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Tax Central
We are dedicated to keeping clients abreast of the latest tax law changes, planning strategies and vital tax-related information. This section includes a library of timely articles, due date reminders and much more. The articles are categorized by subject matter, which can be accessed from the links.Click on your topic of interest and find a wealth of information.
UNDERSTANDING THE LANGUAGE OF TAXES
Part of our increasingly complicated Federal income tax structure is a myriad of acronyms and abbreviations. Understanding the meaning of the more frequently encountered terminology can lead to a better comprehension of the complex tax situations that a taxpayer might encounter.
This section explains some common terminology and provides an overview of their application.
- Above-the-Line Deduction
- The “line” in this term refers to the line drawn when totaling the items that make up the taxpayer's adjusted gross income (AGI). The term “deduction” is usually associated with itemized deductions, but an above-the-line deduction is one that can be taken...
- Acquisition Indebtedness
- This is the debt used to acquire, build, or substantially improve a taxpayer's principal residence or a second home, and it is debt that is secured by the principal residence or second home. The interest on up to $1 million of acquisition indebtedness...
- Adjusted Gross Income (AGI)
- This may be the most important tax term since the tax code uses the AGI to limit a vast number of tax benefits. AGI is basically a taxpayer's gross taxable income from all sources (gross income) reduced by certain allowable adjustments, sometimes referred...
- Alternative Minimum Tax (AMT)
- A different way of computing one’s tax liability; it MUST be used if the resulting tax is higher than the tax computed by the regular method. This alternate way of computing the tax was introduced over three decades ago to prevent higher income...
- Basis
- Basis is the dollar value from which a taxpayer measures any gain or loss from an asset for income tax purposes. Generally, your basis begins with what you paid for the asset, including purchase costs (cost basis) and then is adjusted up for improvement...
- Business Gifts
- Gifts to customers, business contacts, clients, etc., are deductible if they are otherwise ordinary and necessary business expenses. However, business gifts are subject to a $25 limit to each donee per year....
- Capital Gain
- Gains from the sale of certain assets owned for more than one year and inherited assets such as stocks, bonds and real estate enjoy a special tax treatment referred to as a long-term capital gain. Gains from assets held for a shorter period are called...
- Capital Loss
- This is generally a loss from the sale of investment property such as stocks, bonds and land. Losses must first offset other sales in the same year that resulted in capital gains. Then, up to $3,000 ($1,500 for married individuals filing separately) can...
- Constructive Receipt
- Generally, most individual taxpayers are considered cash basis taxpayers. That means they pay taxes on income in the year they receive it. At the end and beginning of a tax year, questions sometimes arise as to when the income was received. The tax concept...
- Consumer Debt
- This term is used to describe debt incurred to purchase consumer products and includes debt such as motor vehicle loans and credit card debt. Interest paid on consumer debt is not deductible as an itemized deduction on a tax return. However, see the section...
- Dependent
- Typically, an individual’s minor child is thought of when the word dependent is used, but a dependent could be another relative, or in some cases, even an unrelated person. Generally, a dependent is someone who is reliant upon a taxpayer for support....
- Depreciation
- This is a tax deduction that is taken to reflect the wear and tear and gradual decline in value of an asset used in business. Although there are some options for depreciation, the tax law requires that the depreciation deduction be taken even if a taxpayer...
- Direct Transfer
- Is a method of moving retirement and IRA funds directly from one account to another without the taxpayer taking possession of the funds and avoiding the potential problems associated with a rollover. Another term for this type of transaction is trustee-to-trustee...
- Early Distributions
- Generally, when a taxpayer withdraws funds from a qualified plan or Traditional IRA before reaching the age of 59-1/2, the withdrawal is considered an early distribution and is subject to a penalty equal to 10% of the taxable amount withdrawn. This penalty...
- Earned Income
- This refers to income that is earned from providing your personal services as distinguished from unearned income such as interest, dividends, pensions, capital gains and passive income. Examples of earned income would include W-2 wage income, commissions,...
- Estimated Tax
- If a taxpayer does not have sufficient withholding from wages and pensions to cover the tax liability for the year, he/she could be subject to underpayment penalties. Self-employed taxpayers and those with substantial investment or other income frequently...
- Exemptions
- An exemption is an amount, $4,050 for 2017 (same as 2016) that can be deducted for the taxpayer and spouse (if applicable) and each dependent claimed on the tax return. The exemptions are phased out for higher income taxpayers. See the term “Dependent.”...
- Fair Market Value
- This is the price at which a property would change hands between a willing buyer and a willing seller, neither being compelled to buy or sell, and both having reasonable knowledge of all the necessary facts....
- FICA
- These initials stand for Federal Insurance Contributions Act, which is the law that covers Social Security and Medicare tax payroll withholding rules. Amounts are withheld from the wages of employees for their contribution to the Social Security and Medicare...
- Filing Status
- A taxpayer's filing status (except Head of Household) is based on their marital status as of the last day of the year and in the case of married individuals whether they wish to file jointly or separately. Thus, if not married on the last day of the tax...
- Gift Tax
- Many taxpayers believe they can deduct gifts they give to other individuals. That is not true! To prevent people from giving their assets away prior to their death and thereby avoid taxes on their estate, our tax system includes a gift tax, which is paid...
- Head of Household
- This is a special filing status for unmarried individuals, and, in certain special situations, married taxpayers, who pay more than half the cost of maintaining a home for themselves and a qualifying person, for more than half the tax year. The special...
- Home Equity Debt
- This term refers to debt incurred on a principal residence or second home that is not used to buy, build, or substantially improve that residence or home. An example is a home equity loan used to acquire consumer products or pay off consumer debt. The...
- Holding Period
- Generally, the length of time an asset is owned will determine if it qualifies for long-term capital gains rates when it is sold. To qualify for long-term capital gains rates, an asset must be owned more than 12 months or be inherited property. The holding...
- Independent Contractor
- Is someone who performs services for others. The recipients of the services do not control the means or methods the independent contractor uses to accomplish the work. Independent contractors are self-employed....
- Investment Interest
- Is interest paid on debt used for investment purposes. Typical examples are interest paid on vacant land held for investment and margin account interest. Investment interest is deductible as an itemized deduction but only to the extent the taxpayer has...
- Itemized Deductions
- Taxpayers are permitted to deduct either a standard deduction or itemized deductions in determining their taxable income. Itemized deductions are in five basic categories: Medical expenses that exceed 10% (7.5% if age 65 or older through 2016) of the...
- Keogh Plans
- Sole proprietors, partnerships (but not individual partners) and corporations may establish qualified retirement plans. A qualified retirement plan set up by a self-employed individual is frequently called a Keogh plan. The Keogh name comes from the Congressman...
- Kiddie Tax
- To prevent parents from using their children’s tax return to avoid taxes on investment income, Congress established what is now referred to as the kiddie tax on the unearned income of children. This applies to children under the age of 18, those...
- Life Insurance Dividends
- Insurance policy dividends that the insurer keeps and uses to pay the taxpayer's premiums are not taxable. However, interest paid on dividends left to accumulate with the insurer is taxable as interest income. This term shouldn't be confused with dividends...
- Listed Property
- Certain assets such as cars, computers, cameras and video equipment, boats and airplanes purchased for business also may be used for personal purposes. To limit a taxpayer's ability to deduct the personal use of these items as business use, Congress established...
- Like-Kind Exchange
- Section 1031 of the tax code allows a taxpayer to exchange like-kind business and investment assets. This type of transaction is frequently referred to as a tax-free exchange, which is misleading since the tax is not “free” but instead is deferred to...
- Limited Partner
- Is a partner whose participation in partnership activities is restricted, and whose personal liability for partnership debts is limited to the amount of money or other property that he or she contributed or may have to contribute....
- Marginal Tax Rate
- Most think that marginal tax rate is synonymous with tax bracket. This may generally be true but as the tax brackets advance to higher rates so does the taxpayer's income; as incomes increase, tax breaks begin to be reduced, phased out and in some cases...
- Modified Adjusted Gross Income
- Many tax deductions, adjustments and credits are phased out or disallowed once a taxpayer's adjusted gross income (AGI) reaches a certain level that varies depending on the particular tax benefit. However, the AGI for these purposes is usually not the...
- Municipal Bond Interest
- A term used for interest received on an obligation issued by a state or local government. Generally, this type of interest is not taxable (but see Private Activity Bonds) for Federal tax purposes. Most states, on the other hand, will treat municipal bond...
- Original Issue Discount (OID)
- Sometimes bonds are issued (sold) at a discount (thus the term “original issue discount”) and then some years later mature at face value. The difference between the issue price and the face value represents the interest paid by the bond issuer. A portion...
- Passive Activity Loss
- In order to limit the tax benefits of tax shelters, the tax code imposes loss limitations on entities that Congress defined as passive activities. Generally, passive activities are investments in which a taxpayer does not materially participate, and losses...
- Points
- In financing lingo, one point is equivalent to 1% of the loan value. Because they constitute prepaid interest, points are usually deducted ratably over the loan term. This rule would apply, for example, when a taxpayer purchases a rental real estate property--the...
- Principal Residence
- A taxpayer can exclude up to $250,000 ($500,000 for married taxpayers) of gain from the sale of the taxpayers' principal residence if they meet the ownership and residence tests. If a taxpayer alternates between two properties, using each as a residence...
- Private Activity Bond
- Generally, interest from municipal bonds issued by a state or local government is federally tax-exempt for both regular and alternative minimum tax (AMT) purposes. However, some municipal bonds whose proceeds are used to support private businesses are...
- Qualified Plan
- This term refers to retirement and employment benefit plans that conform to IRS requirements and are designed to protect the interests of employees or retirees....
- Recapture
- Is to include as income or as additional tax in the return an amount allowed or allowable as a deduction or a credit in a prior year. In some cases, the tax law requires that a tax benefit taken in an earlier year be paid back if the property on which...
- Rollover
- A rollover is a tax-free withdrawal of cash or other assets from one retirement plan and its reinvestment in another retirement program. The amount rolled over is excluded from gross income in the year of the transfer. Generally, a rollover must be completed...
- Section 179 Deduction
- This refers to a section of the Internal Revenue Code that permits taxpayers to expense (write off in one year) up to $510,000 in 2017 (up from $500,000 in 2016) of business equipment expenditures that would normally have to be depreciated over their...
- Section 529 Plan
- Qualified Tuition Plans (also known as Section 529 Plans) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These plans, also known as qualified tuition programs,...
- Self-Employment Tax
- Employees pay Social Security and Medicare taxes (collectively often referred to as FICA tax) through payroll withholding and the employer contributes a like amount for the employee. Since self-employed taxpayers do not have withholding, they pay an equivalent...
- Shared Equity Arrangement
- A shared equity arrangement is a method of financing the purchase of a residence where two or more individuals acquire an ownership interest in a dwelling unit and one or more of the co-owners occupies the property and pays fair rent to the non-occupying...
- Standard Deduction
- Most taxpayers are permitted to deduct either a standard deduction or itemized deductions in determining their taxable income. The standard deductions are based on filing status. For 2017, the amounts are: Single and Married Taxpayers Filing Separately...
- Standard Mileage Rate
- This is the per mile rate that can be used in lieu of actual expenses when using a vehicle for a deductible purpose. For 2016, the cents per mile rates are: 54.0 for business use and 19.0 for moving and medical use. For charity travel the cents per mile...
- Stepped-Up Basis
- When property is inherited, the basis for the beneficiaries is the value assigned to that property in the estate. Generally, that basis is the value of the property on the date of death of the decedent or on an alternate date selected by the executor...
- Tax Credits
- A tax credit is a tax benefit that offsets the tax dollar for dollar. Most credits are nonrefundable and can only be used to reduce the tax to zero. A refundable credit, like the earned income credit, offsets the tax and any balance not used to offset...
- Tax Identification (ID) Number
- For most individuals, their tax identification number is their Social Security number (SSN). It is used when filing tax returns and must be given to financial institutions, employers and other income payers so that appropriate information reporting forms...
- Taxable Income
- This can mean income that is taxable as opposed to income that is not, such as tax-exempt interest from municipal bonds. Or, it can refer to taxable income on a tax return, which is income less adjustments, deductions and exemptions (the final income...
- Tax Bracket
- Try to envision income that is included on a tax return as blocks of income stacked one upon the other. The first block represents the taxpayer's standard or itemized deductions on which there is no tax. Following that is another block representing the...
- Unearned Income
- Is income not earned from personal services. Examples are income from investments, pensions, capital gains and passive activities....
- Wash Sale
- The wash sale rules prevent taxpayers from realizing a loss from the sale of a security and then in a short period of time reacquiring that security. This rule only applies to sales resulting in a loss. A wash sale is defined as a sale that results in...
- Withholding
- This term is applied to amounts that are withheld from income for Federal and State taxes, Social Security and Medicare taxes. Withholding is most commonly associated with wages but can also occur on social security income, pension income, gambling income,...