TaxTerminology.com has been created to provide everyone with easy to understand tax terminilogy definitions. This is a glosary of legal tax terms that are commonly used by the Internal Revenue Service of the United States
of America. We welcome all US citizens and people from around the world to learn and understand these terms.
We will be updating this site with the goal of eventually becoming the largest source of tax and legal terminology online.
1040 Form
The standard Internal Revenue Service (IRS) form that people use to file their annual income tax returns. The form contains sections that require taxpayers to disclose their financial income status for the year to be able to ascertain whether extra taxes are owed or whether the taxpayer is due for a tax refund. 1040 forms need to be filed with the IRS by April 15 of each year.
501(c)
A subsection under the United States Internal Revenue Code. The subsection relates to non-profit organizations and tax law and identifies which non-profit organizations are exempt from paying federal income tax
90-Day Letter
An IRS notice sent after an audit stating that there was a discrepancy or mistake within a persons taxes and they will be assessed unless petitioned.
Abatement
In general, a decrease in the amount of taxes paid by an individual person or company.
Abusive Tax Shelter
An investment scheme that claims to decrease income tax without changing the value of the user's income or assets. Abusive tax shelters have no economic purpose other than lowering the federal or state tax owed when filing. Often, these schemes channel funds through trusts or partnerships to avoid taxation.
Accelerated Cost Recovery System - ACRS
A depreciation system introduced by the Economic Recovery Tax Act of 1981. ACRS depreciation is based on recovery periods instead of useful life. These periods are predetermined by the IRS.
Accumulated Earnings Tax
A tax imposed by the federal government on companies with retained earnings deemed to be unreasonable and in excess of what is considered ordinary.
Ad Valorem Tax
A tax based on the assessed value of real estate or personal property. Ad valorem taxes can be property tax or even duty on imported items. Property ad valorem taxes are the major source of income for state and municipal governments.
Alternative Minimum Tax - AMT
A tax calculation that adds certain tax preference items back into adjusted gross income. If AMT is higher than the regular tax liability for the year, the regular tax and the amount by which the AMT exceeds the regular tax are paid.
Amended Return
A return filed in order to make corrections to a tax return from a previous year. It can be used to correct errors and claim a more advantageous filing.
Applicable Federal Rate - AFR
The interest rate published by the U.S. Treasury to calculate imputed interest charges.
Assessed Value
A dollar value assigned to property for purposes of assessing taxes.
At Risk Rules
Tax laws limiting the amount of losses an investor (usually a limited partner) can claim. Only the amount actually at risk can be deducted.
Attribution Rules
A set of rules created by Canada Revenue Agency (CRA) that prevents investors from transferring assets between family members with the intention of avoiding taxes.
Average-Cost Method
A costing method by which the value of a pool of assets or expenses is assumed to be equal to the average cost of the assets or expenses in the pool.
Away From Home
The IRS criteria used to establish whether or not a person is within commuting distance from home.
Backdating
Dating any document by a date earlier than the one on which the document was originally drawn up. Under most circumstances, backdating is viewed as fraudulent and illegal, although there are some situations in which backdating can be used in a legal and beneficial way, such as backdating a claim for a past period.
Backup Withholding
Tax that is levied on investment income, at an established tax rate, as the investor withdraws it. Backup withholding helps to ensure that government tax-collecting agencies (such as the IRS or Canada Revenue Agency) will be able to receive income taxes owed to them from investors' earnings. Backup withholding may be applied when an investor has not met rules regarding taxpayer identification numbers (TIN). At the time the investor withdraws his or her investment income, the amount mandated by the backup withholding tax is remitted to the government, providing the tax-collecting body with the required funds immediately, but leaving the investor with less short-term cash flow.
Capital Gains Tax
A type of tax levied on capital gains incurred by individuals and corporations. Capital gains are the earnings that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price.
Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold.
Capital Loss
The loss incurred when a capital asset (investment or real estate) decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.
Taxable Spinoff
A divestiture of a subsidiary or division by a publicly traded company, which will be subject to capital gains taxation. The subsidiary will become completely independent from the parent corporation, operating entirely on its own. To qualify as a taxable transaction, the parent corporation must divest through direct sale of the division, or the assets it contains. The profits made from the sale will be taxed as capital gains.
Taxation Without Representation
A situation in which a government imposes taxes on a particular group of its citizens, despite the citizens not consenting or having an actual representative deliver their views when the taxation decision was made. This situation was one of the triggering events that triggered the original thirteen American colonies to revolt against the British Empire.
Terminal Year
For income tax and estate planning, this refers to the year in which a person has died.
Terminally Ill
When a person is not expected to live more than 12 months.
Unrelated Business Taxable Income - UBTI
Income regularly generated by a tax-exempt entity by means of taxable activities. This income is not related to the main function of the entity, but is needed to generate a small portion of income.
Unstated Interest Paid
An assumption by the IRS that interest on a loan has been paid if the stated interest rate is below a minimum.
Useful Life
The number of years, as set by the IRS, that depreciable business equipment or property is expected to be in use.
Value-Added Tax - VAT
A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. Value-added tax is most often used in the European Union. The amount of VAT that the user pays is the cost of the product less any of the costs of materials used in the product that have already been taxed.
Vertical Equity
A method of collecting income tax in which the taxes paid increase with the amount of earned income. The driving principle behind vertical equity is the notion that those who are more able to pay taxes should contribute more than those who are not.
Voluntary Compliance
An assumption or principle that taxpayers will comply with tax laws and, more importantly, accurately report their income and deductions honestly.
Withholding Tax
1. Income tax withheld from employees' wages and paid directly to the government by the employer.
2. A tax levied on income (interest and dividends) from securities owned by a non-resident.
Write-Off
A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues.
Yield Tilt Index Fund
A type of mutual fund that allocates capital as a standard index, by replicating the holdings of a specified stock index, such as the Standard & Poor's 500 Index (S&P 500), except that the fund weights its holdings towards stocks that offer higher dividend yields. Stocks with higher dividend yields are given a greater portfolio weighting, making them represent more of the fund's portfolio than they otherwise would in the standard index.