Chapter 1

Statements

Explanations of various types of income, deductions, and/or credits reported on a schedule or directly on Form 1040. Statements may or may not be official IRS forms.

Medicare Part A

Medicare insurance for qualifying individuals who are age 65 or older or disabled. Medicare Part A covers hospital expenses, care in a skilled nursing facility, hospice care, and some health care. Most participants do not pay a monthly premium for this coverage if they or their spouse paid medicare taxes while working.

Earned Income

Income from personal services as distinguished from income generated by property or other sources. Earned income includes all amounts received as wages, tips, bonuses, other employee compensation, and self-employment income, whether in the form of money, services, or property.

Social Security

___ ___ benefits may be included in taxable income. Benefits are included in the taxable income (to the extent they are taxable) of the person who has the legal right to receive the benefits. You will learn more about social security benefits when you read about retirement distributions.

Earned

___ income is received for services performed. Some examples are wages, commissions, tips, and generally farming and other business income.

Unearned

___ income is taxable income that does not meet the definition of earned income. It includes money received for the investment of money or other property, such as interest, dividends, rents, and royalties. It also includes pensions, alimony, unemployment compensation, social security benefits, and other income that is not from performing services.

Deductions

Amounts that may be subtracted from income that is otherwise taxable.

W-7

An ITIN can be obtained by applying to the IRS with Form ___-___, Application for IRS Individual Taxpayer Identification Number.

W-2

A Form ___ is provided to each employee who received payment during the tax year for services performed for an employer.

Resident Alien

A citizen of another country who lives in the United States and/or has resident status by law or visa or passes the substantial presence test. For tax purposes, a resident alien is generally under the same rules as a U.S. citizen. See IRS Publication 519, U.S. Tax Guide for Aliens, for more information.

Nonrefundable Credit

A credit which cannot exceed the taxpayer's tax liability.

Nonresident Alien

A person who is not a U.S. citizen and does not live in the United States or lives in the United States under a nonresident visa or does not meet the substantial presence test. A nonresident alien return is filed on Form 1040NR. See IRS Publication 519.

Adjusted gross income (AGI)

Adjusted gross income equals gross income less reductions that are allowable, regardless of whether personal deductions are itemized.

Taxable Income

Adjusted gross income, less itemized deductions or the standard deduction, less the qualified business income deduction, if applicable. This term is also used to refer to income that is not exempt or excluded from taxation. For example, wages are taxable income, but gifts are not.

taxable, deductible

As a result of the Tax Cuts and Jobs Act, for divorces initiated or modified after 2018, alimony will be neither ___ to the spouse receiving it, nor ___ by the spouse paying it, and it is not included in gross income.

not taxable, premises, convenience

Bess Rymon and her coworkers worked late into the evening to fill a rush order for their employer. Because the workers were missing dinner, the boss sent out for pizza, which he gave to the workers to eat. The value of the pizza is ___ ___ to Bess, because the meal was consumed on the employer's ___ and was provided for the employer's ___.

W-2, January 31

Every employee should receive a Form ___, Wage and Tax Statement, from their employer by ___ ___ each year, giving the employee plenty of time to file.

nontaxable

Fringe Benefits Many fringe benefits and other employment related payments are considered nontaxable. These may include: Disability and medical insurance premiums paid by an employer. Company car. An employer provided a vehicle exclusively for business purposes, not personal use or commuting. De minimis (meaning too trivial to be considered, especially with regard to legal matters) personal use may also be nontaxable. An example would be doing a quick personal errand en route to an appointment. Purchase discounts. To be excludable, the property or service must be offered to the public in the ordinary course of business. Certain limitations to the amount of the discount apply. No-additional-cost-to-employer services, such as: Free travel for airline employees. Hotel rooms for hotel employees. Use of facilities by spa or hotel employees. Transportation. Provided on an occasional basis. Only provided to allow for overtime work. Occasional coffee, donuts, office party, etc.

income

Generally speaking, ___ is financial gain derived from labor (work), capital (money), or a combination of the two.

worldwide, source, excluded

Gross income means all ___ income from whatever ___ derived, unless specifically source from taxation by law.

Excess Social Security Tax Withheld

If a taxpayer worked for more than one employer during 2020, and more than $8,537.40 was withheld for social security tax, the excess over the maximum is included in the Payments section of the return. The excess amount has the same character as withholding tax.

insured, gifts, bonds, personal, clergy, federal, discharge, 50000, after

Items Specifically Excluded From Gross Income Life insurance payments, if paid by reason of the death of the ___ ___ and inheritances Interest on state and local ___ Compensation for ___ injuries Qualified ___ housing allowances>> ___ income tax refunds Qualified scholarships and fellowships Meals or lodging furnished for the convenience of the employer Certain foster care payments Disaster relief payments Certain income from the ___ of indebtedness>> Usually, the cost of up to $___ of group-term life insurance provided by the employer Worker's compensation paid under a worker's compensation act>> Alimony and separate maintenance payments executed or modified ___ 2018

income, adjustments, gross, standard, itemized, QBI, taxable, additional, non, total, withholdings, refundable, refund, due

Layout of a Federal Tax Return Income + Additional ___ - ___ to Income = Adjusted ___ Income (AGI) - ___ Deduction or ___ Deductions -___ Deduction = ___ Income Tax +___ Tax -Non Refundable Credits + Other Taxes = ___Tax - ___ - ___ Credits =Total Payments Total Payments more than Total Tax = ___ Total Tax more than Total Payments = Balance ___

services, business, property, 2019, life, decedent, estate

Most Common Items Included in Gross Income Compensation for ___, including fees, commissions, and certain fringe benefits Net income derived from ___ Gains derived from dealings in ___ Interest Rents Royalties Dividends Alimony and separate maintenance payments executed before ___ Income from ___insurance and endowment contracts Pensions Certain income from the discharge of indebtedness Distributive share of partnership gross income Income in respect of a ___ Income from an interest in an ___ or trust

Schedules

Official IRS forms used to report various types of income, deductions, and/or credits.

Unearned Income

Taxable income other than that received for services performed (earned income). Unearned income includes money received for the investment of money or other property, such as interest, dividends, and royalties. It also includes pensions, alimony, unemployment compensation, and other income that is not earned.

services, gross

The Internal Revenue Service (IRS) states that wages received by an employee for performing ___ for an employer must be included in ___ income (defined later in this chapter).

Tax Liability

The amount of total tax due to the IRS after any credits and before taking into account any advance payments (withholding, estimated payments, etc.) made by the taxpayer.

Federal Income Tax Withheld

The amount taken out of income by the payer and submitted to the IRS as an advance payment of the taxpayer's federal income tax.

six

The complete Form W-2 consists of ___ copies

Income

The word "income," in its broad sense, is the money derived from capital, labor, or a combination of the two. It is distinguishable from the capital itself. Ordinarily, for income tax purposes, the word "income'' is not used alone. Rather it is used within such descriptive terms as gross income, taxable income, and adjusted gross income, all of which are defined elsewhere in this glossary.

Social Security Wages

Total wages paid to an employee that are subject to this tax. This amount does not include tips. Wages are also subject to medicare tax.

Gross Income

Total worldwide income received in the form of money, property, or services that is subject to tax

Gross Income

Total worldwide income received in the form of money, property, or services that is subject to tax.

exempt

Unless specifically ___ or excluded by law, all income is subject to income tax and is reported on a tax return.