Common Income Tax Questions & Definition Glossary:
Below are federal income tax definitions for some of the phrases and tax questions that you may encounter when filing your income taxes. Our goal is to help you find the answer you are looking for as quickly as possible, but should you need assistance with additional phrases that you are not familiar and cannot be found here, please do not hesitate to contact us.
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ABLE Accounts
ABLE stands for “Achieving a Better Life Experience.” It is a saving account that is tailored toward helping families who are facing the financial hardships of raising children with disabilities. The account allows families and those with disabilities to save for disability-related expenses in a way that has unique tax advantages.
Adjusted Gross Income
For an individual, Adjusted Gross Income is the total gross income for the year less allowances for personal exemptions and itemized deductions. This amount is the figure the IRS uses when determining the tax due by the individual. Included in this is all income you received (both wages and self-employment payments) as well as any goods, property or services received in lieu of payment.
Adoption Credit
This term refers to the tax credit given to individuals or couples that adopt a child within a tax year. The credit is meant to defer the costs associated with the adoption, including legal fees, home inspections, and even travel and incidentals. Taxpayers are allowed to combine the adoption credit with other child tax credits and deductions.
After-Tax Contributions
After-Tax Contributions are also called Voluntary Contributions. These are amounts deposited by a individual into an IRA or other retirement account after taxes have been paid on that amount. The reason these contributions are made is that, when the money is withdrawn at a later date, fewer taxes will be owed at that time.
Alternative Minimum Tax (AMT)
The AMT was created to prevent middle and upper-class citizens from overusing deductions and exemptions. A taxpayer must pay this if their calculated federal income tax falls below what the AMT amount is. For more on how the AMT may impact you, visit this page.
Assets
This includes everything that you own that has a monetary value (i.e. everything worth money). Tangible assets can be physically touched. Land, buildings, automobiles, jewelry, artwork and collectibles are tangible. Intangible assets have value but do not have solid form. Documentation is used to show that they exist. Ownership of stock or bonds are an example of this.
Audit
Each year, people and companies are responsible for filing their own income taxes. The federal government cannot realistically check everyone’s taxes for accuracy, but they do check those tax returns that raise red flags in their system. An audit is when the Internal Revenue requests a person or company’s tax information to make sure that they completed their taxes correctly.
If a taxpayer has fallen behind on paying his or her taxes, he or she may owe back taxes. These are taxes owed from previous tax years. Depending on the circumstances, fees and penalties might be owed on back taxes.
Backup Withholding
Backup withholding is a type of withholding that the IRS may require in certain specific situations. Some of these situations include incorrect reporting of the TIN or Social Security number to a bank or business for investments or accounts, and under reporting interest income, which may cause the IRS to request that the payer withhold interest.
Bankruptcy
This is a legal process which allows a person to get relief from debts that he or she can’t afford to pay. Bankruptcy may help to cancel some of or all of an individuals obligations. It can also provide more time to repay certain creditors. Some debts, such as income tax and student loans, cannot be canceled through bankruptcy.
Bona Fide Residency
A bona fide residency is a permanent address that can be documented showing that a person lives somewhere. This is required for rights such as voting and when running for public office. It can sometimes impact taxes when an individual has multiple residences. When proof is required, typically it can be established with a driver’s license, tax return, or voter registration card.
Buffett Rule
The Buffett Rule, named after billionaire Warren Buffett, is a proposed law that imposes a 30% minimum tax rate on all individual taxpayers making over $1,000,000. Anyone below this income level would not be impacted. The goal of the tax is to ensure that the richest American taxpayers are not paying a lower tax rate than middle class Americans.
This is the period of time that is defined as one year by a typical calendar. It usually includes the period from January 1st to December 31st. It should be noted that a different period has to be specified in order for this term to refer to something else.
Capital Gains or Losses
Any increases or decreases in value of a capital asset (such as stocks, bonds or real estate) at the time which it is sold constitutes a capital gain or loss to be reported on the tax return.
Cash Liquidation Distribution
When a corporation is dissolving or going out of business, cash liquidation distribution occurs. By law, the company is required to pay cash to its shareholders in exchange for their stocks in the corporation. In addition, if the shareholder earns more than $600 for their part of the distribution, the shareholder will be sent a Form 1099-DIV documenting the proceeds.
Casualty loss
This is destruction or loss of property caused by a sudden, unpredictable event such as a flood, fire, earthquake, or other causes. Gradual deterioration of property over a period of time that results in loss or damage is, however, not a casualty loss. When adequate coverage is not provided by insurance, casualty loss can be tax deductible, but you will need proof that the property was damaged during such events and you have been reimbursed for the loss.
Charitable contribution
This is any donation of cash, stock, services, or goods made to a registered non-profit organization. In the case of non-money donations, an estimate of the value must be given. This value is based on the current re-sale value of the goods donated. Services can only be counted under specific circumstances.
Child Tax Credit
This is a tax credit designed for low to middle income earners with children under the age of sixteen. A credit is applied for each child. A taxpayer can only qualify by meeting income requirements. The credit can be taken even if the tax bill of the taxpayer does not exceed the amount of the credit.
Consolidated Omnibus Budget Reconciliation Act (COBRA)
The COBRA program offers temporary medical insurance to Americans who lose their coverage due to events such as job loss. For example, when someone receives health insurance from an employer and employment is terminated, they can qualify for COBRA coverage after becoming unemployed. The same goes for the children and other family members who have lost coverage as a result of this termination. This program allows people to remain insured while they look for replacement medical insurance and employment.
Consumption Tax
This is a type of tax that has been proposed by various groups as a replacement for our current income tax system. The tax would be very similar to the sales tax that many people already pay to their counties, cities, and states. It is designed to make everyone pay taxes, reduce filing expenses, and encourage savings.
Combat Zone Exemption
If an active duty military member is assigned to an identified “combat zone” and earns pay during this assignment, it is nontaxable and reported in a special section of their W-2 (Box 12 (code Q)). These zones are regularly updated and can include temporary assignments, staging assignments associated within the combat zone, and those receiving temporary hostile pay while in such zones. This pay can be accounted for when determining qualifications for certain tax credits, so while tax-free it can impact the filer in other ways. Furthermore, if the filer was in an active combat zone within the last 180 days, they will receive an automatic two-month extension for their end of year filing.
Cost Basis
Cost basis is the total outlay incurred in acquiring and preparing an asset for use in a business. The starting point for depreciation is cost basis reduced by any salvage value. Ongoing basis is reduced as periodic depreciation deductions are taken against business income. Adjusted cost basis is considered in the event of asset disposition to determine gain or loss.
Coverdell Education Savings Account
Coverdell is a trust for beneficiaries under the age of 18 that can be used to pay for their education from grade school to college. Contributions can be made at any USA bank and funds can be withdrawn for education expenses tax free. A single beneficiary is allowed multiple accounts, but the total contributions cannot exceed $2000 per year.