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Definitions of Tax Terms


Below are common tax terms and their meaning-the list is not all inclusive.

Accounting Period: The period of time, usually a year, used by a taxpayer or business for the determination of tax liability (Calendar or Fiscal Year)

Calendar Year: January 1-December 31

Fiscal Year: 12 consecutive months ending on the last day of any month except December. Fiscal years are referenced by their end date or end year.

Accounting Method: The method of accounting under which income and expenses are recognized for tax purposes

Cash Method: Income is reported when cash is actually or constructively received. Expenses are reported when actually paid.

Accrual Method: Income is reported when earned. Expenses are reported when incurred. 

Installment Method: A method of accounting enabling a taxpayer to spread the recognition of gain on the sale of an asset or property over the payout period whan payments are actually received.

Above-The-Line-Deductions: Certain deductions that are allowed even if you don't itemized deductions on Schedule A, Form 1040.

Adjusted Basis: The initial basis of property adjusted for subsequent increases and decreases. Used to calculate the realized gain or loss upon the sale or exchange of an asset.

Amortization: The allocation to amortization expense and accumulated amortization of the cost or other basis of an intangible asset.

Amount Realized: The amount received uopn the sale or exchage of an asset. Various items go into the calculation.

Capital Asset: Assets held for personal use or personal investment.

Capital or Capitalized Expenditure: An expenditure that is added to the basis of the property (and possibly depreciated over time) depending on the property.

Capital Gain or Loss: The gain or loss arising from the sale or disposition of a capital asset.

Carryover: A capital loss, charitable contribution, or net operating loss from the prior year carried into the next subsequent year for possible use.

Constructive Receipt Of Income: Income that is unqualifiedly available to the recipient taxpayer.

Decedent: A person who has died.

Dependent: A qualifying child or qualifying relative who meets specific tests for each category.

Depreciation: The write-off or expensing of the cost or other basis of a tangible asset over time.

Earned Income: Income from working and providing services as an employee or self-employed person.

Portfolio Income: Income earned from investments.

Passive Income: Income from rental real estate and or holding passive investments.

Extension: An extension  to file a tax return (NOT an extension to pay any tax that is due)

Filing Status: Single, Married File Jointly, Married File Separately, Head Of Household, Qualifying Widow(er) with dependent child.

Fringe Benefit: Compensation given to an employee in addition to their regular compensation

Gift: A transfer of property for less than adequate consideration.

Gross Income: Income received in the form of cash/money, canceled debt, debt relief, goods, property, and services (under the IRS tax code, gross income is income from all sources unless specifically exempted by the tax code)

Holding Period; The period of time property has been held for tax purposes.

Short Term Holding Period: Property held for 1-year or less.

Long Term Holding Period: Property held for more than 1-year.

Income Tax: The tax levies on various types os income.

Itemized Deductions: Schedule A, Form 1040 generally medical expenses, real estate taxes, mortgage interest, charitable contributions, and gambling losses.

Lessor: One who rents property to another. (Landlord) 

Lessee: One who rents property from another. (Tenant)

Like-Kind Exchange: An tax-deferred exchange of certain property held for productive use in a trade or business or for certain investment or prodiuction of income.

Net Income or Profit: Gross income less deductible expenses. (Gross Income is total income before deductions).

Net Operating Loss For A Business: The excess of business expenses over business income

Passive Activity: An activity in which the taxpayer does not materially participate and all rental real estate activities (unless the taxpayer qualifies as a real estate professional).

Passive Income or Loss: Income or loss arising from a passive activity.

Pass Through Entity: Entities where income, gain, loss, expense, deduction and credit are passed through to the owner or beneficiary.

Payroll Taxes: Taxes withheld form an employee's paycheck (federal income tax, social security tax, and medicare tax) along with the employer's matching for social security and medicare tax.

Personal Residence: The taxpayer's main residence (as opposed to a second home, rental property or vacation home)

Personal or Personalty Property: Property other than real estate.

Points: Loan origination fees charged by a lender.

Pre-Tax: Deductions taken from your paycheck before payroll taxes have been applied. The money used to pay for a benefit or for a contribution was not subject to income tax.

Prepaid Expense: An expense paid in advance.

Realty or Real Estate: Real estate buildings and land.

Realized Gain or Loss: Amount relaized less adjusted basis of property.

Recognized Gain or Loss: The portion of the realized gain or loss that is taxable or deductible.

Related Party: Under tax law, certain parties and relationships transactions are deemed as between parties and various limitations may apply.

Section 1231 Assets: Depreciable assets and real estate used in a trade or business and held for the required long term holding period.

Section 1245 Property: Personal/Personalty Property subject to depreciation recapture.

Section 1250 Property: Real Estate subject to depreciation recapture.

Self-Employment (FICA) Tax: Social Security Tax and Medicare Tax inposed on independent contractors and self-employed taxpayers.

Short Sale Of Real Estate: Selling real estate for less than is still owed on the property's mortgage(s).

Standard Deduction: The deduction allowed each year by the IRS tax law based on the taxpayer's marital status and age.

Standard Mileage Rate(s): The IRS allowed rate(s) each year for figuring the automobile expense for business, charitable, and medical use of a vehicle.

Tax Avoidance: Using legal tax strategies to reduce your tax owed.

Tax Evasion: Using illegal methods to reduce tax owed. Failing to report all income, taking fake deducitons and  tax credits.

Taxable Income: The amount upon which tax liability is computed.

Tax Credit: Reduces tax liability dollar-for-dollar. A dollar-for-dollar reduction of taxes owed.

Tax Deduction: Reduces taxable income on which the tax due is calculated (reduces taxable income or income subject to taxation.)

Tax Deferred Income: Income that is taxed at a later time than when earned or realized.

Tax-Free-or-Exempt Income: Income not subject to taxation (federal and or state taxation) depending on the specific facts and circumstances.

Tax Penalty Abatement: The full or partical reduction in a tax penalty (and possibly interest charge) charged by a tax authority.

Wash Sale: A loss from the sale of securities that is disallowed because the taxpayer has withing 30 days before of after the sale acquired securities that are substantially identical to those sold.

Worthless Securities: Securities that have become totally worthless during the year. The loss is deemed to have occured on the last day of the year. 

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