If it seems people are speaking a different language when they talk about taxes, it is because they are. You need to be familiar with the unique terms used to explain tax laws. We have compiled a list of common tax terms and their meanings, using plain English. Once you start understanding these terms, you will be amazed how quickly they can become a part of your vocabulary!
Main Home -
Generally, the home in which an individual lives for most of the year. Back to Top
Mandatory Retirement Age -
Generally, the age set by an employer at which an employee must retire. Back to Top
A legal union between a man and a woman as husband and wife. For federal income tax purposes, this definition supersedes any state definitions.
Material Participation -
The satisfaction of one of several tests used to determine that a trade or business is not a passive activity. Generally, material participation in an activity includes being involved in its operations on a regular, continuous, and substantial basis during the year.
Medical Care Expenses -
Amounts paid for the diagnosis, cure, relief, treatment, or prevention of disease and for treatments affecting any part or function of the body. The medical care expenses must be primarily to relieve or prevent a physical or mental defect or illness. Back to Top
Minimum Required Distribution -
The smallest amount that must be distributed from a qualified plan to prevent an additional tax on excess accumulation. Also called a required minimum distribution. Back to Top
Minimum Retirement Age -
Generally, the earliest age at which a taxpayer can first receive a pension or an annuity if they are not disabled.
An individual who is duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for Social Security purposes.
Ministerial Qualified Services -
Services performed in the exercise of the taxpayer's ministry or in the exercise of the taxpayer's duties as required by their religious order.
Modified Accelerated Cost Recovery System (MACRS) -
The name given to tax rules relating to recovering, through depreciation deductions, the basis of most business and investment property placed in service after 1986. Back to Top
Modified Adjusted Gross Income (MAGI) -
Adjusted gross income that is modified to meet the requirements of a specific tax item. Modifications are specific for each tax item that uses MAGI. Back to Top
A legal document an individual signs when they borrow money and put real estate up as collateral to protect the interests of the lender.
Multiple Support Agreement -
A written agreement indicating which taxpayer can claim the dependent exemption for an individual when two or more qualifying taxpayers together provide more than half of the individual's support and individually provide more than 10% of the individual's support.Back to Top
Necessary Expense -
A helpful and appropriate expense for a field of trade, business, or profession; it does not have to be indispensable to be considered necessary. Back to Top
Net Capital Gain -
The amount by which the net long-term capital gain for the year exceeds the net short-term capital loss.
Net Operating Loss (NOL) -
Generally, the amount by which allowable deductions exceed gross income. Back to Top
Net Operating Loss (NOL) Year -
The year in which an NOL occurred.
Net Unrealized Appreciation (NUA) -
The increase in the value of securities while held in trust.
An individual who receives income in their name that actually belongs to someone else.
Nonaccountable Plan -
A reimbursement or allowance arrangement under which an employer reimburses an employee or provides the employee an expense allowance regardless of whether the employee meets any of the requirements of an accountable plan.
Noncustodial Parent -
The parent who has custody of a child for the shorter part of the year or who does not have custody at all.
Nonpassive Income -
Income from earnings or wages, active business participation, dividends, interest, or capital gains.
Nonperiodic Payment or Distribution -
A payment or distribution from a retirement plan that does not recur on a regular basis.
Nonqualified Plan -
A plan that does not meet the IRS requirements for qualified retirement plans.
Nonrecaptured Section 1231 Losses -
The net section 1231 losses for the previous five years that have not been applied against a net section 1231 gain by treating the gain as ordinary income.
Nonrecourse Debt -
A debt for which the debtor is not personally liable.
Nonrecourse Financing -
Financing for which the taxpayer is not personally liable.
Nonrefundable Credit -
A credit that cannot be more than the tax liability on the taxpayer's tax return. Back to Top
Nonresidential Real Property -
Most real property (real estate) other than residential rental property.
Nontaxable Exchange -
An exchange in which any gain is not taxed and any loss cannot be deducted. Back to Top
Not-for-Profit Activity -
Generally, an activity that has not produced a profit in at least three of the last five tax years, including the current year.
A contract conveying the right to buy (call) or sell (put) specific securities, commodities, or stocks at a predetermined price within a defined period. Back to Top
Ordinary Expense -
An expense that is common and accepted in a field of trade, business, or profession.
Owner of Record -
The person whose name is listed as owner in official documents.
An individual who shares ownership of an unincorporated trade or business with one or more persons.
An unincorporated organization with two or more parties who join together to carry on a trade or business, with each party contributing money, property, labor, or skills and expecting to share in the profits and losses of the business.
Passenger Automobile -
Any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans).
Passive Activity -
Generally, a trade or business activity in which a taxpayer did not materially participate and any rental activity (except a rental activity for those who qualify as real estate professionals). Back to Top
Passive Income -
Income from a trade or business activity in which a taxpayer did not materially participate and income from all real estate activities, regardless of their participation (except rental activities for those who qualify as real estate professionals).Back to Top
The exclusive right granted to an owner or inventor to manufacture, use, or sell an invention for a limited period of time.
Generally, a series of regular definitely determinable payments made to the individual after they retire from work. Back to Top
Per Diem -
Daily or per day. Back to Top
Per Diem Payments -
Payments made on a periodic basis without regard to actual expenses incurred.
Periodic Payment or Distribution -
A payment or distribution from a retirement plan that recurs on a regular basis, such as monthly or yearly.
Period of Limitations -
The period of time after which a taxpayer can bring no legal action against the IRS regarding their tax return or vice versa.
Permanently and Totally Disabled -
A condition that indicates an individual cannot engage in any substantial gainful activity because of a physical or mental condition. A physician must certify that the condition has lasted or can be expected to last continually for at least 12 months or that the condition can be expected to result in death.
Personal Representative -
A court-appointed executor or administrator of an estate or anyone who is in charge of a deceased individual's property.
Personal Service Activity -
An activity that involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
Personal Service Corporation -
A corporation for which the main work is the performance of personal service activities and for which these activities are substantially performed by employees who are also owners of the corporation.
The gradual reduction in the amount allowed as a deduction, a credit, or an expense.
Placed in Service -
Ready and available for a specific use whether in a trade or business, the production of income, a tax-exempt activity, or a personal activity.
Placed-in-Service Date -
The date property is ready and available for a specific use.
Mortgage interest fees paid to reduce the initial interest rate on a loan. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Back to Top
A person who owns the proceeds of an insurance contract. The policyholder may also be the insured.
Portfolio Income -
Interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business; a gain or loss from the disposition of property that produces these types of income or that is held for investment.
Postsecondary Education -
Education beyond high school at a college, university, or vocational school. Back to Top
Preferred Stock -
A type of share in the ownership of a company that usually does not provide voting rights, but the preferred stock shareholders' claim to dividends comes before shareholders owning common stock. Back to Top
Presidentially Declared Disaster Area -
An area declared by the president of the United States to be eligible for federal assistance under the Disaster Relief and Emergency Assistance Act.
Pre-Tax Contribution -
The voluntary contribution an employer deducts from an employee's pay that is not subject to income tax. Also known as deferred compensation or elective deferral.
Prior-Year Unallowed Losses -
Losses not allowed in prior years due to basis limitations, at-risk limitations, or passive activity loss limitations that are carried forward to the current tax year.
Private Activity Bond -
A tax-exempt bond issued by a state or locality to finance the private development of public projects for the benefit of the general public.
Progressive Deterioration -
Damage resulting from a steadily ongoing operation or a normal process, rather than from a sudden event.
Property Class -
A category for property under the Modified Accelerated Cost Recovery System (MACRS) that generally determines the depreciation method, recovery period, and convention. Back to Top
Publicly Traded Partnership -
A partnership in which the partnership's interests are traded on an established securities market or are readily tradable on a secondary market (or its substantial equivalent).
Put Option -
A contract granting the owner of a security the right to sell the security at a predetermined price during a specified period of time.
Qualified Dividends -
Certain ordinary dividends received in tax years beginning after 2002 that are subject to the same 5% or 15% maximum tax rate that applies to net capital gains. Back to Top
Qualified Employee Plan -
An employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries and that meets Internal Revenue Code requirements. Back to Top
Qualified Long-term Care Service -
Services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, or necessary maintenance and personal care services, required by a chronically ill individual. The services must be provided pursuant to a plan of care prescribed by a licensed health care practitioner. Back to Top
Qualified Nonrecourse Financing -
Financing for which no one is personally liable for repayment and for which the financing is all of the following: (1) borrowed in connection with the activity of holding real property, (2) secured by real property used in the activity, (3) not convertible from a debt obligation to an ownership interest, and (4) loaned or guaranteed by any federal, state, or local government or borrowed from a qualified person. (Qualified persons generally include any person actively and regularly engaged in the business of lending money; for example, a bank or savings and loan association.)Back to Top
Qualified Organization -
Generally, a charitable organization that must apply to the IRS to be considered a qualified tax-exempt entity (unless it is a church or government entity).
Qualified Retirement Plan -
A retirement plan that conforms to a specific set of legal rules. Qualified retirement plans include IRAs, 401(k), 403(b) and 457(b) plans. Conforming profit-sharing plans and employee stock ownership plans are also qualified retirement plans.
Qualified Services (Religious) -
Services performed in the exercise of the taxpayer's ministry or in the exercise of the taxpayer's duties as required by their religious order.
Qualified Small Business -
A sole proprietorship or a partnership that has average annual gross receipts (reduced by returns and allowances) of $5 million or less during a three-year period ending with the tax year of a net operating loss or the period the business was in existence if the business did not exist for the entire three-year period.
Qualified Tuition Program (QTP) -
A program (also known as a 529 plan or program) established by a state or by an eligible educational institution that is set up to allow either prepayment of or contributions to an account established for paying a student's qualified higher education expenses at an eligible educational institution.
Real Estate Investment Trust (REIT) -
A trust that primarily invests in real estate or real estate secured loans. Most of the assets in real estate mutual fund include REITs.
Realized Gain or Loss -
The difference between the adjusted basis of the property and the sales price. In a like-kind exchange, the total of all money received, net liabilities given up, and the fair market value of all property received, minus the basis of the property traded is the realized gain or loss.
Real Property -
Land and generally anything built on, growing on, or attached to land, such as buildings and their structural components (real estate). Back to Top
To include an amount in income that was deducted or excluded in a prior year.
Recovery Period -
A period of years during which the cost of business assets is depreciated. Back to Top
Treating a contribution to one type of IRA as having been made to another type of IRA.
Recognized Gain or Loss -
The part of a realized gain or loss that is a taxable gain or deductible loss. For a like-kind exchange, it is the lesser of realized gain or boot. A recognized (or taxable) gain is also known as the amount recognized.
The process of converting funds in a traditional IRA to a Roth IRA after they have been recharacterized. A reconversion cannot occur in the same tax year (or within 30 days, whichever is later) as the original conversion.
Recourse Debt -
A debt for which an individual is personally liable.
Recovered Basis -
The basis of property has been fully recovered when the total of the section 179 and cumulative allowed or allowable depreciation deductions equals the cost or investment in the property.
A return of an amount the taxpayer deducted or took a credit for in an earlier tax year.
Recovery Period -
A predetermined number of years over which the cost or other basis of a property is recovered.
The payment or exchange of an obligation such as when stock is sold or converted or a bond is presented for payment.
Refundable Credit -
A credit that, when combined with a taxpayer's other tax payments, can reduce the amount of tax they owe, give them a refund, or increase their refund. Back to Top
Refund Offset -
An item of existing debt that reduces the refund amount claimed on a tax return.
Regular Tax -
The federal tax liability imposed for the year without regard to the alternative minimum tax.
Regulated Investment Company (RIC) -
Commonly called a mutual fund, this type of investment company is required by law to distribute interest, dividends, and capital gains to its shareholders. The income avoids double taxation by only being taxed at the personal level, not at the corporate level.
To pay back for money spent for out-of-pocket expenses.
Rental Expenses -
Ordinary and necessary expenses that may be deducted for rental property.
Rental Income -
Any payment received for the use or occupation of property. Back to Top
Property maintenance that keeps property in good operating condition and that does not materially add to the value of property or substantially lengthen its life. Back to Top
The action of a lender or a seller taking property from an individual, usually because of loan default.
Required Beginning Date -
The date at which an individual must begin receiving distributions from a qualified retirement plan.
Required Distribution Rules -
Requirements for distributing qualified retirement plan funds. The requirements differ depending on whether the person is the owner or the beneficiary.
Required Minimum Distribution -
The smallest amount that must be distributed from a qualified plan to prevent an additional tax on excess accumulation. Also called minimum required distribution.
Residential Rental Property -
Any building or structure, such as a rental home (including a mobile home), for which 80% or more of its gross rental income for the tax year is from dwelling units.
Retiring Property -
Permanently withdrawing property from use in a trade or business or from use in the production of income.
Rita GO Zone -
The portion of the Hurricane Rita disaster area determined by the president before October 6, 2005, to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Rita.
A tax-free withdrawal of cash or other assets from a qualified retirement plan that is reinvested into another qualified retirement plan within 60 days.
Roth IRA -
A type of IRA that allows an individual (subject to certain income limits) to save for retirement while allowing the savings to grow tax-free.
S Corporation -
A corporation that generally is exempt from federal income tax. Its shareholders include on their tax returns their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of income or loss not separately stated. An S corporation may have no more than 100 shareholders, may have only one class of stock, and must be a domestic corporation.
Salvage Value -
The estimated value of property at the end of its useful life. Salvage value is not used under the Modified Accelerated Cost Recovery System.
Generally, an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies.
A money substitute, such as a card or paper certificate, that is used in exchange for goods and services.
Section 179 Property -
Property defined under section 179 of the IRS code for which a taxpayer can choose to recover all or part of the cost of the property (up to a limit) by deducting it in the year they place the property in service. Back to Top
Section 197 Intangibles -
Assets listed in section 197 of the IRS code that a taxpayer can choose to amortize over a period of 15 years.
Section 1231 Transactions -
Sales, exchanges, and involuntary conversions of business, rental, and royalty property held longer than one year.
Section 1245 Property -
Any property that is or has been subject to depreciation or amortization and is personal property, a single purpose agricultural or horticultural structure, or a storage facility (other than a building or its structural components) used for the distribution of petroleum.
Section 1250 Property -
Real property (other than section 1245 property) that is or has been subject to an allowance for depreciation.
Self-Employed Individual -
An independent contractor, a person who carries on a trade or business as a sole proprietor, an active member of a partnership, or a person who is in business for themselves in any other way.
Self-Employment Tax -
Social Security tax and Medicare tax primarily for individuals who work for themselves. Back to Top
Separate Maintenance Decree -
A legal document, court order, or agreement specifying amounts paid to one spouse by another spouse while they live apart.
Separate Property -
Property belonging to one spouse that is not community property.
Separately Stated Items -
The beneficiary, partner, or shareholder's distributive share of income and deductions from an estate, trust, partnership, or S corporation reported on a Schedule K-1.
Settlement Date -
The date by which property must be delivered and payment must be made.
Shared Equity Financing Agreement -
An agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit (including the land), and one or more co-owners are entitled to occupy the unit as their main home upon payment of rent ot the other co-owner or owners.
Sheltered Workshop -
A school operated by certain tax-exempt organizations (or by a state, a U.S. possession, a political subdivision of a state or possession, the U.S., or the District of Columbia) that provides special instruction or training designed to alleviate the disability of an individual.
Short-Term Holding Period -
A period of one year or less. Back to Top
Sick Pay -
A payment to an employee to replace regular wages while they are temporarily absent from work due to sickness or personal injury.
SIMPLE (Savings Incentive Match Plan for Employees) IRA -
A qualified retirement plan, using IRAs, that certain small employers (including self-employed individuals) can set up for the benefit of their employees.
SIMPLE (Savings Incentive Match Plan for Employees) 401(k) -
A qualified retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees.
Simplified Employee Pension (SEP) -
A written qualified retirement plan that allows self-employed individuals to make contributions toward their own, and their employees', retirement using a traditional individual retirement arrangement (called a SEP-IRA). Back to Top
Simplified Method -
The required method of calculating the taxable portion of benefits from a qualified retirement plan with an annuity starting date after November 18, 1996. Back to Top
Sole Proprietor -
Someone who owns an unincorporated business by themselves. Back to Top
Sole Proprietorship -
A business that is owned by one individual and is not incorporated.
A trustee or other administrator of a retirement plan.
The difference between an incentive stock option's exercise price and the stock's fair market value on the date of exercise.
Standard Deduction -
A predetermined dollar amount that reduces the income subject to tax. The amount varies depending on the taxpayer's filing status, age, blindness, and dependency status. Back to Top
Standard Mileage Rate -
A per mile rate, established by statute, that a taxpayer uses to calculate deductible vehicle expenses based on miles driven. Specific rates apply based on whether the use is for business, charity, moving, or medical reasons. Back to Top
Start-Up Costs -
Costs for creating an active trade or business or investigating the creation of acquisition of an active trade or business. Start-up costs include any amounts paid or incurred in connection with any activity engaged in for profit and for the production of income in anticipation of the activity becoming an active trade or business.
A legislative act or law.
Statutory Employee -
A worker who would normally be considered an independent contractor, but is treated by statute as an employee. Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling salespersons, and certain home workers.
A share in a company that represents the portion of the company's earnings and assets that a shareholder owns.
Stock Rights -
The ability to buy more shares in a company at a specified price for a limited time.
Straight-Line Method -
A method of calculating the depreciation for property that uses a percentage rate to deduct the same amount for each year in the recovery period. The percentage rate is determined by dividing one by the number of years in the recovery period. Back to Top
Substantial Gainful Activity -
An activity in which the taxpayer must perform significant duties over a reasonable period of time while working for pay or profit or in work generally done for pay or profit.
Supplier-Based Intangible -
The value resulting from the future acquisition of goods or services used or sold by a business because of business relationships with suppliers including a favorable credit rating or a favorable supply contract.
Surviving Spouse -
The widow or widower of a deceased individual.
Tangible Property -
Property that can be seen or touched, such as buildings, machinery, vehicles, furniture, and equipment. Back to Top
Taxable Income -
Gross income minus any adjustments to income, any allowable exemptions, and either itemized deductions or the standard deduction. Back to Top
Tax-Exempt Interest -
Interest income that is not subject to federal income tax. Tax-exempt interest may or may not be exempt from state income taxes. Back to Top
Tax Home -
The entire city or general area of an individual's regular place of business, employment, or post of duty, regardless of where they maintain their family home. Back to Top
Tax Liability -
The amount of total tax due to the IRS after claiming credits and before reporting payments such as withholding and estimated payments. Back to Top
Tax Year -
The annual period used for keeping tax records and reporting income and expenses. The most common tax year is a calendar year, which ends December 31. Back to Top
An individual subject to any internal revenue tax. All citizens of the U.S. and all individuals resident in the U.S. are subject to internal revenue tax.
Temporary Assignment -
Generally, a work assignment in a single location away from a taxpayer's tax home that the taxpayer realistically expects will last (and does last) for one year or less. Back to Top
Tenancy by the Entirety -
A form of property ownership in which a husband and wife own property jointly. If one owner dies, the survivor is automatically entitled to the decedent's share of the property. Back to Top
Tenancy in Common -
A form of property ownership in which two or more individuals own property separately. If one owner dies, the survivors are not automatically entitled to the decedent's share of the property. Back to Top
Tentative Minimum Tax -
The amount of tax calculated under the alternative minimum tax rules.
Terminally Ill Individual -
Any individual who has been certified by a physician to have an illness that can be reasonably expected to result in death in 24 months or less.
Terrorist Action or Military Action -
Any activity primarily directed against the U.S. or its allies or any military action involving the U.S. Armed Forces resulting from violence or aggression against the U.S. or its allies.
The intentional taking and removing of money or other property from its rightful owner. The taking of property must be illegal under the laws of the state where it occurs and it must be done with criminal intent.
Three-Year Rule -
A method for calculating the taxable portion of benefits from a qualified plan for retirees whose annuity starting date was before July 2, 1986.
Tie-Breaker Rule -
The method the IRS applies to determine who can claim the tax benefits when two or more tax returns are filed using the same individual as a qualifying child. Back to Top
Time-Savings Account -
An interest-bearing savings account that restricts access to its funds for a defined time limit. Funds cannot be withdrawn before the limit without incurring a penalty.
A transfer of property for other property or services. Back to Top
Trade or Business -
Generally, an activity carried on for a livelihood or in good faith to make a profit. Back to Top
Traditional IRA -
Any IRA that is not a Roth IRA, a Savings Incentive Match Plan for Employees (SIMPLE) IRA, or a Simplified Employee Pension IRA (SEP-IRA). Back to Top
Someone who does not have a regular place of business or post of duty and does not have a place where they regularly live.
Travel Expenses -
The ordinary and necessary expenses a person incurs while traveling away from home to meet the demands of their job. Back to Top
The person who is responsible for managing the assets of a trust for the benefit of the beneficiaries and who is usually independent of the person who created the trust. Back to Top
Trustee-to-Trustee Transfer -
A transfer of funds in a traditional IRA from one trustee directly to another, either at the taxpayer's request or at the trustee's request. This is not a rollover.
Unadjusted Basis -
The basis of property for purposes of calculating gain on a sale without taking into account any depreciation taken in earlier years but with adjustments for the section 179 deduction and any special depreciation allowance. Back to Top
Underpayment of Tax -
The amount of tax that has not been paid by either withholding or estimated payments but that has been properly reported on the tax return.
Underpayment Penalty -
A penalty assessed for not paying enough tax through withholding or because estimated tax payments were not made in a timely manner. Back to Top
Understatement of Tax -
The difference between the tax that should have been reported on the tax return (if all the income had been properly included and all the deductions correctly reported) and the lower tax that was actually reported on the return.
Unearned Income -
Investment income (such as interest, dividends, and capital gains) and other income that is not generated by personal service (such as unemployment compensation, taxable Social Security benefits, pensions, annuities, and alimony). Back to Top
Unmarried Individual -
A person who is unmarried or legally separated from their spouse under a divorce or separate maintenance decree. State law governs whether a taxpayer is married or legally separated under a divorce or separate maintenance decree. A taxpayer is considered unmarried for the entire year if they can be considered unmarried as of the last day of the tax year. Back to Top
Unrecognized Gain or Loss -
The difference between realized gain or loss and recognized gain or loss.
Unstated Interest -
The part of the stated principal amount of an installment sale contract that is treated as interest when the contract does not provide for adequate stated interest.
Useful Life -
The estimated length of time it takes for property to wear out, decay, get used up, become obsolete, or lose its value from natural causes. Back to Top
Generally, a car, van, pickup truck, panel truck, or sport utility vehicle weighing 6,000 pounds or less that is considered a passenger automobile. Back to Top
Voluntary Interest Payments -
Payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment.
Wash Sale -
A stock transaction in which the person sells or trades stock or securities at a loss and, within 30 days before or after the sale, acquires substantially identical stock or securities, either directly or through an option. Back to Top
Wilma GO Zone -
The portion of the Hurricane Wilma disaster area determined by the president before November 14, 2005, to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Wilma. Back to Top