| Term |
Definition |
| Accelerated Cost
Recovery System (ACRS) |
The system of
depreciation that came into effect in 1981,
replacing traditional methods of depreciation
based on useful life. Under ACRS, costs of
qualified property are written off over
predetermined periods. The minimum number of
years and the applicable percent of cost that may
be deducted each year depends on the class of the
property. The Tax Reform Act of 1986 contained
several changes to the ACRS rules. The changes
are generally effective for property placed in
service after December 31, 1986. See Modified
Accelerated Cost Recovery System. |
| Accelerated
Depreciation |
Various methods of
depreciation that yield larger deductions in the
earlier years of the life of an asset than does
the straight-line method. The double (or 200
percent) declining balance method is an example
of an accelerated depreciation method. |
| Accident and Health
Benefits |
Employee fringe benefits
provided by employers through the payment of
health and accident insurance premiums or the
establishment of employer-funded medical
reimbursement plans. Employers generally are
entitled to a deduction for such payments. Employ
ees generally exclude the benefits from gross
income. |
| Accountable Plan |
A plan for reimbursing
employees for expenses such as meals,
entertainment, travel, and transportation
incurred for business purposes on behalf of the
employer. A plan is an accountable plan if the
employer requires the employee to account for all
business expenses and to return any excess
reimbursements. For employees under an
accountable plan, reimbursements aren't entered
on the tax return as income and the expenses
aren't deductible. |
| Accounting Method |
The method under which
income and expenses are determined for tax
purposes. Major accounting methods are the cash
method and the accrual method. |
| Accounting Period |
The 12-month period that
a taxpayer uses to determine federal income tax
liability. Unless a taxpayer makes a specific
choice to the contrary, his accounting period is
the calendar year. |
| Accrual Method of
Accounting |
One of the two most
common methods of accounting, the other being the
cash method. Under the accrual method of
accounting, income is reported in the tax year
earned, whether or not received, and deductions
are claimed in the tax year incurred, whether or
not paid. |
| Accrued Interest |
Interest that has been
earned but not yet paid or credited; for example,
interest earned on a bond since the last interest
payment was made. |
| Acquisition Debt |
Debt incurred to
acquire, construct, or improve the taxpayer's
principal or secondary residence. |
| Active Income |
For purposes of the
passive loss rules, income must be divided into
three categories: active income, passive income,
and portfolio income. Active income is income for
which the taxpayer performs services. Examples
are wages, salaries, tips, bonuses, a nd business
and partnership income in which the taxpayer
materially participates in the business or
partnership. See Passive Income and Portfolio
Income. |
| Active Participant |
A taxpayer who is
covered by an employer-maintained qualified
retirement plan, or a qualified self-employed
retirement plan, if even for only one day during
the year. |
| Actual Expenses (Regular
Method) |
The method of deducting
automobile expenses based on actual costs
incurred. |
| Additional Child Tax
Credit |
A refundable credit
available to taxpayers with three or more
children qualifying for the child tax credit and
whose regular child tax credit exceeds tax
liability minus other nonrefundable credits. The
additional child tax credit is computed on Form
8812. See also Child Tax Credit. |
| Adjusted Basis |
The cost or other
original basis of property reduced by adjustments
such as depreciation allowed or allowable and
increased by capital improvements and other
adjustments. |
| Adjusted Gross Income
(AGI) |
Adjusted gross income
equals gross income less reductions that are
allowable regardless of whether personal
deductions are itemized. On the 1999 tax forms,
AGI is entered on line 4 Form 1040EZ, line 18,
Form 1040A, and line 33, Form 1040. |
| Adjustment to Income |
An expense that may be
deducted even if the taxpayer does not itemize
deductions. Adjustments to income are subtracted
from gross income to arrive at adjusted gross
income. |
| Adoption
Credit |
A nonrefundable credit
for qualified adoption expenses incurred for each
eligible child. The credit cannot exceed $5,000
per child, or $6,000 per special-needs child. The
limit is a per-child limit, not an annual limit,
and can be carried forward for five years or
until used. |
| Advance Earned Income
Credit |
Payment by an employer
based on an employee's claim to entitlement to
the earned income credit. Advance earned income
credit payments are treated as additional taxes
on the tax return. |
| Advance Payments |
Prepayments for services
or goods that generally are includable in gross
income upon receipt for both accrual- and cash-basis
taxpayers. |
| Alimony Payments |
Payments made by one
spouse to the other spouse or former spouse under
a separation or divorce agreement. Qualified
alimony and separate maintenance payments are
includable in the gross income of the recipient
and are deductible by the payer. Child support
payments, voluntary payments, and property
settlements are not treated as alimony. |
| Alternate (Straight-Line)
ACRS Method (Accelerated Cost Recovery System) |
Under this method, the
ACRS deduction is computed using a straight-line
percent and, in some cases, an optional longer
recovery period. |
| Alternative Minimum
Tax (AMT) |
The alternative minimum
tax is designed to prevent taxpayers from
escaping a fair share of tax liability by use of
certain tax breaks. A taxpayer is subject to this
tax if he or she has certain minimum tax
adjustments or tax preference items and his or
her alternative minimum taxable income exceeds
the exemption allowed for his or her filing
status and income level. The alternative minimum
tax is computed on Form 6251. |
| Alternative Straight-Line
Depreciation System |
A MACRS (Modified
Accelerated Cost Recovery System) system of
depreciation using the straight-line method over
an alternative (usually longer) recovery period. |
| Amended Return |
A tax return filed on
Form 1040X after the original return has been
filed. An amended return is used to correct
errors or to claim more advantageous ways of
filing the original return. An amended return can
also be used to carry back certain unused cr
edits or a net operating loss. |
| Amortization |
The deduction of certain
capital expenses over a fixed period of time.
Amortization is claimed on Form 4562. Amortizable
expenses include business start-up expenses,
qualified forestation or reforestation costs,
goodwill, going-concern value, covenants not to
compete, franchises, trademarks, trade names, and
section 197 costs. |
| Amount Realized |
The amount received by a
taxpayer on the sale or exchange of property. The
amount received is the sum of the cash and the
fair market value of any property or services
plus any of the seller's liabilities assumed by
the purchaser. Determining the amount realized is
the starting point for arriving at realized gain
or loss. |
| Annualized Income |
The actual income and
expenditures for a particular period multiplied
by the ratio of the number of months in the
period to 12 months. |
| Annuitant |
A person who receives a
pension or an annuity. |
| Annuity |
A fixed sum payable to a
person at specified intervals for a specific
period of time or for life. Payments represent a
partial return of capital and a return on the
capital investment. Therefore, an exclusion ratio
must generally be used to compute th e taxable
and nontaxable amounts. |
| Annuity Starting Date |
The first day of the
first period for which an amount is due as an
annuity payment under an annuity contract. |
| Anti-Churning Rules |
Regulations designed to
prevent taxpayers from bringing their pre-1981
property under the liberalized cost recovery
rules of ACRS (Accelerated Cost Recovery System)
instituted in 1981. Additional anti-churning
rules cover the transition from ACRS to MACRS (Modified
Accelerated Cost Recovery System). |
| Asset |
An item of useful or
valuable property. |
| At-Risk Rules |
Special rules limiting
the taxpayer's deductible business, partnership,
S corporation, or real estate loss to cash
invested plus debt he or she is legally obligated
to pay and the adjusted basis of any property
contributed. |
| Audit |
An IRS examination and
verification of a taxpayer's return or other
transactions with tax consequences. An office
audit is an audit by the IRS that is 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. |
| Automobile Expenses |
Automobile expenses are
generally deductible to the extent the automobile
is used in business or for the production of
income. Personal commuting expenses are not
deductible. The taxpayer may deduct actual
expenses (including depreciation and insurance)
or the standard (optional) mileage rate may be
used during any one year. For 1999, the standard
business mileage rate was 32.5 cents per mile
from January 1 through March 31, and 31 cents per
mile for the remainder of the year. The standard
business mileage rate for 2000 is 32.5 cents per
mile. Automobile expenses incurred for charitable
activities, medical purposes, and in connection
with job-related moving expenses are deductible
to the extent of actual out-of-pocket expenses
for gas and oil or at the rate of 14 cents per
mile for charitable activities, and 10 cents per
mile for medical purposes and job-related moving
expenses. |
| Away From Home
Overnight |
For purposes of
deducting travel expenses, a trip away from one's
tax home for a period longer than an ordinary
work day, during which time one is released from
duty to obtain rest. |
