing Jointly for taxpayers with a dependent child.
Example: After her husband's death, Mary qualifies for the Widow(er) with Dependent Child filing status for the next two tax years, benefiting from higher standard deductions and favorable tax rates.
Windfall Elimination Provision (WEP)
A rule that can reduce Social Security benefits for individuals who receive a pension from work not covered by Social Security.
Example: Tom, a retired teacher with a state pension, learns that his Social Security benefits will be reduced due to the Windfall Elimination Provision.
Withholding Agent
A person or entity responsible for withholding taxes on payments made to foreign persons and remitting them to the IRS.
Example: A U.S. corporation acts as a withholding agent when it pays dividends to a foreign shareholder, withholding and remitting the appropriate tax to the IRS.
Work Opportunity Tax Credit (WOTC)
A federal tax credit available to employers for hiring individuals from certain targeted groups who face significant barriers to employment.
Example: A business hires a veteran and qualifies for the Work Opportunity Tax Credit, reducing its federal tax liability.
Worldwide Income
U.S. citizens and U.S. resident aliens are required to report worldwide income on a U.S. tax return regardless of where they live and even if the income is taxed by the country in which it was earned. Filing requirements are the same as for U.S. citizens and U.S. resident aliens living in the United States and apply whether income is from within or outside the U.S.
X
XBRL (eXtensible Business Reporting Language)
A global standard for exchanging business information, particularly financial data, in a digital format.
Example: Companies use XBRL to file their financial statements with the IRS and other regulatory bodies, ensuring data consistency and accuracy.
Y
Year-End Tax Planning
The process of analyzing and planning financial activities at the end of the fiscal year to minimize tax liability.
Example: Sarah reviews her investments and charitable donations in December to take advantage of deductions and credits, optimizing her year-end tax planning.
Year-to-Date (YTD)
The period starting from the beginning of the current year to the present date, often used in financial statements to show performance.
Example: Jane's pay stub shows her YTD earnings, which indicate her total income from January 1st to the current date.
Yield
The income return on an investment, such as the interest or dividends received, expressed as a percentage of the investment's cost.
Example: If Mark invests $1,000 in a bond that pays $50 in interest annually, the yield on the bond is 5%.
Young Child Tax Credit (YCTC)
A state-specific tax credit aimed at reducing the tax burden for families with young children.
Example: In California, families with children under six years old may qualify for the Young Child Tax Credit, providing additional financial support.
Z
Zero-Based Budgeting
A budgeting method where all expenses must be justified for each new period, starting from a "zero base."
Example: A company uses zero-based budgeting to review and approve all expenses from scratch for the upcoming fiscal year, ensuring that each expense is necessary and justified.
Zero Coupon Bond
A bond that is issued at a discount and does not pay periodic interest, but is redeemed at its face value at maturity.
Example: John purchases a zero coupon bond for $800, and it matures in 10 years at $1,000. He does not receive interest payments but gains $200 when the bond matures.
Z-Score
A statistical measure that indicates the number of standard deviations a data point is from the mean, often used in tax audits to identify anomalies.
Example: The IRS uses Z-scores to detect unusual patterns in tax returns that may indicate errors or fraud, such as an unusually high deduction compared to the average.
