A calendar year covers a 12-month period that begins January 1 and ends December 31.
Any asset that is not specifically identified as a noncapital asset. Almost everything you own and use for personal purposes or investment is a capital asset. Examples of capital assets include stocks and bonds, a home owned and occupied by you and your family, timber grown on your home property or investment property even if you make casual sales of the timber, household furnishings, your car used for pleasure or commuting, coin or stamp collections, gems and jewelry, gold, silver, and other metals.
Capital Expenditure or Improvement
Expenses for major improvements or additions to property used in a business or trade that cannot be immediately deducted on the tax return. These expenses must be added to the basis of the property and depreciated or amortized over time.
Generally, a sale or trade of a capital asset results in a capital gain or capital loss. If the sales price is greater than the basis, there is a gain. If you sell an item that you owned for personal use (such as a car, refrigerator, furniture, stereo, jewelry, or silverware), any gain is taxable as a capital gain. You cannot deduct a loss for personal-use property. However, if you sell an item that was held for investment (such as stocks, gold or silver bullion, coins, or gems), any gain is taxable as a capital gain and any loss is deductible as a capital loss.
Capital Gain Distributions
Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by regulated investment companies (commonly called mutual funds) and real estate investment trusts (REITs). Report capital gain distributions as long-term capital gains regardless of how long you owned the shares in the mutual fund or REIT.
Generally, a sale or trade of a capital asset results in a capital gain or capital loss. If the sales price is less than the basis, there is a loss. If you sell an item that you owned for personal use (such as a car, refrigerator, furniture, stereo, jewelry, or silverware), any gain is taxable as a capital gain. You cannot deduct a loss for personal-use property. However, if you sell an item that was held for investment (such as stocks, gold or silver bullion, coins, or gems), any gain is taxable as a capital gain and any loss is deductible as a capital loss.
Capital Loss Carryover
The amount of the capital loss carryover is the amount of the total net loss that is more than the lesser of: (1) your allowable capital loss deduction for the year, or (2) your taxable income increased by the allowable capital loss deduction for the year and the deduction for personal exemptions. If the deductions are more than your gross income for the tax year, use the negative taxable income when calculating the amount in item (2). If you have a total net capital loss, you can carry the unused part over to the next year. If part of the loss is still unused in the following year, you can carry it over to later years until it is completely used up.
Applying a loss, deduction, or credit to a prior year.
Carryforward / Carryover
Applying a loss, deduction, or credit to a future year.
The accounting method in which all items of income are reported in the year you actually or constructively receive them and you deduct all expenses in the year you actually pay them. Most individual taxpayers use this method.
The damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. A sudden event is one that is swift, not gradual or progressive. An unexpected event is one that is ordinarily unanticipated and unintended. An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. A casualty occurs when property is damaged as a result of a disaster such as a storm, fire, car accident, or similar event.
The act of losing property or experiencing a decrease in the value of property as a result of a casualty. Deductible casualty losses can result from certain car accidents, earthquakes, certain fires, floods, government-ordered demolition or relocation of a home that is unsafe to use because of a disaster, mine cave-ins, shipwrecks, sonic booms, storms (including hurricanes and tornadoes), terrorist attacks, vandalism, and volcanic eruptions.
A donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value in return. A charitable contribution can be either cash or noncash. Noncash contributions may be items such as household goods, furniture, or artwork.
A “child” under the Uniform Definition of a Child is a taxpayer’s: son, daughter, or stepchild; legally adopted child or one lawfully placed with the taxpayer for legal adoption; or eligible foster child placed with the taxpayer by an authorized placement agency or by a judgment, decree, or other order of any court of competent jurisdiction.
Child and Dependent Care Credit
A nonrefundable credit that you may be able to claim for paying for care of your dependent who is under age 13 or for your spouse or dependent who is not able to care for themselves. To qualify, these expenses must be paid so you can work or look for work.
Payments made by one parent to the other who has custody of their child(ren) when the parents are separated. A payment that is specifically designated as child support under a divorce or separation instrument is not alimony. Child support payments are neither deductible by the payer nor taxable to the recipient.
Child Tax Credit
A nonrefundable credit that reduces your tax by as much as $1,000 (for tax-year 2005) for each qualifying child. To take the credit, your modified adjusted gross income must be below a certain amount based on your filing status. If you are unable to claim the full amount of the Child Tax Credit, you may qualify for the Additional Child Tax Credit.
A number of years that establishes the property class and recovery period for most types of property under the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).
Pay received by members of the U.S. Armed Forces and support personnel in combat zones, including peace-keeping efforts. Combat pay received by enlisted personnel, warrant officers, and commissioned warrant officers is exempt from federal income tax. Combat pay received by commissioned officers (other than commissioned warrant officers) is exempt up to the highest rate of enlisted pay (plus imminent danger/hostile fire pay).
Any area the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order.
A fee a broker or agent charges you for facilitating a transaction, such as the buying or selling of securities or real estate.
Common Law Marriage
A marriage in which a man and woman who have lived together for a certain period of time and who hold themselves to be husband and wife are considered to be married even without a license or a formal ceremony. Only certain states recognize common law marriages. When determining your filing status, you are considered married for the whole year if on the last day of your tax year you and your spouse are living together in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began.
Generally, income from: (1) community property; (2) salaries, wages, or pay for services of you, your spouse, or both during your marriage; and (3) real estate that is treated as community property under the laws of the state where the property is located for married taxpayers who are domiciled in one of the following community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.
Property: (1) that you, your spouse, or both acquire during your marriage while you are domiciled in a community property state; (2) that you and your spouse agreed to convert from separate to community property; and (3) that cannot be identified as separate property. If you are married and your permanent home is in a community property state, half of any income described by state law as community income may be considered yours.
Transporting yourself between your home and your main or regular place of work. You cannot deduct commuting expenses regardless of how far your home is from your regular place of work. You cannot deduct commuting expenses even if you work during the commuting trip.
Pay received for your services. Employee compensation can include wages, salaries, tips, and fringe benefits.
You constructively receive income when it is credited to your account or set apart in any way that makes it available to you. You do not need to have physical possession of it. For example, interest credited to your bank account on December 31 is taxable income to you in the year it was credited if you could have withdrawn it in that year (even if the amount is not entered in your passbook or withdrawn until the next year).
A method established under the Modified Accelerated Cost Recovery System (MACRS) to determine the portion of the year to depreciate property. This method is used both in the year the property is placed in service and in the year of disposition.
The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for sales tax, freight, installation and testing, excise taxes, legal and accounting fees (when they must be capitalized), revenue stamps, recording fees, and real estate taxes (if assumed for the seller). In addition, the basis of real estate and business assets may include other items.
Cost of Goods Sold
If your business manufactures products or purchases them for resale, some of your expenses are for the products you sell. You use these expenses to calculate the cost of the goods you sold during the year, as follows: inventory at the beginning of the year plus purchases (reduced by cost of items withdrawn for personal use) plus cost of labor (not including amounts paid to yourself) plus materials and supplies plus other costs, then subtract inventory at the end of the year.
Cost of Keeping Up a Home
Expenses incurred to maintain your household. When determining whether you paid more than half of the cost of keeping up a home for Head of Household filing status, include expenses such as rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home. Do not include expenses such as clothing, education, medical treatment, vacations, life insurance, or transportation. Also, do not include the rental value of a home you own or the value of your services or those of a member of your household.
Coverdell Education Savings Account (ESA)
A trust or custodial account created or organized in the United States for the sole purpose of paying the qualified education expenses of the designated beneficiary of the account (formerly called Education IRA). Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax-free until withdrawn. If, for a year, withdrawals from an account are not more than a designated beneficiary’s qualified education expenses at an eligible educational institution, the beneficiary will not be taxed on the withdrawals.
When parents are separated or divorced, the parent who has custody of the child for the greater part of the year. The custodial parent is generally treated as the parent who provides more than half of the child’s support. It does not matter whether the custodial parent actually provided more than half of the support.