401(k) Plan
A qualified retirement investment plan offered by your employer that allows you to contribute a percentage of earned wages into a tax-deferred investment account selected by the employer. The amount put into the 401(k) plan is not currently taxed, but is taxed when you withdraw funds upon retirement.
Accelerated Cost Recovery System (ACRS)
Instead of depreciating an asset uniformly over its useful life (as is the case with the straight-line depreciation method), ACRS uses fixed percentages and a predetermined number of years (depending on the asset’s class life) to calculate a depreciation deduction. This method allows for a greater depreciation deduction in the earlier years and generally applies to tangible property placed into service after 1980 and before 1987.
Accelerated Depreciation
Any method of depreciation that results in greater depreciation deductions for an asset in the earlier years of its life, rather than uniform depreciation over its entire useful life (i.e., the straight-line depreciation method).
Accountable Plan
A plan in which all three of the following rules are satisfied: (1) your expenses (such as for travel, transportation, meals, and entertainment) must have been paid or incurred while performing services as an employee of the employer who manages the plan; (2) you must adequately account to the employer for these expenses; and (3) you must return any excess reimbursement or allowance. When an employer reimburses you, the reimbursement will not be considered income on your tax return and the expenses will not be allowed as a deduction on your tax return.
Accounting Method
The method used to account for income and expenses for tax purposes. Most taxpayers use either the cash method or an accrual method. Your accounting method is chosen when you file your first income tax return. Generally, approval is required from the Internal Revenue Service to change accounting methods after that time.
Accounting Period
The 12-month period you use as your tax year when filing a tax return. Most individual tax returns cover a calendar year. If a calendar year is not used, the accounting period is a fiscal year. The accounting period (tax year) is chosen when you file your first income tax return. The period cannot be longer than 12 months.
Accrual Method
The accounting method in which, generally, you report income when earned, rather than when received. Additionally, you usually deduct expenses when incurred, rather than when paid.
Acquisition Debt
A mortgage taken out after October 13, 1987 to buy, build, or improve your home. The interest on this mortgage is fully deductible if this mortgage, plus any grandfathered debt (mortgage taken out on or before October 13, 1987), totaled $1 million or less for the year ($500,000 or less if married filing separately).
Actual Expenses
A method used to calculate the deductible costs of operating your car (including a van, pickup, or panel truck) for business, charitable, medical, or moving purposes based on the actual costs incurred. For business purposes, this includes gas, oil, repairs, tires, depreciation, insurance, lease payments, registration fees, garage rent, and licenses. For charitable, medical, and moving purposes, this includes unreimbursed out-of-pocket expenses such as the cost of gas and oil. Expenses for general repairs and maintenance, depreciation, registration fees, or the costs of tires or insurance cannot be deducted.
Adopted Child
An individual adopted by the taxpayer or placed by an authorized placement agency for adoption by the taxpayer. This child is considered a child of the taxpayer by blood.
Additional Child Tax Credit
The Additional Child Tax Credit is a refundable credit for certain individuals who get less than the full amount of the Child Tax Credit. The Additional Child Tax Credit may give you a refund even if you do not owe any tax.
Adjusted Basis
The basis of property after certain adjustments (increases such as capital improvements and decreases such as prior-year depreciation) are made to determine the basis to be used for determining gain or loss on a sale, exchange, or other disposition of the property or calculating allowable depreciation, depletion, or amortization.
Adjusted Gross Income (AGI)
Gross, or total, income minus any allowed deductions (other than the standard deduction/itemized deductions or deduction for exemptions), or adjustments to income.
Adjustment to Income
A deduction that is allowed even if you do not itemize deductions. Adjustments to income are subtracted from total income to determine adjusted gross income (AGI). Examples of adjustments include deductions for Individual Retirement Arrangement (IRA) contributions, student loan interest, moving expenses, one-half of self-employment tax, self-employed health insurance, educator expenses, tuition and fees, and alimony paid.
Adjustments for Alternative Minimum Tax
Your regular income is modified by either positive or negative adjustments to arrive at your alternative minimum taxable income. The adjustment affects the current tax year and may have implications in subsequent tax years. Some of these adjustments include personal exemptions, standard or itemized deductions, installment sale adjustments, gain or loss adjustments on the disposition of business property, incentive stock options, and passive activity loss limitation.
Alimony
Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument. Alimony is deductible by the payer and must be included in the spouse’s or former spouse’s income.
Alternative Minimum Tax (AMT)
An additional tax that you may have to pay if you benefit from tax laws that give special treatment to some kinds of income and allow special deductions and credits for some kinds of expenses. AMT ensures that you pay at least a minimum amount of tax.
Amended Return
A return used to correct a return that has already been filed. A return should be corrected if, after it has been filed, it is determined that (1) some of your income was not reported, (2) deductions or credits were claimed that you should not have claimed, (3) deductions or credits were not claimed that you could have claimed, or (4) you should have claimed a different filing status.
Amortization
Amortization is similar to recovering expenditures through straight-line depreciation. Using amortization, your cost or basis in certain property can be recovered proportionately over a specific number of years or months. Examples of costs that can be amortized are the costs of starting a business, reforestation, and purchasing certified pollution control facilities.
Amount Realized
The total value of everything you received from a sale or trade of property. This includes the money you received plus the fair market value of any property or services received.
Annuity
A series of contractual payments made at regular intervals over a period of more than one year. Part of the payment represents a return of capital and is not taxable. The rest of the payment is taxable as it represents a return on investment. Annuity contracts are generally established by tax-exempt organizations for the benefit of their employees.
Asset
An item of value or usefulness. For tax purposes, an asset is classified either as capital or noncapital.
Audit
A process through which the Internal Revenue Service (IRS) verifies the amounts reported on your tax return or reconciles amounts not reported on the return but reported to the IRS. You should have documentation supporting income, expenses, and itemized deductions. An audit is also known as an examination.
Automobile Expenses
Expenses that may be deductible if you use your car (including a van, pickup, or panel truck) for business, charitable, medical, or moving purposes. Generally, one of the two following methods can be used to calculate deductible expenses: actual expenses or the standard mileage rate. Parking fees and tolls are expenses that can be deducted regardless of which method you use to calculate deductible expenses.
Away From Home
For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for a business, profession, or job. You are traveling away from home if: (1) your duties require you to be away from your tax home substantially longer than an ordinary day’s work, and (2) you need sleep or rest to meet the demands of work while away from home.