Tax Glossary

1040 Form

While the 1040 form is composed of only a couple of pages, taxpayers may need to fill out extra sections called schedules. For example, if a taxpayer received dividends that totaled more than $1,500, he or she will need to fill out Schedule B, which is the section for reporting interest and ordinary dividends.

There are several variations of the 1040 depending on your individual tax situation. For example, taxpayers that possess very simple taxation circumstances can fill out the Form 1040EZ, which is a less comprehensive form. 

1040 EZ From

The 1040EZ is an alternative to the Internal Revenue Service’s (IRS) 1040 income tax form and offers a faster and easier way to file taxes, meant for taxpayers with rudimentary tax situations. In order to be eligible to use this form, the individual must have a taxable income of less than $100,000, interest income of $1,500 or less, possess no dependents and fulfill other requirements set by the IRS. 

Adjusted Gross Income - AGI

A measure of income used to determine how much of your income is taxable. Adjusted gross income (AGI) is calculated as your gross income from taxable sources minus allowable deductions, such as unreimbursed business expenses, medical expenses, alimony and deductible retirement plan contributions.

Exemption

A deduction allowed by law to reduce the amount of income that would otherwise be taxed. An exemption is based on a status or circumstance rather than economic standing.

There are two types of exemptions: personal and dependency.An example of an exemption is the reduction in taxes you are granted for the dependent children (under the age of 18) living with you.

Standard Deduction

A base amount of income that is not subject to tax and that can be used to reduce a taxpayer's adjusted gross income (AGI). A standard deduction can only be used if the taxpayer does not choose the itemized deduction method of calculating taxable income. The amount of the standard deduction is based on a taxpayer's filing status, age and whether he or she is disabled or claimed as a dependent on someone else's tax return. 

Short-Term Gain

A capital gain realized by the sale or exchange of a capital asset that has been held for exactly one year or less. Short-term gains are taxed at the taxpayer's top marginal tax rate.

A short-term gain can only be reduced by a short-term loss. A taxable capital loss is limited to $3,000 for single taxpayers and $1,500 for married taxpayers filing separately.

Long-Term Capital Gain Or Loss

A gain or loss from a qualifying investment owned for longer than 12 months and then sold. The amount of an asset sale that counts toward a capital gain or loss is the difference between the sale value and the purchase value. Long-term capital gains are assigned a lower tax rate than short-term capital gains in the United States.

Wash-Sale Rule

An Internal Revenue Service (IRS) rule prohibiting a taxpayer from claiming a loss on the sale of an investment when the same investment was purchased within 30 days before or after the sale date. Also know as the "30-day wash-sale rule".

Traditional IRA

An individual retirement account (IRA) that allows individuals to direct pre-tax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Traditional IRA. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status and other factors.

Other variants of the IRA include the Roth IRA, SIMPLE IRA, and SEP IRA.

Child Tax Credit

A credit given to taxpayers for each dependent child that is under the age of 17 at the end of the tax year.

Schedule A

A U.S. income tax form used by taxpayers to report itemized deductions, which can help reduce an individual's federal tax liability. Expenses that can be itemized and claimed on the form include medical and dental expenses, amounts paid for particular taxes and interest expenses as well as specific losses due to theft.

Schedule D

A U.S. income tax form used by taxpayers to report their realized capital gains or losses.  Investors are required to report their capital gains (and losses) from the sales of assets, which result in different cash values being received for them than what was originally paid, in order to affix some amount of taxation to the income and wealth that is generated through investment activities.

Alternative Minimum Tax - AMT

A tax calculation that adds certain tax preference items back into adjusted gross income. Alternative minimum tax (AMT) uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back, and then the AMT exemption is subtracted to get the AMT taxable income (AMTI). AMTI is then taxed at the current rate schedule to get tentative minimum tax (TMT). If TMT is higher than the regular tax liability for the year, the regular tax and the amount by which the TMT exceeds the regular tax are paid (i.e. the taxpayer pays the full TMT).

Audit

1. An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm). /li>
2. An IRS examination of a taxpayer's return or other transactions. The IRS performs this examination to verify the accuracy of these filings.

2008 IRS Deduction, Exemption & Limit Changes

Finally, all the 2008 deduction and exemption values were published by the IRS in October, here are the notable increases (or unchanged values):

• Personal and dependency exemptions increase $100 to $3500 each.
• Standard deduction for married couples filing jointly increases $200 to $10,900. Singles and married filing separately increases $100 to $5,450. Heads of households get a $150 increase to $8,000.
• Maximum earned income tax credit (for low/moderate income workers and families with 2+ children) increases from $4716 to $4824. The income limit for this increased to $41,646.
• The maximum Hope credit increases $150 to $1,800.
• Roth IRA contribution limit phase outs begin at $101,000 (+$2k) for singles and HoH, $159,000 (+3k) for married.
• 401(k) and 403(b) contribution limits remain unchanged at $15,500.
• Annual limit for most defined contribution plans increases to $46,000 from $45,000.

Hope Credit:

•   To claim the Hope Credit, the student must be enrolled in the first 2 years of college, working toward a recognized degree, taking at least half the full-time workload for at least 1 academic period, and can't have claimed the Hope Credit in more than 1 previous tax year. The student must be you, or spouse or a dependent for whom you claim an exemption.
•   The maximum Hope Credit for 2008 is $1,800 for each eligible student. For students who attended school in a Midwestern disaster area, the maximum is $3,600.

Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:
1. 100% of the first $1,200 ($2,400 for students in a Midwestern disaster area) of qualified
education expenses paid for the eligible student, and
2. 50% of the next $1,200 ($2,400 for students in a Midwestern disaster area) of qualified
education expenses paid for that student.
The maximum amount of Hope credit in 2008 is $1,800 per student ($3,600 for students in
Midwestern disaster areas).

·  The Hope Credit can apply to certain prepaid qualified expenses, such as January tuition paid in December.

 

Try these popular searches on Goolge.com for: