A

ABLE account.

An account for a person who became disabled before age 26. Nondeductible annual contributions can be made up to a specified limit and distributions are tax free if used to pay qualified disability expenses; see 34.12.

Accelerated cost recovery

A statutory method of depreciation allowing accelerated rates for most types of property used in business and income-producing activities during the years 1981 through 1986. It has been superseded by the modified accelerated cost recovery system (MACRS) for assets placed in service after 1986; see 42.4 and 42.12.

Accelerated depreciation.

Depreciation methods that allow faster write-offs than straight-line rates in the earlier periods of the useful life of an asset. For example, in the first few years of recovery, MACRS allows a 200% double declining balance write-off, twice the straight-line rate; see 42.5–42.8.

Accountable reimbursement plan.

An employer reimbursement or allowance arrangement that requires you to adequately substantiate business expenses to your employer, and to return any excess reimbursement; see 20.32.

Accrual method of accounting.

A business method of accounting requiring income to be reported when earned and expenses to be deducted when incurred. However, deductions generally may not be claimed until economic performance has occurred; see 40.3.

Acquisition debt.

Debt used to buy, build, or construct a principal residence or second home and that generally qualifies for a full interest expense deduction; see 15.2.

Active participation.

Test for determining deductibility of IRA deductions. Active participants in employer retirement plans are subject to IRA deduction phase-out rules if adjusted gross income exceeds certain thresholds; see 8.4.

Adjusted basis.

A statutory term describing the cost used to determine your profit or loss from a sale or exchange of property. It is generally your original cost, increased by capital improvements, and decreased by depreciation, depletion, and other capital write-offs; see 5.20.

Adjusted gross income (AGI).

Gross income less allowable adjustments, such as deductions for IRAs, alimony, and self-employed retirement plans. AGI determines whether various tax benefits are phased out, such as personal exemptions, itemized deductions, and the rental loss allowance; see 12.1 and modified adjusted gross income (MAGI).

Alimony.

Payments made to a separated or divorced spouse as required by a decree or agreement. Qualifying payments are deductible by the payor and taxable to the payee; see Chapter 37.

Alternative minimum tax (AMT).

A tax triggered if certain tax benefits reduce your regular income tax below the tax computed on Form 6251 for AMT purposes; see Chapter 23.

Amended return.

On Form 1040X, you may file an amended return within a three-year period to claim a refund or correct a mistake made on an original or previously amended return; see Chapter 47.

Amortizable bond premium.

The additional amount paid over the face amount of an obligation that may be deducted under the rules in 4.17.

Amortization of intangibles.

Writing off an investment in intangible assets over a specified period; see 42.17–42.19.

Amount realized.

A statutory term used to figure your profit or loss on a sale or exchange. Generally, it is sales proceeds plus mortgages assumed or taken subject to, less transaction expenses, such as commissions and legal costs; see 5.14.

Amount recognized.

The amount of gain reportable and subject to tax. On certain tax-free exchanges of property, gain is not recognized in the year it is realized; see 6.1.

Annualized rate.

A rate for a period of less than a year computed as though for a full year.

Annuity.

An annual payment of money by a company or individual to a person called the annuitant. Payment is for a fixed period or the life of the annuitant. Tax consequences depend on the type of contract and funding; see 7.21–7.27.

Applicable federal rate.

Interest rate fixed by the Treasury for determining imputed interest; see 4.30–4.32.

Appreciation in value.

Increase in value of property due to market conditions. When you sell appreciated property, you pay tax on the appreciation since the date of purchase. When you donate appreciated property held long term, you may generally deduct the appreciated value; see 14.6.

Archer Medical Savings Account (MSA).

A type of medical plan combining high deductible medical insurance protection with an IRA-type savings account fund to pay unreimbursed medical expenses; see 41.13.

Assessment.

The IRS action of fixing tax liability that sets in motion collection procedures, such as charging interest, imposing penalties, and, if necessary, seizing property; see 48.2.

Assignment.

The legal transfer of property, rights, or interest to another person called an assignee. You cannot avoid tax on income by assigning the income to another person.

At-risk rules.

Rules limiting loss deductions to cash investments and personal liability notes. An exception for real estate treats certain nonrecourse commercial loans as amounts “at risk”; see 10.18.

Audit.

An IRS examination of your tax return, generally limited to a three-year period after you file; see Chapter 48.

Away from home.

A tax requirement for deducting travel expenses on a business trip. Sleeping arrangements are required for at least one night before returning home; see 20.3 and 20.5–20.7.

B

Balloon.

A final payment on a loan in one lump sum.

Basis.

Generally, the amount paid for property. You need to know your basis to figure gain or loss on a sale; see 5.16.

Bonus depreciation.

An additional 50% first-year depreciation allowance for qualifying property; see 42.20.

Boot.

Generally, the receipt of cash or its equivalent accompanying an exchange of property. In a tax-free exchange, boot is subject to immediate tax; see 6.3.

C

Cancellation of debt.

Release of a debt without consideration by a creditor. Cancellations of debt are generally taxable; see 11.8.

Capital.

The excess of assets over liabilities.

Capital asset.

Property subject to capital gain or loss treatment. Almost all assets you own are considered capital assets except for certain business assets or works you created; see 5.2.

Capital expenses.

Costs that are not currently deductible and that are added to the basis of property. A capital expense generally increases the value of property. When added to depreciable property, the cost is deductible over the life of the asset.

Capital gain or loss.

The difference between amount realized and adjusted basis on the sale or exchange of capital assets. Long-term capital gains are taxed favorably, as explained in Chapter 5. Capital losses are deducted first against capital gains, and then again up to $3,000 of other income; see 5.1–5.5.

Capital gain distribution.

A mutual fund distribution allocated to gains realized on the sale of fund portfolio assets. You report the distribution as long-term capital gain even if you held the fund shares short term; see 32.3–32.4.

Capital loss carryover.

A capital loss that is not deductible because it exceeds the annual $3,000 capital loss ceiling. A carryover loss may be deducted from capital gains of later years plus up to $3,000 of ordinary income; see 5.4.

Capitalization.

Adding a cost or expense to the basis of the property.

Carryback.

A tax technique for receiving a refund of back taxes by applying a deduction or credit from a current tax year to a prior tax year. For example, a business net operating loss may be carried back for two years.

Carryforward.

A tax technique of applying a loss or credit from a current year to a later year. For example, a business net operating loss may be carried forward 20 years instead of being carried back; see 40.18.

Cash method of accounting.

Reporting income when actually or constructively received and deducting expenses when paid. Certain businesses may not use the cash method; see 40.3.

Casualty loss.

Loss from an unforeseen and sudden event that is deductible, subject to a $100 per event floor and an overall 10% income floor for losses to personal-use property; see 18.1.

Child and dependent care credit.

A credit ranging from 20% to 35% based on certain care expenses incurred to allow you to work; see 25.4.

Community income.

Income earned by persons domiciled in community property states and treated as belonging equally to husband and wife; see 1.6.

Condemnation.

The seizure of property by a public authority for a public purpose. Tax on gain realized on many conversions may be deferred; see 18.19–18.20.

Constructive receipt.

A tax rule that taxes income that is not received by you but that you may draw upon; see 2.2.

Consumer interest.

Interest incurred on personal debt and consumer credit. Consumer interest is not deductible.

Convention.

Rule for determining MACRS depreciation in the year property is placed in service. Either a half-year convention, mid-quarter convention, or mid-month convention applies; see 42.5–42.7, 42.12.

Coverdell Education Savings Account.

A special account set up to fund education expenses of a student; see 33.10–33.11.

Credit.

A tax credit directly reduces tax liability, as opposed to a deduction that reduces income subject to tax.

D

Declining balance method.

A rapid depreciation method determined by a constant percentage based on useful life and applied to the adjusted basis of the property; see 42.5 and 42.8.

Deductions.

Items directly reducing income. Personal deductions such as for mortgage interest, state and local taxes, and charitable contributions are allowed only if deductions are itemized on Schedule A of form 1040, but deductions such as for alimony, capital losses, moving expenses to a new job location, business losses, student loan interest, and IRA and self-employment deductions are deducted from gross income even if itemized deductions are not claimed; see Chapter 12.

Deferred compensation.

A portion of earnings withheld by an employer or put into a retirement plan for distribution to the employee at a later date. If certain legal requirements are met, the deferred amount is not taxable until actually paid, for example, after retirement; see 2.7.

Deficiency.

The excess of the tax assessed by the IRS over the amount reported on your return; see 48.8.

Defined benefit plan.

A retirement plan that pays fixed benefits based on actuarial projections; see 41.2.

Defined contribution plan.

A retirement plan that pays benefits based on contributions to individual accounts, plus accumulated earnings. Contributions are generally based on a percentage of salary or earned income; see 41.2.

Dependent.

A relative or household member for whom an exemption may be claimed; see Chapter 21.

Depletion.

Deduction claimed for the use of mineral resources; see 9.15.

Depreciable property.

A business or income-producing asset with a useful life exceeding one year; see 42.1.

Depreciation.

Writing off the cost of depreciable property over a period of years, usually its class life or recovery period specified in the tax law; see 42.4.

Depreciation recapture.

An amount of gain on the sale of certain depreciable property that is treated as ordinary income in the case of personal property. Recapture is computed on Form 4797; see 44.1. For recapture on the sale of realty, see 44.2.

Disaster losses.

Casualty losses such as from a storm, in areas declared by the President to warrant federal assistance. An election may be made to deduct the loss in the year before the loss or the year of the loss; see 18.3.

Dividend.

A distribution made by a corporation to its shareholders generally of company earnings or surplus. Most dividends are taxable but exceptions are explained in Chapter 4.

E

Earned income.

Compensation for performing personal services. You must have earned income for a deductible IRA, see 8.2, or to claim the earned income credit, see 25.6.

Earned income credit.

A credit allowed to taxpayers with earned income or adjusted gross income (AGI) below certain thresholds; see 25.6.

Education IRA.

See Coverdell Education Savings Account and 33.10–33.11.

Electronic Federal Tax Payment System (EFTPS).

An online and phone tax payment system available 24 hours a day. For enrollment information, call (800) 555-4477, or go to www.eftps.gov.

Estimated tax.

Advance payment of current tax liability based either on wage withholdings or installment payments of your estimated tax liability. To avoid penalties, you generally must pay to the IRS either 90% of your final tax liability, or either 100% or 110% of the prior year’s tax liability, depending on your adjusted gross income; see Chapter 27.

Exemption.

A fixed deduction allowed to every taxpayer, except those who may be claimed as a dependent by another person. Extra exemption deductions are allowed for a spouse on a joint return and for each qualifying dependent. A deduction of $4,050 is allowed for each exemption claimed on 2017 returns. However, if income exceeds an annual threshold, the deduction for exemptions is phased out; see Chapter 21.

F

Fair market value.

What a willing buyer would pay to a willing seller when neither is under any compulsion to buy or sell.

Fiduciary.

A person or corporation such as a trustee, executor, or guardian who manages property for another person.

First-year expensing (or Section 179 deduction).

A deduction of the cost of business equipment in the year placed in service; see 42.3 for limitations.

Fiscal year.

A 12-month period ending on the last day of any month other than December. Partnerships, S corporations, and personal service corporations are limited in their choice of fiscal years and face special restrictions.

Flexible spending arrangement.

A salary reduction plan that allows employees to pay for enhanced medical coverage or dependent care expenses on a tax-free basis; see 3.16.

Foreign earned income exclusion.

For 2017, up to $102,100 of foreign earned income is exempt from tax if a foreign residence or physical presence test is met; see 36.1–36.2.

Foreign tax credit.

A credit for income taxes paid to a foreign country or U.S. possession; see 36.13.

401(k) plan.

A deferred pay plan, authorized by Section 401(k) of the Internal Revenue Code, under which a percentage of an employee’s salary is withheld and placed in a savings account or the company’s profit-sharing plan. Income accumulates on the deferred amount until withdrawn by the employee after reaching age 59½ or when the employee retires or leaves the company; see 7.15.

G

Gift tax.

Gifts in excess of an per-donee annual exclusion ($14,000 for 2017) are subject to gift tax, but the tax may be offset by a gift tax credit; see 39.2.

Grantor trust rules.

Tax rules that tax the grantor of a trust on the trust income; see 39.6.

Gross income.

The total amount of income received from all sources before exclusions and deductions.

Gross receipts.

Total business receipts reported on Schedule C or Schedule C-EZ before deducting adjustments for returns and allowances and cost of goods sold; see 40.6.

Group-term life insurance.

Employees are not taxed on up to $50,000 of group-term coverage; see 3.4.

H

Head of household.

Generally, an unmarried person who maintains a household for dependents and is allowed to compute his or her tax based on head of household rates, which are more favorable than single person rates; see 1.12.

Health reimbursement arrangement (HRA).

An employer-established account that provides tax-free reimbursements to employees for deductibles and other medical expenses that could be taken as itemized deductions; see 3.3.

Health savings account.

For calendar year 2016, taxpayers covered by an HDHP may contribute up to $3,350 ($6,750 for family coverage) plus $1,000 extra if age 55 or older and not enrolled in Medicare; see 3.2 and 41.11.

High deductible health plan (HDHP).

For 2017, a high deductible health plan is a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and with annual out-of-pocket expenses that do not exceed $6,550 or $13,100, respectively.

Hobby loss.

Hobby expenses are deductible only up to income from the activity; loss deductions are not allowed; see 40.10.

Holding period.

The length of time that an asset is owned and that generally determines long- or short-term capital gain treatment; see 5.3 and 5.9–5.12.

Home equity debt.

Debt secured by a principal residence or second home to the extent of the excess of fair market value over acquisition debt. An interest deduction is generally allowed for home equity debt up to $100,000 ($50,000 if married filing separately); see 15.3.

Household income.

This amount is used to determine eligibility for the premium tax credit (25.12) and the individual shared responsibility payment (38.6). It is AGI increased by excluded foreign income and tax-exempt interest.

I

Imputed interest.

Interest deemed earned on seller-financed sales or low-interest loans, where the parties’ stated interest rate is below the applicable IRS federal rate; see 4.31 and 4.32.

Incentive stock option.

Option meeting tax law tests that defers tax on the option transaction until the obtained stock is sold; see 2.16.

Inclusion amount for leased cars.

Based on an IRS table, an amount that reduces a business deduction taken for payments on an auto leased for a minimum of 30 days; see 43.12.

Income in respect of a decedent.

Income earned by a person before death but taxable to an estate or heir who receives it; see 1.14 and 11.16.

Independent contractor.

One who controls his or her own work and reports as a self-employed person; see Chapters 40 and 45.

Individual retirement account (IRA).

A retirement account to which up to $5,500 (or $6,500 if you are 50 or over) may be contributed for 2017, but deductions for contributions to a traditional IRA are restricted if you are covered by a company retirement plan. Earnings accumulate tax free; see Chapter 8.

Installment payment agreement.

A formal arrangement with the IRS to pay taxes over time; see 46.5.

Installment sale.

A sale of property that allows for tax deferment if at least one payment is received after the end of the tax year in which the sale occurs. The installment method does not apply to year-end sales of publicly traded securities. Dealers may not use the installment method. Investors with very large installment balances could face a special tax; see 5.21.

Intangible assets.

Intangible assets that come within Section 197, such as goodwill, are amortizable over a 15-year period; see 42.17.

Inter vivos or lifetime trust.

A trust created during the lifetime of the person who created the trust. If irrevocable, income on the trust principal is generally shifted to the trust beneficiaries; see 39.6.

Investment in the contract.

The total cost investment in an annuity. When annuity payments are made, the portion allocable to the cost investment is tax free; see 7.21 and 7.24 –7.27.

Investment interest.

Interest on debt used to carry investments, but not including interest expense from a passive activity. Deductions are limited to net investment income; see 15.10.

Involuntary conversion.

Forced disposition of property due to condemnation, theft, or casualty. Tax on gain from involuntary conversions may be deferred if replacement property is purchased; see 18.19-18.20.

Itemized deductions.

Items, such as interest, state and local income and sales taxes, charitable contributions, and medical deductions, claimed on Schedule A of Form 1040. Itemized deductions are subtracted from adjusted gross income to arrive at taxable income. However, for taxpayers with income over an annual threshold, the overall deduction for itemized deductions is subject to a partial phaseout; see Chapter 13.

J

Joint return.

A return filed by a married couple reporting their combined income and deductions. Joint return status provides tax savings to many couples; see 1.4.

Joint tenants.

Ownership of property by two persons. When one dies, the decedent’s interest passes to the survivor; see 5.18.

K

Keogh plan.

A term that is sometimes used to describe a qualified retirement plan set up by a self-employed person, providing tax-deductible contributions, tax-free income accumulations until withdrawal, and favorable averaging for qualifying lump-sum distributions; see Chapter 41.

Kiddie tax.

The tax on the investment income in excess of an annual floor ($2,100 for 2017) of a child under age 18, and many children age 18–23. The tax is based on the parents’ marginal tax rate and computed on Form 8615; see 24.2.

L

Legally separated.

A husband and wife who are required to live apart from each other by the terms of a decree of separate maintenance. Payments under the decree are deductible by the payor and taxable to the payee as alimony; see 37.2.

Like-kind exchange.

An exchange of similar assets used in a business or held for investment on which gain may be deferred; see 6.1.

Lump-sum distribution.

Payments within one tax year of the entire amount due to a participant in a qualified retirement plan. Qualifying lump sums may be directly rolled over tax free. For participants born before January 2, 1936, a lump sum may be eligible for current tax under a favorable averaging method; see 7.2.

M

Marital deduction.

An estate tax and gift tax deduction for assets passing to a spouse. It allows estate and gift transfers completely free of tax; see 39.10.

Market discount.

The difference between face value of a bond and lower market price, attributable to rising interest rates. On a sale, gain on the bond is generally taxed as ordinary income to the extent of the discount; see 4.20.

Material participation tests.

Rules for determining whether a person is active in a business activity for passive activity rule purposes. Unless the tests are met, passive loss limits apply; see 10.6.

Miscellaneous itemized deductions.

Generally, itemized deductions for job and investment expenses subject to a 2% of adjusted gross income floor; see Chapter 19.

Modified ACRS (MACRS).

Depreciation methods applied to assets placed in service after 1986.

Modified adjusted gross income (MAGI).

This is generally adjusted gross income increased by certain items such as tax-free foreign earned income. MAGI usually is used to determine phaseouts of certain deductions and credits.

Mortgage interest.

Fully deductible interest on up to two residences if acquisition debt secured by a home is $1 million or less, and home equity debt is $100,000 or less; see 15.1.

N

Net operating loss.

A business loss that exceeds current income may be carried back against income of prior years and carried forward as a deduction from future income until eliminated. The carryback and carryforward periods are discussed in 40.18–40.22.

Nonperiodic distributions.

A 20% withholding rule applies to nonperiodic distributions, such as lump-sum distributions, paid directly to employees from an employer plan; see 7.6 and 26.9.

Nonrecourse financing.

Debt on which a person is not personally liable. In case of nonpayment, the creditor must foreclose on property securing the debt. At-risk rules generally bar losses where there is nonrecourse financing, but an exception applies to certain nonrecourse financing for real estate; see 10.18.

O

Offer in compromise.

A proposal to the IRS that, if accepted, allows a taxpayer to pay less than the full amount of tax owed; see 48.10.

Ordinary and necessary.

A statutory requirement for the deductibility of a business expense.

Ordinary income.

Income other than long-term capital gains or qualified dividends that are taxed the same as long-term capital gains; see 5.3.

Ordinary loss.

A loss other than a capital loss.

Original issue discount (OID).

The difference between the face value of a bond and its original issue price. OID is reported on an annual basis as interest income; see 4.19.

P

Partnership.

An unincorporated business or income-producing entity organized by two or more persons. A partnership is not subject to tax but passes through to the partners all income, deductions, and credits, according to the terms of the partnership agreement; see 11.9–11.13.

Passive activity loss rules.

Rules that limit the deduction of losses from passive activities to income from other passive activities. Passive activities include investment rental operations or businesses in which you do not materially participate; see 10.1.

Patronage dividend.

A taxable distribution made by a cooperative to its members or patrons.

Percentage depletion.

A deduction method that applies a fixed percentage to the gross income generated by mineral property; see 9.15.

Personal interest.

Tax term for interest on personal loans and consumer purchases. Such interest is not deductible.

Placed in service.

The time when a depreciable asset is ready to be used. The date fixes the beginning of the depreciation period.

Points.

Charges to the homeowner at the time of the loan. A point is equal to 1 percent. Depending on the type of loan, points may be currently deductible or amortized over the life of the loan; see 15.8.

Premature distributions.

Withdrawals before age 59½ from qualified retirement plans are subject to penalties unless specific exceptions are met; see 7.13 and 8.12.

Principal residence.

On a sale of a principal residence, you may avoid tax under the rules explained in Chapter 29.

Private letter ruling.

A written determination issued to a taxpayer by the IRS that interprets and applies the tax laws to the taxpayer’s specific set of facts. A letter ruling advises the taxpayer regarding the tax treatment that can be expected from the IRS in the circumstances specified by the ruling. It may not be used or cited as precedent by another taxpayer.

Probate estate.

Property held in a decedent’s name passing by will; see 39.7.

Profit-sharing plan.

A defined contribution plan under which the amount contributed to the employees’ accounts is based on a percentage of the employer’s profits; see 7.15 and 41.2.

Provisional income.

If your provisional income exceeds a base amount, part of your Social Security benefits may be subject to tax. To figure provisional income, see 34.3.

PTIN.

A preparer tax identification number required for tax professionals to prepare tax returns for compensation.

Q

Qualified charitable organization.

A nonprofit philanthropic organization that is approved by the U.S. Treasury to receive charitable contribution deductions; see 14.1.

Qualified dividends.

Dividends that are taxed at the long-term capital gain rate; see 4.2.

Qualified domestic relations order (QDRO).

A specialized domestic relations court order that conforms to IRS regulations and provides instructions to pension plan administrators and IRA custodians as to how to pay benefits to a divorced spouse; see 7.10 and 8.11.

Qualified plan.

A retirement plan that meets tax law tests and allows for tax deferment and tax-free accumulation of income until benefits are withdrawn. Pension, profit-sharing, stock bonus, employee stock ownership, and IRAs may be qualified plans; see Chapters 7, 8, and 41.

Qualified tuition program (QTP).

A state-sponsored college savings plan or prepayment plan, or a prepayment plan established by a private college; see 33.5.

Qualifying widow or widower.

A filing status entitling the taxpayer with dependents to use joint tax rates for up to two tax years after the death of a spouse; see 1.11.

R

Real estate investment trust (REIT).

An entity that invests primarily in real estate and mortgages and passes through income to investors; see 31.1.

Real estate professional.

An individual who, because of his or her real estate activity, qualifies to deduct rental losses from nonpassive income; see 10.3.

Real property.

Land and the buildings on land. Buildings are depreciable; see 42.12 and 42.15.

Recognized gain or loss.

The amount of gain or loss to be reported on a tax return. Gain may not be recognized on certain exchanges of property; see 6.1.

Recovery property.

Tangible depreciable property placed in service after 1980 and before 1987 and depreciable under ACRS; see 42.11 and 42.15.

Refundable tax credit.

A credit that entitles you to a refund even if you owe no tax for the year.

Required Minimum Distributions (RMDs).

Distributions that must be taken annually to avoid a 50% IRS penalty by a traditional IRA account owner starting with the year age 70½ is reached. For qualified plan participants the starting date may be delayed for employees working beyond age 70½. Minimum distribution rules also apply to beneficiaries of qualified plans, traditional IRAs, and Roth IRAs. See 7.11–7.12, 8.13–8.14, and 8.25.

Residence interest.

Term for deductible mortgage interest on a principal residence and a second home; see 15.1–15.2.

Residential rental property.

Real property in which 80% or more of the gross income is from dwelling units. Under MACRS, depreciation is claimed over 27.5 years under the straight-line method; see 42.12.

Retirement savers credit.

Eligible taxpayers may claim a tax credit for 10%, 20%, or 50% of up to $2,000 of retirement plan contributions; see 25.10.

Return of capital.

A distribution of your investment that is not subject to tax unless the distribution exceeds your investment; see 4.11.

Revenue ruling.

A revenue ruling is the Commissioner’s “official interpretation of the interpretation of the law” and generally is binding on revenue agents and other IRS officials. Taxpayers generally may rely on published revenue rulings in determining the tax treatment of their own transactions that arise out of similar facts and circumstances.

Revocable trust.

A trust that may be changed or terminated by its creator or another person. Such trusts do not provide an income tax savings to the creator; see 39.6.

Rollover.

A tax-free reinvestment of a distribution from a qualified retirement plan into an IRA or other qualified plan, or from one IRA to another, within 60 days of the distribution; see 7.2, 7.6, and 8.10.

Roth IRA.

A nondeductible contributory IRA that allows for tax-free accumulation of income. Qualifying distributions are completely tax free. See 8.19–8.25.

S

Salvage value.

The estimated value of an asset at the end of its useful life. Salvage value is ignored by ACRS and MACRS rules.

S corporation.

A corporation that elects S status in order to receive tax treatment similar to that of a partnership; see Chapter 11.

Section 179 deduction (or First-year expensing).

A deduction allowed for investments in depreciable business equipment in the year the property is placed in service; see 42.3 for limitations.

Section 457 plan.

Deferred compensation plan set up by a state or local government, or tax-exempt organization, which allows tax-free deferrals of salary; see 7.20.

Section 1231 property.

Depreciable property used in a trade or business and held for more than a year. All Section 1231 gains and losses are netted; a net gain is treated as capital gain, a net loss as an ordinary loss; see 44.8.

Section 1244 stock.

Stock in a closely-held corporation for which losses up to a dollar limit are treated as ordinary rather than capital losses; see 30.11.

Self-employed person.

An individual who operates a business or profession as a proprietor or independent contractor and reports self-employment income on Schedule C; see Chapters 40 and 45.

Self-employment tax.

Tax paid by self-employed persons to finance Social Security and Medicare coverage. For 2017, there are two rates. A 12.4% rate (for Social Security) applies to a taxable earnings base of $127,200 or less and a 2.9% rate (for Medicare) applies to all net earnings; see Chapter 45.

Separate return.

Return filed by a married person who does not file a joint return. Filing separately may save taxes where each spouse has separate deductions, but certain tax benefits require a joint return; see 1.3.

Short sale.

Sale of borrowed securities made to freeze a paper profit or to gain from a declining market; see 30.5.

Short tax year.

A tax year of less than 12 months. May occur with the startup of a business or change in accounting method.

Short-term capital gain or loss.

Gain or loss on the sale or exchange of a capital asset held one year or less; see 5.1, 5.3, and 5.10.

Simplified employee plan (SEP).

IRA-type plan set up by an employer, rather than the employee. Salary-reduction contributions may be allowed to plans of small employers set up before 1997; see 8.15–8.16.

Standard deduction.

A fixed deduction allowed to taxpayers who do not itemize deductions, based on filing status, plus certain additional amounts for qualifying individuals; see 13.1.

Standard mileage rate.

A fixed rate allowed by the IRS for business auto expenses in place of deducting actual expenses; see 43.1.

Statutory employees.

Certain employees, such as full-time life insurance salespersons, who may report income and deductions on Schedule C, rather than on Schedule A as miscellaneous itemized deductions; see 40.6.

Stock dividend.

A distribution of additional shares of a corporation’s stock to its shareholders; see 4.6.

Stock option.

A right to buy stock at a fixed price.

Straddle.

Taking an offsetting investment position to reduce the risk of loss in a similar investment; see 30.9.

Straight-line method.

A method of depreciating the cost of a depreciable asset on a pro rata basis over its cost recovery period; see 42.9, 42.12, 42.15.

T

Tangible personal property.

Movable property, such as desks, computers, machinery, and autos, depreciable over a five-year or seven-year period; see 42.4.

Taxable income.

Net income after claiming all deductions from gross income and adjusted gross income, such as IRA deductions, itemized deductions, or the standard deduction, and personal exemptions; see 22.1.

Tax attributes.

When debts are canceled in bankruptcy cases, the canceled amount is excluded from gross income. Tax attributes are certain losses, credits, and property basis that must be reduced to the extent of the exclusion; see 11.8.

Tax deferral.

Shifting income to a later year, such as where you defer taxable interest to the following year by purchasing a T-bill or savings certificate maturing after the end of the current year; see Chapter 4. Investments in qualified retirement plans provide tax deferral (Chapters 7, 8, and 41).

Tax home.

The area of your principal place of business or employment. You must be away from your tax home on a business trip to deduct travel expenses; see 20.7–20.10.

Tax identification number.

For an individual, his or her Social Security number; for businesses, fiduciaries, and other non-individual taxpayers, the employer identification number.

Tax preference items.

Items that may subject a taxpayer to the alternative minimum tax (AMT); see 23.2.

Tax-sheltered annuity.

A type of retirement annuity offered to employees of charitable organizations and educational systems, generally funded by employee salary-reduction contributions; see 7.19.

Tax year.

A period (generally 12 months) for reporting income and expenses; see 40.4.

Tenancy by the entireties.

A joint tenancy in real property in the name of both husband and wife. On the death of one tenant, the survivor receives entire interest.

Tenants in common.

Two or more persons who have undivided ownership rights in property. Upon death of a tenant, his or her share passes to his or her estate, rather than to the surviving tenants.

Testamentary trust.

A trust established under a will.

Trust.

An arrangement under which one person transfers legal ownership of assets to another person or corporation (the trustee) for the benefit of one or more third persons (beneficiaries).

U

Unrecaptured Section 1250 gain.

Long-term gain realized on the sale of depreciable realty attributed to depreciation deductions and subject to a 25% capital gain rate; see 5.3 and 44.2.

Useful life.

For property not depreciated under ACRS or MACRS, the estimate of time in which a depreciable asset will be used.

W

Wash sales.

Sales on which losses are disallowed because you recover your market position within a 61-day period; see 30.6.

Withholding.

An amount taken from income as a prepayment of an individual’s tax liability for the year. In the case of wages, the employer withholds part of every wage payment. Backup withholding from dividend or interest income is required if you do not provide the payer with a correct taxpayer identification number. Withholding on pensions and IRAs is automatic unless you elect to waive withholding; see Chapter 26.