Glossary
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Ability to Pay
A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay tax at different rates. Wealth includes assets such as houses, cars, stocks, bonds, and savings accounts. Income includes wages, interest and dividends, and other payments.
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Active Participation
Just what it sounds like: taking an active role in the management of an enterprise. This is a determining factor for the IRS in rental real estate issues. The rules for active participation are much easier to meet than the material participation rules. An active participant may generally deduct up to $25,000 of rental real estate losses against other income. An active participant must not be a limited partner or own 10 percent or less of the property. See also Material Participation.
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Adjusted Gross Income (AGI)
A person's entire income (for example: wages, interest income, money from a rental property) after it is reduced by adjustments (such as contributions to an Individual Retirement Account or medical savings account, moving expenses, and alimony paid to a former spouse). It is often referred to in tax publications as AGI and is used for various tax payment or credit calculations.
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Adjustments to Income
Adjustments to income include IRA contributions; deduction for one-half of self-employment tax; contributions to a retirement plan for self-employed individuals (Keogh Plan or self-employed SEP or SIMPLE plan); contributions to a medical savings account; penalty on early withdrawal of savings; and alimony payments.
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AGI- Adjusted Gross Income
A person's entire income (for example: wages, interest income, money from a rental property) after it is reduced by adjustments (such as contributions to an Individual Retirement Account or medical savings account, moving expenses, and alimony paid to a former spouse). It is often referred to in tax publications as AGI and is used for various tax payment or credit calculations.
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Alternative Minimum Tax
This tax primarily affects high-income taxpayers who shelter some of their income from tax through certain tax preference items or deductions. It is often referred to in tax publications as AMT and, if your income meets the limit, you have to recalculate your tax due based on the separate alternative minimum tax rates and tables.
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Amended Return (1040-X)
A return filed to correct a previous year's individual tax return. You must correct your original filing if, for example, your employer is late in sending you an earnings statement and you filed your return without reporting the added income. You also can file an amended return if you discover you made a mistake or circumstances change that would allow you to get a refund for a previously filed return. An amended return is prepared using Form 1040-X.
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Amount Due
Money that taxpayers must pay to the government when the total tax is greater than their total tax payments.
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Appeal
To call for a review of an IRS decision or proposed adjustment.
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Authorized IRS e-file Provider
A business authorized by the IRS to participate in the IRS e-file Program. The business may be a sole proprietorship, a partnership, a corporation, or an organization. Authorized IRS e-file Providers include Electronic Return Originators (EROs), Transmitters, Intermediate Service Providers, and Software Developers. These categories are not mutually exclusive. For example, an ERO can at the same time, be a Transmitter, a Software Developer, or an Intermediate Service Provider, depending on the function being performed.
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Benefits Received
A concept of tax fairness that states that people should pay taxes in proportion to the benefits they receive from government goods and services.
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Bonus
Compensation received by an employee for services performed. A bonus is given in addition to an employee's usual compensation, such as a salary.
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Business
A continuous and regular activity that has income or profit as its primary purpose.
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Capital Asset
An item that you own for investment or personal purposes such as stocks, bonds, or stamp collections. When you sell a capital asset, depending on the price, you earn a Captial Gain or a Capital Loss. Gains are taxed at a special rate and losses can be used in many cases to reduce the amount of income that is taxed.
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Capital Gain
Profit on the sale of a Capital Asset. Capital gains receive more favorable tax treatment than regular income. Depending on your tax bracket and on how long you held an asset before selling it, you may pay about one-third to one-half less tax tax than you would have paid on the same amount if you had earned it as salary. See also Capital Asset.
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Capital Loss
When you sell an asset for less than you paid for it or less than its adjusted basis, you have a capital loss. While it is never fun to lose money, when it comes to taxes a capital loss isn't necessarily all bad. You can reduce the amount of income that will be taxed by the amount of your loss, up to $3,000 per year. If your loss exceeds $3,000, you can carry the excess (known as capital loss carryover) forward indefinitely until the total loss is used.
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Carry Back
If you have deductions or credits that cannot be taken in the current year, in some instances, the IRS allows you to reduce your tax liability for a prior year(s) by using it. This is known as a carry back. Individual taxpayers may carry back net operating losses, general business credits and foreign tax credits, but not capital losses. Amounts not carried back may be carried forward to later years.
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Carry Forward
This is like Carry Backs, only going into future tax years instead of past tax years. If you have excess deductions or credits for the current year, the IRS allows you in some cases, such as large charitable deductions, to "save" the excess and carry it forward to reduce your tax liability in later years.
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Casualty and Theft Loss
A loss caused by a hurricane, earthquake, fire, flood, theft or similar event that is sudden, unexpected or unusual. You can deduct a portion of personal casualty or theft losses as an itemized deduction.
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Charitable Contribution Deduction
An itemized deduction for contributions of cash or property to a qualified tax-exempt organization.
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Child and Dependent Care Credit
You may be able to claim this credit if you pay someone to care for your dependent who is under age 13, or for your spouse or dependent who is unable to care for him/herself. The credit can be up to 30% of your expenses. To qualify, you must pay these expenses so you can work or look for work.
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Citizen or Resident Test
Assuming all other dependency tests are met, the citizen or resident test allows taxpayers to claim a dependency exemption for persons who are U.S. citizens for some part of the year or who live in the United States, Canada, or Mexico for some part of the year.
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Commission
Compensation received by an employee for services performed. Commissions are paid based on a percentage of sales made or a fixed amount per sale.
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Compulsory Payroll Tax
An automatic tax collected from employers and employees to finance specific programs.
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Cost of Goods Sold
An expense that appears on a business's income statement and represents the cost of the inventory sold during the period.