Tax Glossary

The process of electronically filing a federal income tax return with the IRS.

An amount distributed from the individual's pension, annuity, or traditional IRA account before they reach age 59 1/2.

Income received for services, such as wages, salaries, tips, net earnings from self-employment, and professional fees, and any other income received as pay for work actually performed. Earned income also includes taxable scholarship and fellowship grants.

A refundable credit for certain individuals who work and have earned income under a certain amount based on their filing status and the number of qualifying children, if any.

A term referring to the economic capacity of a corporation to make a distribution to shareholders that is not a return of capital. Such a distribution would constitute a taxable dividend to the shareholder to the extent of current and accumulated earnings and profit

Sales revenue less cost of sales, operating expenses, and interest, before taxes have been paid.

Practice of reducing the taxable income of a corporation by paying excessive amounts of interest to related third parties.

A legal right to use someone else's land for a particular purpose, such as for utilities, for a right-of-way, or for recreational purposes. Ownership is not transferred.

A program that allows a taxpayer who paid qualified higher educational expenses during the year to exclude from income all or part of the interest they receive during the same year from redeeming Series EE savings bonds and Series I savings bonds issued after 1989.

The rate at which a taxpayer would be taxed if his tax liability were taxed at a constant rate rather than progressively. This rate is computed by determining what percentage the taxpayer’s tax liability is of his total taxable income.

Non-resident alien individuals and foreign corporations engaged in trade or business within the US are subject to US income tax on income, from sources both within and outside the US, which is "effectively connected" with the conduct of the trade or business within the US. Income is effectively connected if it is derived from assets which are used in or held for use in the US, and the activities of the US business were a material factor in the realization of the income.

The voluntary contribution an employer deducts from an employee's pay that is not subject to tax. Also called deferred compensation or pre-tax contributions.

Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. These institutions include nearly all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

An individual who is placed by an authorized placement agency, or by judgment, decree, or other order of any competent jurisdiction.

An individual who is hired to work for a person, an organization, or a company in return for compensation and who is subject to the will and control of the employer regarding what work is done and how and when to do it.

The system under which the employees of an enterprise are entitled by employment contract or by law to a share of the profits made by the enterprise.

An opportunity for employees to purchase stock (shares) in the company they work for, often at a discount on the market value. It is provided as an incentive to stay with the employer until the options vest.

The individual, organization, or company for which an employee works.

A nine-digit number assigned by the IRS to an employer for tax filing and reporting purposes.

The income of a professional entertainer, e.g., a musician, actor or other artiste, or athlete is treated differently from the income of people carrying on other independent professions.

Expenses incurred while participating in an activity that provides entertainment, amusement, or recreation.

In general, for tax purposes, an organization, person, or party possesses separate existence. Options include corporations, partnerships, estates, and trusts.

Tax imposed for environmental reasons, e.g. to provide an incentive to reduce certain emissions to an optimal level or taxes on environmentally harmful products.

A general principle of taxation which requires that taxpayers pay an equal amount of tax if their circumstances are equal.

An equitable interest in an asset is the interest of the beneficial owner; this may or may not be the same person as the legal owner.

1. The extent of a person's beneficial ownership of a particular asset. This is equivalent to the value of the asset minus the liability to which the asset is subject. 2. Paid-in capital plus retained earnings in a corporation 3. The ownership interest possessed by shareholders in a corporation - stock as opposed to bonds.

A method of financing a business where money is received by the issuance of shares in the enterprise.

Any deduction, credit, or expense item that is incorrectly stated on a tax return and any income item that is not properly reported on a tax return.

Placing an amount in the care of a third party to make a payment in the future.

Employee stock ownership plan.

All that a person owns, whether real property or movable property, for instance, the estate one leaves at death.

The estimated assessment procedure is used when the taxpayer failed or is late in returning his tax declaration. The tax authority unilaterally assesses the estimated taxes owed by the taxpayer. The estimated assessment procedure puts the burden of proof on the taxpayer.

Estimated tax is the method used to prepay tax on income that is not subject to withholding.

The date that determines whether the buyer or the seller of stock receives the next dividend distribution a company pays. This date is usually two business days before the date of record.

The checking of a taxpayer's tax return, accounts, self-assessment calculations, etc. The process may or may not include an audit of the taxpayer's own books.

The difference between the minimum amount required to be distributed from a qualified retirement plan and the amount that was actually distributed.

To barter, swap, part with, give, or transfer property for other property or services.

A tax imposed on an act, occupation, privilege, manufacture, sale, or consumption.

Term used to describe income, which is exempt, i.e. not included in the calculation of gross income for tax purposes.

An amount that a taxpayer can claim for themselves, their spouse, and their eligible dependents.

People who have left their country and live abroad.

Rules under which a taxpayer continues to be subject to tax when he relinquishes his residence or his citizenship in order to avoid tax.

Costs that are currently deductible, as opposed to capital expenditures, which may not be currently deducted but must be depreciated or amortized over the useful life of the property.

Tax levied on exports of basic commodities entering world trade, such as rubber, copper, palm oil, tea, cocoa, and coffee.

Additional time granted by the IRS for a taxpayer to file their federal income tax return.