Tax Preparation Test

Net Premium Tax Credit

A refundable credit the taxpayer will receive when the premium tax credit (PTC) is greater than the advanced payment of the premium tax credit (APTC).

Premium Tax Credit (PTC)

A refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Marketplace.

Earned Income Tax Credit (EITC/EIC)

A refundable tax credit for qualified taxpayers based on earned income, adjusted gross income, and the number of qualifying children.

Joint Return

A return combining the income, credits, and deductions of a married couple, resulting in a joint tax liability.

Loss

A loss occurs when the taxpayer's basis exceeds the amount of the sale or exchange of a capital asset.

Standard Deduction for Married Filing Separately (MFS) filing status

$12,400

Standard Deduction for Single (S) filing status

$12,400

Standard Deduction for Head of Household (HOH) filing status

$18,650

Standard Deduction for Married Filing Jointly (MFJ) filing status

$24,800

Standard Deduction for Qualified Widow(er) (QW) filing status

$24,800

Cost

(1) Cash and/or the value of property given to acquire the property received. (2) The purchase price paid for property, or the value at which property is taken into income (as in services paid for with property). Cost is the amount that is most often applied against the amount realized from the sale of property in determining the gain or loss. It is also the figure most often used in determining the depreciation or cost recovery deduction.

Exempt Individuals

(1) Individuals who are not required to maintain qualifying health care coverage for any month because they qualify for an exemption. (2) Nonresident aliens who are temporarily in the United States under certain visas and exempt from counting days towards the substantial presence test.

Common Law Marriage

A marriage established in a state that legally recognizes non-ceremonial marriages. The parties must have the legal capacity and the intent to marry, and they must live together and present themselves publicly as married. See also: Husband and Wife.

Federal Poverty Level (FPL)

A measure of income issued annually by the Department of Health and Human Services used to determine eligibility for certain programs and benefits.

457 Plan

A non-qualified deferred compensation plan available to employees of many government entities and certain tax-exempt non-governmental entities.

Hobby Loss

A nondeductible loss arising from a personal hobby as compared to a loss arising from an activity engaged in for profit.

Standard Deduction

A base amount of income not subject to tax. The regular standard deduction for 2020 is $12,400 for single taxpayers and married persons filing separately; $18,650 for heads of household; and $24,800 for married couples filing a joint return and qualifying widow(er)s. Taxpayers who are blind and/or age 65 or older have higher standard deductions. Taxpayers who may be claimed as dependents on other taxpayers' returns may have reduced standard deductions.

Eligible Foster Child

A child other than the taxpayer's biological child, stepchild, or adopted child, who was placed with the taxpayer by an authorized placement agency or by a court order, decree, or judgment.

Qualifying Child (QC)

A child who meets the relationship, age, residency, support, joint return, and the special tests with regard to a taxpayer to determine the taxpayer's eligibility to claim dependency.

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.

American Opportunity Tax Credit (AOTC)

A credit for qualifying education expenses paid for an eligible student to an eligible educational institution. One restriction is that the expenses must be for the first four years of higher education. The AOTC may be partially refundable.

Foreign Tax Credit (FTC)/ Foreign Tax Deduction

A credit or deduction available to a U.S. citizen or resident alien, and in limited circumstances, to a U.S. nonresident alien, who incurs or pays income taxes to a country other than the United States.

Education Credits

A credit that helps with the cost of higher education by reducing the amount of tax owed. The two education credits available to taxpayers are the American Opportunity Credit (AOTC) and the Lifetime Learning Credit.

Non-Refundable Credit

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

Refundable Credit

A credit which will result in a refund, even for an amount of credit in excess of the taxpayer's tax liability.

401(k) Plan

A deferred compensation plan available through a wide range of employers. Contributions to a 401(k) plan are tax-deferred to the employee (income tax is not charged on the amount of the contribution at the time it is made). Distributions from the plan are taxed as ordinary income to the recipient when received.

403(b) Plan

A deferred compensation plan available to employees of many public educational institutions and tax-exempt organizations. Also known as a tax-sheltered annuity (TSA) plan.

Credits

A direct reduction of tax liability allowed for various purposes to taxpayers who meet the qualifications. Some credits are refundable; the IRS will send the taxpayer a refund for any amount in excess of the tax liability. Some credits are nonrefundable; they can only reduce tax liability to zero. Some credits may be carried to other tax years.

Lineal Ancestor

A direct, in-line family predecessor of the taxpayer; e.g., parent, grandparent, great-grandparent, etc..

Lineal Descendent

A direct, in-line offspring of the taxpayer; e.g., child, grandchild, great-grandchild, etc..

Permanent and Total Disability

A disability that prevents an individual from engaging in any substantial, gainful activity because of a medically determined physical or mental impairment expected to result in death, or that has lasted, or is expected to last, for a continuous period of not less than 12 months.

Annuity

A fixed sum payable to a person at specific intervals for a specific period of time or for life. Payments represent a partial return of capital and a return on the capital investment. Once the cost in the investment has been recovered, all payments are then included in gross income

Non-Taxable Distribution

A general term applied to stock dividend distributions that are not taxable. These distributions generally take the form of return of capital, stock dividends, stock splits, and/or tax-free distributions.

Gift Tax

A graduated federal tax paid by donors on gifts exceeding the annual gift tax exclusion ($15,000 per donee (for 2020) and the lifetime unified credit ($11.58 million per donee for 2020).

Marketplace

A health insurance exchange resource where individuals, families, and small businesses learn about their health coverage options; compare health insurance plans based on costs, benefits, and other important features; choose a plan; and enroll in coverage. In some states, the Marketplace is run by the state, while in others it is run by the federal government.

Lifetime Learning Credit

A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees paid during the year on behalf of the taxpayer, their spouse, or their dependents.

Adoption Credit

A nonrefundable credit for qualified adoption expenses incurred for each eligible child. For 2020, the credit cannot exceed $14,300 per child. The limit is a per-child limit, not an annual limit, and can be carried forward for up to five years or until used.

Child Tax Credit (CTC)

A nonrefundable credit of up to $2,000 per dependent child under age 17 at the end of the tax year with an SSN.

Child and Dependent Care Tax Credit

A nonrefundable tax credit of 20-35% of employment-related child and dependent care expenses for amounts of up to $6,000, available to individuals who are employed and have a qualifying child or disabled spouse or dependent.

Due Diligence Penalty

A penalty that can be assessed against tax preparers who fail to comply with the due diligence requirements of the Earned Income Tax Credit (EITC), Child Tax Credit/Other Dependent Credit (CTC/ODC), Additional Child Tax Credit (ACTC), American Opportunity Credit (AOTC), and head of household (HOH) filing status.

Special Enrollment Period

A period of time, usually 60 days, outside of the yearly Open Enrollment Period when a taxpayer can enroll in health insurance through the Marketplace. Taxpayers generally qualify for a Special Enrollment Period if they have experienced certain life events, such as losing health coverage, getting married, or having a baby.

Qualifying Relative (QR)

A person who bears a certain relationship to the taxpayer for whom the taxpayer provides more than one-half support for the year, whose gross income for the year is less than the exemption amount, and who is not claimed as a qualifying child of any taxpayer.

Decedent

A person who has died.

Non-Resident 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.

Individual Retirement Agreement (IRA)

A personal savings plan that allows a taxpayer to accumulate money tax-deferred until withdrawal, usually upon retirement. The primary two types of IRAs are traditional IRAs and Roth IRAs, both defined elsewhere.

Cafeteria Plan

A plan wherein an employer offers a choice of nontaxable, fringe benefits from which participating employees may select. The plan may be funded with employer contributions, employee contributions (usually through salary reduction agreements), or a combination of both. It is also often called a §125 plan or a flexible spending account (FSA).

Rollover

A qualified transfer of funds from one tax-favored account to another, usually of the same type. A rollover must take place within 60 days of receiving the funds.

Worksheet

A record of compiled information that is generally not sent to the IRS with a tax return.

Additional Child Tax Credit (ACTC)

A refundable credit available to certain taxpayers who get less than the full amount of the Child Tax Credit. The credit is available to taxpayers with earned income exceeding $2,500 or those with three or more qualifying children and whose regular Child Tax Credit exceeds tax liabilities minus other refundable credits. The Additional Child Tax Credit is computed on Form 8812. See also: Child Tax Credit.

Fraudulent Return

A return filed with the intent to evade taxes known to be due by the taxpayer. The taxpayer's conduct was intended to conceal, mislead, or otherwise prevent the collection of taxes. The civil fraud penalty is generally 75% of the entire underpayment.

Frivolous Return

A return that does not contain sufficient information to determine the accuracy of the tax liability, or a return that contains information indicating the amount of tax shown on the return is substantially incorrect. It involves a frivolous position or intent to delay or impede administration of the tax laws. The penalty for filing a frivolous return is $5,000 for each occurrence.

Confidentiality

A set of rules or a promise that limits access or places restrictions on certain types of information.

Conflict of Interest

A situation that has the potential to undermine the impartiality of a person because of the possibility of a clash between the person's self-interest and professional interest or public interest.

Dividend

A stockholder's share of the profits of a corporation. Dividends may be classified as either ordinary or qualified. Ordinary dividends are taxable as ordinary income, while qualified dividends must meet certain requirements and are taxed at lower capital gain rates. For tax purposes, an insurance dividend is not a true dividend, but a return of premium, and dividends from a savings and loan association or credit union are interest, not dividends.

Tax Table

A table provided to help taxpayers with taxable incomes of less than $100,000 figure their tax liability. Separate columns are provided for single taxpayers, married taxpayers filing jointly or qualifying widow(er)s, heads of household, and married taxpayers filing separately.

Unenrolled Tax Preparer

A tax preparer who is not an attorney, CPA, enrolled agent, enrolled retirement plan agent, or enrolled actuary authorized to practice before the IRS.

Health Savings Account (HSA)

A tax-exempt trust or custodial account created exclusively for paying the qualified medical expenses of a high-deductible health plan of the account holder.

Coverdell Education Savings Account (ESA)

A tax-favored savings plan established to pay qualified elementary, secondary, or post-secondary education expenses for the account's designated beneficiary. Contributions can only be made to an account established for a beneficiary under the age of 18 or a special needs beneficiary. The Coverdell ESA is the only tax benefit for education available to elementary and secondary students (excepting savings accounts for individuals with disabilities).

Estate

A taxable entity that is established upon the death of a taxpayer. It consists of all the decedent's property and personal effects. The estate exists until the final distribution of its assets to the heirs and other benefits. During the period of administration, the executor must usually file a return.

Disability Pension

A taxable pension from an employer-funded disability plan or a disability provision of a retirement plan. Until the recipient reaches normal retirement age, a disability pension is treated as wages for purposes of the Child and Dependent Care Credit, Child Tax Credit, and Earned Income Tax Credit.

Social Security Number (SSN)

A taxpayer identification number issued by the Social Security Administration (SSA).

Independent Contractor (IC)

A taxpayer who contracts to do work according to his own methods and who is not subject to control except as to the results of such work. An employee, by contrast, is subject to the control of the employer as to the methods to be used to obtain the desired results.

Active Participant

A taxpayer who is covered by a qualified employer-maintained retirement plan, or a qualified self-employed retirement plan, if even for only one day during the year.

Saver's Tax Credit

A term often used to reference the Retirement Savings Contributions Credit, a nonrefundable credit based on up to $2,000 ($4,000 if married filing jointly) in contributions to employer-sponsored retirement plans and traditional and Roth IRAs. The maximum credit of $1,000 ($2,000 if married filing jointly) is allowed in addition to any deduction available for the contributions. It is computed on Form 8880, Credit for Qualified Retirement Savings Contributions.

Gift

A transfer of property from one person or entity to another for less than full consideration (fair market value). For income tax purposes, the words "gift" and "contribution" usually have separate meanings. Whereas "contribution" is used in connection with contributions to charitable, religious, etc., organizations, the word "gift" refers to transfers of money or property to private individuals, needy persons, friends, relatives, etc. The recipient of a gift is not required to include it in his gross income, and the maker of the gift is not entitled to deduct it (except for business gifts to customers of $25 or less per donee per year).

Roth IRA

A type of individual retirement arrangement in which contributions are not tax deductible, earnings grow tax deferred, and qualified withdrawals are tax free.

Legally Blind

Able to see no better than 20/200 in the better eye with corrective lenses or having a field of vision not more than 20 degrees.

Educator Expense Deduction

Above-the-line deduction of up to $250 for classroom supplies, books, and equipment, available to eligible educators who work at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide in a public or private elementary or secondary school of grades kindergarten through 12th grade.

Deductions

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

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.

Capital Gains Distribution

Amounts paid by mutual funds, regulated investment companies, and real estate investment trusts. These amounts represent the shareholder's portion of gain from the sale of capital assets owned by these investment companies. Capital gain distributions are taxed in the year constructively received and are always considered to be held long-term.

Employee Identification Number (EIN)

An EIN is also known as a federal tax identification number. It is used to identify a business entity. It is also used by estates and trusts, which have income required to be reported on Form 1041, U.S. Income Tax Return for Estates and Trusts.

Flexible Spending Account (FSA)

An FSA allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with an employer. No employment or federal income taxes are withheld from contributions. The employer may also contribute.

Audit

An IRS examination and verification of a taxpayer's return or other transactions with tax consequences. A correspondence audit is a tax audit the IRS performs by mail. An office audit is an audit by the IRS conducted in the agent's office. A field audit is conducted by the IRS on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer.

Individual Tax Identification Number (ITIN)

An ITIN is a tax processing number only available for certain nonresident and resident aliens, their spouses, and dependents who cannot get a social security number (SSN). It is a 9-digit number, beginning with the number "9", formatted like an SSN (NNN-NN-NNNN).

Calendar Year

An accounting period that extends from January 1 to December 31.

Fiscal Year

An accounting year (12 months) ending on the last day of any month except December.

Excess Advance Premium Tax Credit

An additional tax liability the taxpayer owes when the Advance Premium Tax Credit is greater than the Premium Tax Credit.

Moving Expenses

An adjustment to income permitted to members of the U.S. Armed Forces who move because they are on active duty and the move is pursuant to a military order and incident to a permanent change of station, or if they have moving expenses that would qualify as a deduction if they did not get a reimbursement. Form 3903 is used to compute deductible moving expenses for members of the U.S. Armed Forces.

Multiple Support Agreement

An agreement between taxpayers who collectively provide at least 50% of a dependent relative's support. The agreement allows one of the taxpayers to claim the dependent if they provide at least 10% of the support, even though that taxpayer does not provide more than 50% of the support for the otherwise qualifying relative. All the others who furnish at least 10% of the support file written declarations that they will not claim the individual for that taxable year. Form 2120 is used for this purpose.

Interest Received

An amount received for the use of money that is to be repaid in full at a specified time or on demand.

Enrolled Actuary

An enrolled actuary is any individual who has satisfied the qualifications set forth in the regulations of the Joint Board for the Enrollment of Actuaries and who has been approved by the Joint Board to perform actuarial services under the Employee Retirement Income Security Act (ERISA) of 1974.

Enrolled Agent (EA)

An enrolled agent is a person who has earned the privilege of practicing (that is, representing taxpayers) before the Internal Revenue Service. Enrolled agents, like attorneys and certified public accountants (CPAs), are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can practice before.

Traditional IRA

An individual retirement arrangement. Contributions may or may not be deductible depending on the taxpayer's adjusted gross income (AGI) and whether they are covered under an employer-sponsored retirement plan. Earnings within a traditional IRA grow tax deferred. Distributions from a traditional IRA are taxable, except to the extent they represent nondeductible contributions and earnings.

Widow(er)

An individual who has not remarried following the death of their spouse.

Full-time Student

An individual who is enrolled in a school for the number of hours or courses considered by the school to be full-time. School includes elementary and secondary schools, post-secondary colleges, and technical and trade schools. It does not include on-the-job training, correspondence schools, or night school. However, a student will not be disqualified by night classes that are part of a full-time course of study.

Dependent

An individual who may be claimed on another person's income tax return. To be claimed as a dependent, a person must meet the qualifying child or qualifying relative test.

Qualified Health Plan

An insurance plan certified by the Health Insurance Marketplace and provides minimum essential coverage. This includes Bronze, Silver, Gold, and Platinum level plans, but not catastrophic coverage plans.

Mutual Fund

An open-ended investment company that pools money from many investors and invests the funds in stocks, bonds, money market instruments, and other securities. Mutual funds must be registered with the Securities and Exchange Commission (SEC) and are subject to SEC regulation.

Eligible Educator

Any educator who works at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide in a public or private elementary or secondary school of grades kindergarten through 12th grade.

Non-Signing Return Preparer

Any tax return preparer who is not a signing tax return preparer, but who prepares all or a substantial portion of a return or claim for refund with respect to events that have occurred at the time the advice is rendered.

Inheritance

As distinguished from a bequest, property acquired through laws of descent and distribution from a person who dies intestate (without leaving a will). Property so acquired usually takes as its basis the fair market value at the date of the decedent's death. An inheritance of property is generally not a taxable event, but the income produced by an inherited asset is taxable.

Itemized Deductions

Certain personal expenditures allowed to be deducted from adjusted gross income by the Tax Code. Examples include certain medical expenses, qualified interest on home mortgages, and charitable contributions. Itemized deductions are reported on Form 1040, Schedule A. A taxpayer who itemizes deductions may not claim the standard deduction.

Fringe Benefits

Compensation or other benefits received by an employee that are not in the form of cash. Some fringe benefits, such as accident and health plans, and group-term life insurance, may be excluded from the employee's gross income, and therefore are not subject to federal income tax.

Pension

Defined periodic payments made over a specified period (usually life) from an employer-maintained plan to workers who have met the stated requirements. The primary purpose of a pension is to provide retirement income.

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.

Cost of Maintaining a Home

Expenses necessary to maintain a taxpayer's residence. These costs include mortgage interest and real estate taxes (or rent), fire and casualty insurance on the dwelling, upkeep and repairs, utilities, paid domestic help, and food consumed in the home.

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.

Noncompliance

Failure or refusal to comply with the Tax Code.

Scholarships and Fellowships

Financial aid grants awarded to students for the purpose of attending a college or performing research.

Expenses

For federal income tax purposes, expenses are divided into four categories: (1) trade or business expenses, (2) expenses in connection with production of income, management, conservation, or maintenance of property that is held for production of income, (3) expenses in connection with the determination, collection, or refund of any tax, and (4) personal, family, or living expenses. Expenses in the first three categories are generally deductible in determining taxable income. Expenses in the fourth category are not deductible, except in a few cases (medical expenses, charitable contributions, etc.) in which they are specifically allowed by law.

Modified Adjusted Gross Income (MAGI)

For purposes of computing a specific deduction or credit, MAGI begins with the taxpayer's regular adjusted gross income, which is then modified to account for certain types of losses, exclusions, and deductions. For example, for many tax purposes, MAGI is regular adjusted gross income (AGI) plus any excluded foreign, U.S. possession, and Puerto Rico source income.

MAGI for PTC Purposes

For purposes of the Premium Tax Credit, MAGI is the adjusted gross income plus foreign earned income, tax-exempt interest, and social security benefits not included in income.

Special Needs Child

For the adoption credit, a child determined by the state to be difficult to adopt due to factors such as racial or ethnic background, age, a condition that requires special care, or whether the child has siblings. A special needs child must be a U.S. citizen.

Gross Profit

Gross receipts less the cost of goods sold.

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.

Limitation on Premium Tax Credit Repayment

If the advanced premium tax credit is greater than the premium tax credit, the taxpayer's additional tax liability may be limited. The limit is based on filing status and household income as a percentage of the federal poverty line.

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.

Non-Taxable Income

Income that is exempt from tax by law.

Investment Income

Income that is generally derived from interest, dividends, capital gains, and other types of distributions, including mutual fund distributions.

Investment Interest

Interest paid on loans acquired to purchase or hold investment property. Investment interest is deductible as an itemized deduction to the extent of net investment income. It is reported on Schedule A, line 9.

Group Term Life Insurance

Life insurance coverage purchased by an employer for a group of employees. Such insurance is renewable on a year-to-year basis and does not accumulate in value; that is, no cash surrender value is built up. The premiums paid by the employer on such insurance are usually not taxed to an employee unless coverage exceeds $50,000.

Distribution

Money or property a taxpayer receives from a retirement plan, such as an individual retirement arrangement (IRA) or an employer-maintained retirement plan.

Charitable Contributions

Money or property donated to a qualified charitable organization. Beginning for tax year 2020, cash-only contributions up to $300 ($150 MFS) are deductible on form 1040. Cash contributions greater than $300 ($150 MFS), and all other types of contributions, are only deductible on Schedule A as an itemized deduction. A taxpayer can either take the above-the-line deduction or itemize deductions, not both.

Schedules

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

Ordinary Dividends

Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Ordinary dividends are taxable as ordinary income unless they are qualified dividends.

Combat Pay

Pay received by a servicemember assigned to a combat zone and exempted from taxable income.

Community Property

Property considered to belong in equal shares to a husband and wife. This concept of ownership for property acquired after marriage is followed in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, TEXAS, Washington, and Wisconsin.

Due Diligence

Reasonable steps taken by a tax preparer to satisfy compliance with the tax law and ensure that a tax return is correct.

Legally Seperated

Separated under a decree of separate maintenance that requires the spouses to live apart.

Coronavirus Aid, Relief, and Economic Security Act (CARES)

Signed into law on March 27, 2020 as H.R.748. The CARES Act is a response to the coronavirus (COVID-19) public health crisis. In addition to stimulus checks for individuals and employer credits, the CARES Act includes other individual and business provisions, appropriations for health care, unemployment compensation, small business loans, and more.

Entertainment Expenses

Such expenses are deductible by self-employed taxpayers only if the expenses are directly related to or associated with a trade, business, or profession. To prevent abuses, various restrictions and documentation requirements have been imposed on the deductibility of entertainment expenses. The deduction for qualified business entertainment is limited to 50% of cost. The entertainment expense deduction for employees was eliminated by the Tax Cuts and Jobs Act of 2017 for Tax Years 2018-2025. However, due to the Consolidated Appropriations Act of (2021), the 100% business meal deduction is back for years 2021 and 2022.

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.

Credit for Other Dependents (ODC)

The ODC is a nonrefundable credit up to $500 for each qualifying person. The qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien. Dependents who do not qualify to be claimed for the Child Tax Credit may still qualify for the Credit for Other Dependents (ODC).

Full Retirement Age

The age at which a worker qualifies to receive full social security benefits. For those who turned 62 in 2020, the full retirement age is 66 and eight months. In other words, the current full retirement age is 65 for taxpayers born in 1937 or earlier, but gradually rises to 67 for those born in 1960 or later. If the taxpayer turns 62 in 2020, their full retirement age is 66 and eight months.

Fair Market Value (FMV)

The amount at which property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.

Estimated Tax

The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts withheld and certain refundable credits.

Fair Rental Value

The amount the owner of property could reasonably expect to receive from a stranger for the same type of lodging; generally, the amount at which a home with similar furnishings could be rented for a similar size family in a similar location.

State or Local Tax Withheld

The amounts taken out of income by the payer and submitted to the state or local taxing authority as an advance payment of the taxpayer's state or local income tax.

Ethics

The application of values to behavior.

Taxable Year

The calendar year or fiscal year the taxable income is computed.

Internal Revenue Service (IRS)

The division of the U.S. Treasury Department responsible for collecting taxes and enforcing tax law.

Education Expense Deduction

The education expense deduction was eliminated by the Tax Cuts and Jobs Act of 2017 for Tax Years 2018-2025. It has been extended for qualified tuition and fees paid in calendar years 2018, 2019, and 2020. After 2020, tuition and fees will no longer be allowed unless the deduction is extended again. Expenses that employees may deduct as an itemized deduction, if the expenses are incurred either to maintain or improve existing job-related skills, or to meet the express requirements of the employer, or legal requirements to retain current employment status. Such expenses are not deductible as an itemized deduction if the education is required to meet the minimum educational requirements for the taxpayer's job, or if the education qualifies the taxpayer for a new trade or business. Education expenses may also qualify the taxpayer for an American Opportunity Tax Credit, or a lifetime learning credit.

Social Security Tax Withheld

The employee's share of social security tax that was taken out of the employee's pay and submitted along with the employer's share to the IRS by the employer. The employee pays 6.2% and the employer pays 6.2% of the first $137,700 of the employee's gross wages (for 2020).

Gain

The excess of the amount realized from a sale or exchange over the adjusted basis of the property sold or exchanged.

Department of Health and Human Services (DHHS/HHS)

The federal agency that oversees the Centers for Medicare and Medicaid Services (CMS). CMS administers programs for protecting the health of all Americans

Qualifying Widow(er) (QW)

The filing status available to a qualified taxpayer for two tax years following the year of the spouse's death. To qualify, the surviving spouse must have been entitled to file a joint return for the year of death, remain unmarried at the end of the current tax year, and pay over half the cost of maintaining their home, which was the principal residence the entire tax year of their dependent child.

Married Filing Separately (MFS)

The filing status used by a married couple choosing to record their respective incomes and deductions on separate individual tax returns.

Married Filing Jointly (MFJ)

The filing status used by a taxpayer who is considered married at the end of the tax year and not legally separated under a final decree of divorce or separate maintenance agreement. As a result of filing MFJ, the taxpayer(s) record total income and deductions of both spouses on one tax return.

Head of Household (HOH)

The filing status used by an unmarried (or married, but qualified to be unmarried for tax purposes) taxpayer who pays more than half of the cost of maintaining a household for a qualifying child who is a dependent for more than six months, or for their mother or father for the entire year, and may claim either on their tax return.

Bronze/Silver/Gold/Platinum Plans

The four levels of qualified health plans offered by health insurance marketplaces, based on the value of the coverage provided.

Capital Gain

The gains from the sales or exchanges of capital assets.

Federal Insurance Contributions Act (FICA)

The law that provides for social security and medicare benefits. This program is financed by payroll taxes imposed equally on the employer and employee. For 2020, the employer is required to withhold 1.45% from each employee's gross wages for medicare tax and 6.2% of each employee's wages up to $137,700 for social security tax.

Capital Loss

The loss from the sale or exchange of a capital asset. If capital losses exceed capital gains, the excess can be deducted on a taxpayer's return and used to reduce other income up to a limit. Up to $3,000 ($1,500 if MFS) of net capital loss is deductible annually with the excess carried forward to future years. Losses on personal-use assets are not deductible.

Tax Family

The number of individuals reported on the taxpayer's return. This includes the taxpayer, spouse (if married filing jointly), and any qualifying children or qualifying relatives.

Beneficiary

The owner or recipient of funds in an account, such as an IRA, or from an insurance policy or will.

Non-Custodial Parent

The parent who is not the custodial parent of the child.

Custodial Parent

The parent with whom a child lived for the greater number of nights during the year. A custodial parent for tax purposes may differ from a custodial parent identified in a divorce decree, based on circumstances.

Open Enrollment Period

The period during which the taxpayer is authorized to enroll in health insurance through the Marketplace/Exchange. Outside the Open Enrollment Period, a taxpayer can generally enroll in a health insurance plan only if they qualify for a Special Enrollment Period.

Depletion

The process by which the cost or other basis of a natural resource (for example, an oil and gas interest) is recovered upon extraction and sale of the resource. The two ways to determine the depletion allowance are the cost and percentage methods, both of which are defined elsewhere in this glossary.

Knowledge Requirement

The requirement that a tax return preparer must not know, or have reason to know, that any information used in determining a taxpayer's eligibility for, or the amount of, the Child Tax Credit (CTC), Other Dependent Credit (ODC), Additional Child Tax Credit (ACTC), Earned Income Tax Credit (EITC), American Opportunity Tax Credit (AOTC), or head of household (HOH) filing status is incorrect.

Non-Participating Spouse

The spouse of an active participant in an employer-maintained retirement plan who is not also an active participant in such a plan.

Medicare Tax

The tax taken out of an employee's wages, or the same tax paid by a self-employed person on net self-employment income. The payment of this tax contributes to the taxpayer's medicare coverage under the U.S. social security system. The current tax rate is 1.45% of gross wages (2.9% for self-employed individuals). An additional medicare tax may apply if the taxpayer's wages and compensation exceed a threshold amount.

Support

The total amount provided on behalf of an individual. Support includes food, lodging, and other necessities, as well as recreation and other nonessential expenditures. Support is not limited to necessities and can be as lavish as the taxpayer can afford.

Tuition and Fees Deduction

The tuition and fees deduction has been extended for tax years 2018 through 2020. An above-the-line deduction of up to $4,000 per tax return is allowed for qualified tuition and course-related expenses. The amount of the deduction is figured on Form 8917.

Gross Income

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