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Tax Glossary.

A    B    C    D    E    F    G    H    I    J    K    L    M    N    O    P    Q    R    S    T   U  V  W

A

 

Abatement of Penalties - An abatement of penalties is a request to the IRS to remove certain penalties that were added to the taxpayers account for a particular year or multiple years. The taxpayer is required to have reasonable cause that is specific for each year when submitting this request and must be able to explain why this reason should grant the penalties to be removed from their account.

Accelerated Cost Recovery System (ACRS) - The ACRS system of depreciation allows for larger depreciation deductions for businesses in the early years of ownership. The Tax Reform Act of 1986 sited several changes to the ACRS rules, thus ACRS was replaced by MACRS (Modified Accelerated Cost Recovery System.)

Accelerated Depreciation - As opposed to the straight-line depreciation method, this method of depreciation allows for larger deduction amounts in the earlier years of ownership and lesser in the later years.

Accountable Plan - A plan for reimbursing employees for business related expenses, such as meals and travel, under which an employee is required to account for all his/her expenses and return any excess reimbursements.

Accrual Method of Accounting - This accounting method allows for income to be reported in the year it was earned, whether or not received, and deductions to be claimed in the year incurred, whether or not paid.

Active Participant - A taxpayer who is eligible to participate in his/her employer's retirement or pension plan. Ability to deduct the IRA contribution is based on income.

Acquisition Debt - Debt incurred to acquire or improve a principal or secondary residence, of which the interest is fully deductible.

Adjusted Basis - A calculated measure, which reflects profit or loss in property value. The value is reduced by depreciation, increased by the cost of improvements.

Adjusted Gross Income (AGI) - A determination peculiar to individual taxpayers used to calculate limitations on the amount of certain expenses which may be deductible, including medical expenses, charitable contributions, personal casualty losses and certain miscellaneous deductions. Generally, adjusted gross income represents gross income less certain business expenses, and expenses attributable to the production of rent or royalty 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

 

Alimony Payments - Payments from one spouse to another, required as a result of a divorce or separation agreement, which meet certain statutory requirements. Alimony and separate maintenance payments are included in the gross income of the recipient and are deducted by the payor.

Alternative Minimum Tax (AMT) - AMT is a federal tax system designed to ensure taxpayers pay their fair share of tax liability. In short, this system was implemented to prevent higher-income individuals from claiming too many deductions and paying too little in taxes.

Amended Return - A tax return filed with a 1040X within three years of an original return, which allows for correction of errors or changes regarding the original return.

Amortization - Claimed on form 4562 and similar to depreciation, amortization is a way of writing off intangible assets, such as goodwill.

Amount Realized - The fair market value of property received by a taxpayer on the sale or exchange of property.

Annuity - Purchased by an individual for investment and retirement purposes, this investment product is paid periodically and includes the return of invested capital plus the income generated by it.

Appeal - IRS administrative process for taxpayers to contest decisions within the IRS. Also known as the Appeals Division.

Asset - A property or investment of value.

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 inquisition into your financial records regarding your tax returns.

Away From Home Overnight - A period longer than a workday when one is away from home. Expenses incurred MAY be deducted as a business travel expense.

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B

Bad Debts - Uncollectible, legally binding debts that are owed to you but you probably will never receive. These may be tax-deductible.

Bankruptcy - This is a legal process under Federal statutes that provides for rehabilitation of a debtor (provide the opportunity to make a fresh start) through the discharge of certain debts or through a debt repayment plan over a certain period of time. Creditors cannot contact the debtor during the bankruptcy. They must wait until it is fully discharged. There are three chapters of bankruptcy.

See descriptions below:

Chapter 7: In Title 11, United States Code, this chapter of bankruptcy law provides for a full liquidation of an entitys non-exempt property to satisfy creditors, and discharges all dischargeable debts.

Chapter 11: This chapter of the bankruptcy law provides for a partial payment of some debts and the partial discharge of some debts belonging to a business.

Chapter 13: This chapter of the bankruptcy law provides for the partial payment of some debts and the partial discharge of some debts for an individual. It is also known as the Wage Earners Repayment Plan since all creditors must receive a dividend.

Basis - The tax basis of property, or more simply, the cost of an asset.

Bearer Bond - This bond does not have an owner's name on it and is therefore payable to the holder.

Beneficiaries - The individuals to which you name to inherit your assets.

Bequest - A gift of personal property by will to a beneficiary that is not included as income of the recipient.

Boot - Taxable cash or property received in an otherwise tax-free exchange of investment real estate.

Burden of Proof - A formal legal requirement to provide persuasive information or evidence of the legitimacy of a claim. For tax returns, OICs, or requests for any resolution, the burden of proof to substantiate the claim or deduction rests with the individual or entity either required to sign the return or who submitted the claim.

Business Assets - Assets used in business or to produce rental or royalty income.

Business Gifts - A cost that is deductible to the maximum of $25 per client per year, unless the gift is a promotional item of under a $4 value.

Business Interest - A tax deduction that businesses take for interest paid on business loans.

Business Use Property - Property used for the production of income, such as an office, or using your car for non-commuting business purposes.

Bypass Trust - A way of sheltering your assets from taxes when a spouse dies. Since only $1,000,000 can be passed on free of federal estate taxes, a bypass trust can be created whereby upon the death, that spouse's individual assets go into a trust.

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C

Calendar Year - A 12-month period beginning January 1 and ending December 31.

Call - An option to purchase fixed-price stock in a specified amount of time.
Capital Expenditure - Costs incurred for additions or improvements that increase the value of property. You may not immediately deduct these expenses but you can depreciate them overtime by adding them to the basis of your property.

Capital Gain Distributions - 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.

Capital Gain - A taxable gain from the sale or exchange of a property or financial asset.

Capitalize - To treat the cost of additions to property as an increase to the property's basis, as opposed to treating it as a deduction.

Capital Improvement - An improvement made to extend the useful life of a property or add to its value. Major repairs such as the replacement of a roof are capital improvements. The costs of capital improvements to business property must be capitalized and may be depreciated.

Capital Loss - A taxable loss from the sale or exchange of a property or financial asset.

Carryback / Carryover -Provisions in the tax Code that allow certain losses or credits to be used in a tax year other than the tax year incurred. A carryover is to a future year. A carryback is to a prior year.

Cash Method of Accounting - Common method of accounting wherein income is reported in the year it is received and expenses are deducted in the year they were paid.

Casualty Loss - A casualty is the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature. Examples are floods, storms, fires, earthquakes, and auto accidents. Individuals may deduct a casualty loss only if the loss is incurred in a trade or business, in a transaction entered into for profit, or is a personal loss arising from a disaster such as those mentioned above. Individuals deduct personal casualty losses as itemized deductions on Schedule A, subject to a $100 nondeductible amount and a reduction of the loss by 10 percent of the taxpayer's AGI. Use of Form 4684 is required.

Centralized Authorization File (CAF) - Located three of the ten IRS Service Centers, it contains all Forms 2848, Powers of attorney, and Forms 8821, Tax Information Authorizations. Each individual authorized by these forms will be given a CAF number.

Certificate  - The actual piece of paper that is evidence of ownership of stock in a corporation.

 

Certified Historic Structure - A structure listed on the National Register of Historic Places or located in a designated historic area. The IRS Code provides tax incentives for the rehabilitation of such structures.

 

Certified public accountant - A CPA has passed a state's qualifying exam for accounting, but may or may not be an expert on matters of taxation. The strength of a CPA is that they can configure an overall tax plan, and can guide you through complex financial situations. CPA's can also issue audited financial statements and represent taxpayers before the IRS.

 

Certifying Acceptance Agent (CAA) - A Certifying Acceptance Agent is an individual, business or organization who is authorized by the Internal Revenue Service to assist alien individuals and other foreign persons with obtaining ITIN (Individual Taxpayer Identification Number) from the IRS. A Certifying Acceptance Agent can certify certain documents so that original documents are not required to be submitted to the IRS.

 

Change in Accounting Method - A change from one method to another, which usually requires prior approval from the IRS. A change generally requires adjustments to avoid omissions or duplications.

  

Change in Accounting Period - A change from one period to another. Income for the short period created by the change must be annualized to calculate the tax for that period.

Charitable Contribution - Allowable deduction on taxes for cash or properties donated to approved charities.

Child and Dependent Care Credit - A tax credit of 20-30 percent of employment-related child and dependent care expenses for amounts of up to $3,000 is available to individuals who are employed and maintain a household for a dependent child or disabled spouse or dependent. The credit is computed on Form 2441 for Form 1040 filers and on Schedule 2 for Form 1040A filers.

Child Support Payments - Non-tax deductible payments made to support a minor child after a divorce.

Child Tax Credit - A nonrefundable credit of up to $1000 per dependent child under age 17 at the end of the tax year.

 

Closed Year - A tax year for which the statute of limitations has expired. The taxpayer can't claim a refund and the IRS can't collect additional taxes (with certain exceptions).

 

Closely Held Corporation -  A corporation with five or fewer shareholders who own more than 50% in value of the stock at any one time during the year. Note, this is the IRS definition. In common usage the definition can be broader.

Collection Division - That organizational arm of the IRS which has the mission of collecting delinquent taxes and securing delinquent tax returns for individuals, businesses, corporations, trusts, or any other entity that owes IRS money. The Service Center Collection Function, the Automated Collection Site, or the Field Collection Function is all part of the Collection Division. The revenue officer is required to effectively collect against any Balance Due accounts.

Collection Information Statement (CIS) - IRS standard financial statements required from individuals and/or self-employed individuals (Form 433-A) and businesses (Form 433-B) that owe IRS taxes and have indicated an inability to pay the liability. IRS uses these forms to determine the taxpayers ability to pay in full by installment agreement or a hardship situation.

Collection Statute of Limitation - IRC Section 6503 places an express limit on the time in which the IRS may collect a tax. Normally, the Collection Statute is 10 years from the date of assessment, but can be extended under certain situations.

Common-Law State - A state in which the laws governing property rights are based on British common law. The property and income of each spouse belongs to him or her separately.

 

Common Stock - Shares in the ownership of a corporation that are entitled to residual dividends, after bonds and preferred stock have first received interest and dividends. A common stockholder usually has a vote in deciding company affairs, including the election of a corporation's board of directors.

Community Property - Property that belongs equally to husband and wife. This concept of ownership is followed in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.

Commuting - Traveling from one's residence to one's regular place of business and back to the residence.

 

Compensation - Wages, commissions, tips, professional fees, and net self-employment income from services rendered; that is, earned income.

Compliance - All taxes are paid up to date and all returns required to file are filed to date. Therefore, if submitting an OIC, IA or status 53 for individuals request, the taxpayer must have all estimated tax payments paid to date and returns filed. If submitting an OIC or IA for a business, the taxpayer must have paid all taxes for the past two quarters and filed all returns.

Condemnation - The seizure of property by a public entity, who in turn compensates the owner. The power to condemn property is known as the right of eminent domain.

Constructive Receipt - Income you are taxed on due to the fact that it is available to you, even if you chose not to receive it. An example of this is interest credited to a savings account. The money is there and available to you, regardless of whether you choose to withdraw it.

Contributions - (1) Gifts to qualified charitable organizations as opposed to gifts to private individuals. Such contributions are generally deductible on Schedule A.

 

Convertible - A bond or preferred stock that may, under specified conditions, be exchanged for common stock or another security, usually of the same corporation.  

 

Copyright - The exclusive legal right to sell, reproduce, or publish a literary, musical, or artistic work.

 

Corporation - For income tax purposes, this term includes associations, trusts that have a majority of corporate characteristics, joint stock companies, and insurance companies.

 

Cost - (1) Cash and/or the value of property given to acquire the property received.

 

Cost Depletion - A method for recovering the taxpayer's investment in natural resources or timber. The cost is recovered ratably as the resource is extracted or the timber harvested. Total cost depletion cannot be claimed in excess of basis. Percentage depletion, the other method for computing depletion of natural resources, is defined elsewhere in this glossary.

 

Cost Method of Inventory Valuation - Valuing inventory purchased during the year at cost; that is, the invoice price less any discounts plus transportation or other costs incurred in acquiring the merchandise.

 

Cost of Goods Sold - Beginning inventory plus direct purchases, direct labor costs, and overhead costs less withdrawals for personal use and ending inventory. Sole proprietors compute their cost of goods sold in Part III of Schedule C.

 

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

 

Cost or Market, Whichever Is Lower - This phrase is used in reference to inventory valuations. Most taxpayers prefer to use "cost or market, whichever is lower" as a basis for valuing their inventories because this method affords an opportunity to take advantage of a drop in the market so that profits can be reduced accordingly before disposition of the goods. If "cost" only is used, a drop in the market cannot affect the income until the merchandise is sold. Either method is acceptable, but the one adopted must be followed unless the IRS grants permission for a change.

 

Cost Recovery - The writing off of the capital cost of qualified assets over a specified time period. See also Accelerated Cost Recovery System (ACRS) and Modified Accelerated Cost Recovery System (MACRS).

 

Coupon Bond - A bond with interest coupons attached. The coupons are clipped as they come due and are presented by the bond holder for payment of accrued interest.

Currently Non-Collectible - Status 53 is also referred to as Currently Non-Collectible, Currently Uncollectible, or CNC. Status 53 allows taxpayers to make no monthly payments to their delinquent tax debt due to minimal income to provide for themselves and their family.

Credits - Reductions of tax liability for taxpayers who meet certain criteria, which reduce your tax bill dollar-for-dollar.

Custodial Parent - The parent with whom a child lives for more than half the year.

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D

Dealer - A person or firm that regularly buys and sells property. A person is classified as a dealer if at the time of the sale, that person held the property primarily for sale to customers in the ordinary course of business. Gains from the sale of such property are ordinary gains not capital gains.

Declining Balance Method of Depreciation - A method of accelerated depreciation wherein a larger depreciation deduction is taken in the current year and the deduction for the next year is reduced.

Deduction - An expense that may be deducted from your income that is otherwise taxable so as to lower your taxable income.

Default - Failure to repay an outstanding debt as agreed.

Deferred Compensation - Compensation that will be taxed when received or upon the removal of certain restrictions on receipt and not when earned. For example, contributions by an employer to a qualified pension or profit-sharing plan on behalf of an employee is considered deferred compensation. Such contributions will not be taxed to the employee until the funds are made available or distributed to the employee, usually upon retirement.

Deferred Gain - Nonrecognition of realized that gain on which taxation can be deferred until a later year.

Defined Benefit Plan - An employee benefit plan that provides determinable benefits not based on employer profits.

 

Defined Contribution Plan - An employee benefit plan that provides a separate account for each person covered and pays benefits on amounts allocated to each account.

Dependency Exemption - An exemption of $3,700 (for 2011) for qualified individuals with dependents.

Dependent - An individual who is supported by a taxpayer and qualifies to be claimed as an exemption on your tax return.

Dependent Care Credit - A nonrefundable credit to reduce your taxes based on expenses paid for a dependent's care, which allows for you to be gainfully employed.

Depletion - A deductible expense reflecting the decrease of a depletable natural resource, such as oil or gas.

Depreciation - The tax deduction for writing off the cost of wear and tear of tangible property and business assets over an IRS-specified number of years.

Distribution - Money a taxpayer withdraws from a retirement plan such as an individual retirement arrangement or an employer-maintained pension plan. See also Distributions by Corporations.

 

Distributions by Corporations - As used in the tax Code, this term refers to any amounts paid by a corporation to its shareholders, or any property distributed, other than for value received in goods or services. It is a broader term than dividends, for a distribution may be a divid end, and therefore taxable income, or it may be a return of capital. See also Returns of Capital.

Discharge of Federal Lien - Authorized under the IRS Code. The process whereby the taxpayer or interested third party applies to have the federal tax lien removed from a specific piece of property or other asset. The discharge may be granted if:

  • IRS has no interest in the property,
  • IRS will receive the net proceeds from the sale of the asset, or
  • The taxpayer has equity in other assets equal to 3 times the amount of the tax liability.

Dividend - A taxable share of the profits of a corporation that is distributed to shareholders.

Divorce Decree (Final)  - A decree issued after a divorce is declared final by the court. This action dissolves the marriage and returns the spouses to unmarried status. Alimony payments made as a result of this decree are deductible by the payer and income to the recipient, if requirements are met.

 

Divorce Decree (Interlocutory) - A divorce decree that is not yet final. Alimony paid under an interlocutory decree is deductible by the payer and income to the recipient, if requirements are met.

Dual Status Alien - An individual who is both a nonresident alien and a resident alien for different parts of the same year.

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E

Earned Income - Taxable money, services or property you receive for doing work, such as tips, wages and bonuses.

Earned Income Credit (EIC) - A refundable tax credit for qualified taxpayers based on earned income and modified adjusted gross income.

 

Education Expense - Employees may deduct education expenses 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 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 the Hope scholarship credit or the lifetime learning credit, both of which are defined elsewhere in this glossary.

Education IRA - A tax-favored savings plan created for the purpose of paying for qualified higher education expenses.

Eminent Domain - The right of a government authority to take private property for public use and paying fair compensation to the owner.

 

Employee - For income tax purposes, an employee is to be distinguished from an independent contractor. This is important, because the withholding of income taxes on wages applies only to employees. Also, employee status will affect the manner and extent of some deductions and credits. The regulations state that an employee is one who is subject to the will and control of the employer not only as to what shall be done but also as to how it shall be done.

 

Employee Stock Option - An option granted to an employee to purchase the employer's stock. Employee stock options to which special income tax treatment is accorded are known as statutory options.

 

Employer-Funded Retirement Plan - A pension plan funded in full or in part by employer contributions on behalf of employees.

 

Employment Expenses - Ordinary and necessary expenses required to perform the duties for which the taxpayer was hired.

 

Energy Tax Credit--Business Property - An energy tax credit allowed for the purchase of certain business-use property utilizing solar, geothermal, or biomass energy.

 

Energy Tax Credit--Residential Property - Prior to 1986, taxpayers were eligible for a credit against the cost of energy-saving devices or renewable energy source property installed in their principal residences. Residential energy credits claimed in prior years must be subtracted from the basis of the residence.

 

Entertainment Expenses - Such expenses are deductible by employees and 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 percent of cost.

 

Enrolled agent - A professional  tax preparer. This type of tax pro has a long history; the first enrolled agents started helping taxpayers claim legitimate losses they suffered in the Civil War. Today, they also can help you file your routine return and, more importantly, are officially authorized "agents" who can appear in your place to resolve a dispute with the IRS. Some other tax professionals can accompany you to IRS meetings to counsel you and help explain your tax issues, but EAs can go to these sessions in your place. An Enrolled Agent is a federal license issued by the US Department of Treasury and Enrolled Agents can represent taxpayers is all 50 states. Enrolled Agents specialize in taxes.

Estate - Established upon the death of a taxpayer, its value is that of all assets minus loans and liabilities. An estate may be taxable at state and local levels depending on its value.

Estimated Tax - Estimated tax payments you make to the IRS either on a quarterly basis or through regular payroll withholding.

Estimated Tax Voucher - A statement by an individual of (1) the amount of income tax he or she estimates he or she will incur during the current taxable year on income that is not subject to withholding, (2) the excess amount over that withheld on income that is subject to withholding, and (3) his or her estimated self-employment tax. Advance payment of tax may be required (on as many as four payment dates) unless estimated tax due after withholding and credits is less than $1,000.

 

Estimated (Useful) Life - The period of time over which an asset will be used by a particular taxpayer. Although that period cannot be longer than the estimated physical life of an asset, it can be shorter if the taxpayer does not intend to keep the asset until it wears out. The estimated useful life of an asset is essential to determining the annual tax deduction for depreciation and amortization.

Equitable Relief - If a spouse does not qualify for innocent spouse relief or separation of liability, they may qualify for equitable relief. The taxpayer must show, under all facts and circumstances, that it would be unfair to be held liable for the understatement or underpayment of taxes. (U.S. Master Tax Guide 2004)

Excess Social Security Tax Withheld - If a taxpayer worked for more than one employer the tax year, and more than the maximum 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.

 

Exchange - A transfer of property for other property or services. Exchanges of like-kind property are a popular method for deferring taxes.

 

Excludable Amount of Pension - The portion of pension distributions that is not taxable.

 

Excluded Gain - Generally applies to gains realized on the sale of a principal residence. For sales after May 6, 1997, a taxpayer may exclude up to $250,000 ($500,000 MFJ) of gain on the sale if he or she owned and occupied the residence for at least two of the five years prior to the sale.

Exclusion - An amount of income that is excluded from your adjusted gross income.

Exemption - A personal or dependency deduction amount allowed by law as a reduction that would otherwise be taxed.

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F

Fair Market Value - The price at which property is being bought by a willing buyer and sold by a willing seller.

Federal Insurance Contributions Act (FICA) - This is Social Security Tax. FICA consists of Social Security (supplemental retirement income) payroll tax and a Medicare (hospital insurance) tax. The tax is levied on employers, employees, and certain self-employed individuals. On some pay stubs it may be listed as some form of Old Age Survivors and Disability Insurance (OASDI).

Federal Tax Deposit (FTD) - An employer must deposit employment taxes withheld (income tax withholding and FICA taxes) including the employers share of the FICA, either monthly or semi-weekly (depending on the amount of tax withheld) with an authorized commercial bank or Federal Reserve Bank.

Federal Unemployment Tax Act (FUTA) - A Federal tax paid by employers that provide for the administrative costs of a states unemployment compensation program for workers who have lost their jobs through no fault of their own. Only the employer pays FUTA tax, it is not deducted from the employees wages. This annual tax is reported on Form 940.

First-in, first-out (FIFO) - An accounting method for determining the cost of inventories. Under this method the cost of inventory on hand is deemed to be the cost of the most recently acquired units.

Fiduciary - One who is responsible for an estate or trust.

Finance Charges - Interest paid for the privilege of making purchases on a deferred-payment basis.

Fiscal Year - A 12-month accounting year ending on the last day of any month other than December.

Foreign Corporation - A corporation organized outside the laws of one of the states or territories of the United States.

Foreign Tax Credit or Deduction - This credit applies to taxes paid to foreign countries and is available to a U.S citizen or resident alien, and in limited circumstances to a U.S. non-resident alien.

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G

Garnishment - Legal process whereas a creditor (the IRS in this case) has obtained judgment on a debt (IRS back taxes or other debt) may obtain full or partial payment by seizure of a portion of a debtor's (taxpayer in this case) assets such as wages, bank account, etc.

Gift - A transfer of property for less than adequate consideration. Gifts usually occur in a personal setting (such as between members of the same family).

Goodwill - Pertaining to a business, goodwill represents the difference between the purchase price and the value of net assets. Goodwill is depreciated or amortized over the years.

Gross Income - Your total taxable worldwide income of a taxpayer before subtracting any allowable deductions.

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H

Head of Household - A filing status used by a taxpayer who is unmarried, pays over fifty percent of the cost of maintaining the principal residence for over half of the tax year and lives with a relative who is a qualifying individual.

Hobby Loss - Losses that cannot be used to reduce other taxable income that arise from personal, enjoyable activities that are not conducted for profit.

Holding Period - The length of time an asset has been owned used to determine whether a sale or exchange is a short-term or long-term capital gain or loss.

Home Office Expenses - Tax deductions are allowed for expenses of operating a place of business from your residence.

Hope Scholarship Credit - An income tax credit of up to $1,500 for each eligible student for tuition and fees paid for the first two years of post-secondary education.

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I

Imputed Interest - Interest amounts deemed to have been earned on a debt if the stated interest rates are below the federal rate set by law.

Income Averaging - A method sometimes used by farmers that taxes some of the income in a high-income year as if it were spread evenly over a four year period. Income averaging is not availr 1ont>

Independent Contractor - A taxpayer who contracts to do work according to his own methods and procedures and is treated for tax purposes as self-employed. People who qualify are responsible for paying their own estimated taxes.

Information Returns - Returns such as Form W-2, 1065 and 1099 forms which must be filed with the IRS as a means of reporting income and property transactions.

Innocent Spouse - A spouse who unknowingly filed a joint return with their spouse who had reported an understatement of tax due to erroneous items. The unknowing spouse must prove that at the time the tax return was signed he/she did not know, or have reason to know, there was an understatement of tax. Also with the fact and circumstances taken into consideration, it must show that it would be unfair to hold the unknowing (innocent) spouse liable for the understatement of tax. To request innocent spouse relief, the taxpayer must file Form 8857. (See also Equitable Relief and Separation of Liability).

Investment Interest - Deductible interest paid on loans acquired to purchase investment property.

Installment method - A method of accounting enabling a taxpayer to spread the recognition of gain on the sale of property over the payment period. Under this procedure, the seller computes the gross profit percentage from the sale (i.e., the gain divided by the contract price) and applies the percentage to each payment received to arrive at the gain to be recognized.

Installment Agreement (IA) - An agreement between the IRS and a taxpayer to allow the taxpayer to pay their delinquent debt over a specified period of time.

Involuntary Conversion - The receipt of money due to the forced disposition of property due to theft, casualty or condemnation.

Itemized Deductions - Personal expenses allowed to be claimed on your tax return as deductions from your adjusted gross income. Examples are medical expenses, mortgage interest and charitable contributions. Taxpayers who itemize deductions may not claim the standard deduction. Schedule A

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J

Joint Return - Filing status for legally married couples combining their income, exemptions, credits and deductions.

Joint Tenancy - A form of joint ownership of property where each party is considered co-owner. On the death of one of the owners, the surviving partner becomes full owner of the whole.

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K

Keogh Plan - A retirement savings plan that is available to self-employed taxpayers. Contributions are deductible within specific limits.

Kiddie Tax - The relatively low rate of tax on the first $1,600 (for 2006) of income, such as interest from investments, of a dependent child under the age of 17.

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L

Legally Separated - A husband and wife separated under a decree of separate maintenance and are required to live apart.

Levy - Garnishment attached to taxpayers wages, bank account, account receivable, social security income, etc.

Lien for Taxes - The U.S. Treasury may attach this legal claim on the property of a taxpayer who is delinquent in his tax payments to the IRS and has not made arrangements to pay. A lien prohibits the sale or transfer of property until the payment of the amount of the lien has been satisfied.

Lien - Whether a taxpayer does or does not own any property, IRS will issue a lien against their SSN to hinder them from purchasing, selling or transferring any property. A lien will effect their credit report. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. If not preparing an OIC, the lien will be released when the tax debt is either paid in full or the statute to collect the tax has expired. *The Internal Revenue Code of 1986 provides for a statutory lien of the Federal Government to be filed for a tax debt after a proper assessment, notice and demand, and a neglect or refusal to pay. Liens can be discharged or subordinated under special circumstances. **A Federal Tax Lien is formally recording in the appropriate public records office (county recorder, MENSE, Secretary of State (UCC) or US District Court) in order to establish priority over creditors, judgement lien creditors and other lenders.

Lien Discharge - Removal of a lien on a specific piece of property to allow for its sale or disposal.

Lien Release - Issued by IRS when a tax debt is fully paid or if the taxpayer can prove they are suffering from a financial hardship and are unable to provide for their familys health and wellbeing.

Lien Subordination - To set aside a lien temporarily to allow for a sale or refinance.

Lifetime Learning Credit - A nonrefundable credit equal to twenty percent for up to $10,000 of qualified tuition and related expenses for undergraduate (junior and senior year of college) and or graduate level courses. For first 2 years of college, see Hope Credit.

Like-Kind Exchange - A tax-free exchange of assets such as real-estate (not inventory, stocks or bonds) held for either productive use or investment purposes that you may defer paying taxes on if you purchase a property of the same type.

Limited Liability Company (LLC) - Business organizations usually treated as partnerships for tax purposes but offering the limited liability of a corporate stockholder to all members.

 

Listed property - Listed property includes computer and peripheral equipment, unless used exclusively at a regular business establishment, passenger automobiles, cellular telephones, property used for transportation, and property used for entertainment, recreation, or amusement. The depreciation of listed property is subject to certain limitations where the property is not used over 50 percent in a qualified business use.

Long-Term Capital Gain or Loss - Profit or loss on the sale or exchange of assets or properties that have been held for more than 12 months.

Lump-Sum Distribution - The payment of an entire amount due within one tax year rather than in installments. The distribution is usually triggered by such events as retirement or death. Marginal Tax Rate - Combined federal and state tax rates at which additional dollars of interest over a specified ceiling are taxed at a higher rate.

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Master File - An IRS File which consists of a series of runs, data records and files that are in production with links to many of the other IRS systems. All businesses and individuals have an IRS Master File. Master files receives individual or business tax submissions in electronic format and processes them through a pre-posting phase, posts the transactions, analyzes the transactions and produces output in the form of Refund data, Notice data, Reports, and information feeds to other entities.

Marital Deduction - Provision that allows for unlimited asset transfers from one spouse to another without having to pay any gift or estate taxes.

Medical Expenses - If medical expenses of yourself, a dependent or spouse exceed 7.5% of your adjusted gross income, you may apply the amount over the 7.5% limit to an itemized deduction on Schedule A.

Medical Savings Accounts (MSAs) - An MSA is a savings account coupled with a high-deductible health insurance plan used for medical expenses. Personal contributions to MSAs are deductible and employer contributions to MSAs are excludible from income within certain limits.

Miscellaneous Itemized Deductions - If expenses such as job expenses or union dues exceed 2% of your adjusted gross income, you may apply the amount over the 2% limit to an itemized deduction on Schedule A.

Modified Accelerated Cost Recovery System (MACRS) - A modified version of the ACRS depreciation system used for assets acquired after 1986. This system is less favorable for businesses and stretches out the number of years during which business assets can be depreciated.

Module - On the IRS Master File, the module of the return defines a specific return by its time frame. Form 1040, Individual Income Tax Return, is normally for a calendar year module and Form 941, Employers Quarterly Tax Return, is for a 3-month quarterly module during a calendar year i.e. March 31st, June 30th, September 30th, and December 31st). (Same as the term period.)

Monthly Disposable Income - Any positive amount remaining after the taxpayers necessary monthly living expenses are subtracted from their monthly income. MDI is used to help calculate the taxpayers RCP (reasonable collection potential) for OIC purposes.

Mortgage Interest - A tax cut whereby interest on your primary and secondary residences is deductible.

Moving expenses - A deduction in arriving at adjusted gross income is permitted to employees and self employed individuals providing certain tests are met (e.g., the taxpayer’s new job must be at least fifty miles farther from the old residence than the old residence was from the former place of work). Ceiling limitations are placed on indirect expenses (e.g., house-hunting trips and temporary living expenses, and certain disposition and acquisition expenses of personal residences).

Mutual Fund - A professionally managed fund wherein the company invests its shareholders investments, usually in stocks and bonds.

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Negligence - A lack of reasonable care that results in failure to make a reasonable attempt at assessing your taxes.

Net Operating Loss (NOL) - A net loss in a business that exceeds your other income for a year. The law allows losses to be carried back 2 years or carried forward 20 years to reduce taxes in those years. For certain losses, the carryback can be 3 or even 5 years, rather than 2.

Nonbusiness bad debts - A bad debt loss not incurred in connection with a creditor’s trade or business. Such loss is deductible as a short-term capital loss and will only be allowed in the year the debt becomes entirely worthless. In addition to family loans, many investor losses fall into the classification of nonbusiness bad debts.

Nonrecourse Debt - An obligation for which the borrower is not personally liable and the lender must look to the financed property for repayment.

Nonresident Alien - An individual who is not a permanent resident or citizen of the United States and is required by the IRS to pay taxes only on income earned from US sources.

Nontaxable Exchange - An exchange in property for which no gains or losses are recognized.

Notice of Federal Tax Lien - Whether a taxpayer does or does not own any property, IRS will issue a lien against their SSN to hinder them from purchasing, selling or transferring any property. A lien will effect their credit report. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. If not preparing an OIC, the lien will be released when the tax debt is either paid in full or the statute to collect the tax has expired. *The Internal Revenue Code of 1986 provides for a statutory lien of the Federal Government to be filed for a tax debt after a proper assessment, notice and demand, and a neglect or refusal to pay. Liens can be discharged or subordinated under special circumstances. **A Federal Tax Lien is formally recording in the appropriate public records office (county recorder, MENSE, Secretary of State (UCC) or US District Court) in order to establish priority over creditors, judgement lien creditors and other lenders.

Notice of Levy - A notice imposing and collecting a fine. When used in conjunction with IRS, this normally refers to the document that is served on a third party that attach wages, bank accounts, and other personal property.

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Offer In Compromise - Code Section 7122 authorized the Commissioner or his delegate the authority to compromise most tax liabilities. An OIC is an agreement between the IRS and taxpayer that allows the taxpayers delinquent tax debt to be compromise for less than the amount owed. The offered dollar amount is based on the taxpayers net worth plus their future income potential.

An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances. A tax debt can be legally compromised for one of the following reasons:

  • Doubt as to Liability - Doubt exists that the assessed tax is correct.
  • Doubt as to Collectibility - Doubt exists that you could ever pay the full amount of tax owed.

Effective Tax Administration - There is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider a taxpayer's OIC. To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable. The objective of the OIC program is to accept a compromise when it is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.

Typically there is an application fee of $150.00 for the offer in compromise. The IRS will accept an Offer in Compromise (OIC) when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The ultimate goal is a compromise that is in the best interest of the taxpayer and the IRS. Acceptance of an adequate offer will also result in creating, for the taxpayer, an expectation of a fresh start toward complying with all future filing and payment requirements. The OIC process is based on a debt-to-asset formula devised by the IRS.

The Process - The OIC process is complex and time-consuming and can take up to 24 months to resolve. Wink Tax Service relies on the client to provide detailed financial information required by the IRS. The IRS will not consider an OIC if the client-submitted documents are more than three months old. In addition, the client must be in compliance (all taxes must be filed and quarterly estimated payments, if applicable, have to be current).

Office-in-the-home expenses - Employment and business-related expenses attributable to the use of a residence (e.g., den or office) are allowed only if the portion of the residence is used exclusively and on a regular basis as the taxpayer’s place of business or as a place of business which is used by patients, clients, or customers. If the expenses are employment related, the use must be for the convenience of the employer as opposed to being merely appropriate and helpful.

Ordinary Income - Income that derives from sources other than capital gain, such as employment, and is not subject to preferential tax treatment.

Organization expenses - Organizational expenses are associated with the formation of a business prior to the beginning of operations. A corporation may elect to amortize organizational expenses over a period of sixty months or more. Certain expenses related to starting a company do not qualify for amortization (e.g., expenses connected with issuing or selling stock or other securities).

Owner-Employee - A self-employed individual who is the proprietor of a business.

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Partnership - An unincorporated business, which is owned by two or more persons. The entity itself is not taxable as the burden of tax obligation trickles down to the individual partners.

Passive Activity - A business deal in which an individual does not contribute to the actual management of the venture (silent partner.) These losses are subject to deduction limitations.

Passive losses - Passive losses are deductible only to the extent of passive income. Unused passive losses carry forward indefinitely (until the activity which generated the losses is disposed of) and can be used by taxpayers to offset passive income in future years.

Patronage Dividend - A taxable rebate made unto members by a cooperative.

Patents - A patent is an intangible asset which may be amortized over its life. The sale of a patent usually results in long-term capital gain treatment.

Pension - An arrangement where payments are made to qualified workers from an employee-funded plan for a specified period.

Percentage Depletion - A method of calculating depletion for nearly all natural resources (except timber) that applies a fixed percentage to the gross income generated from the property.

Personal residence - The sale of a personal residence may result in the recognition of capital gain (but not loss). Taxpayers may permanently exclude $250,000 ($500,000 if married) of gain on the sale of their personal residence from income providing certain requirements are met.

Personal Use Property - Non-necessity properties owned by a taxpayer, such as a home, vehicles, clothing, etc.)

Points - Premium charges on a loan that may be deducted as interest.

Portfolio income - Portfolio income includes dividends, interest, royalties, annuities, and realized gains or losses on the sale of assets producing portfolio income.

 

Power of Attorney - The legal form giving an authorized individual (Certified Public Accountant, Enrolled Agent, or Attorney) authority to represent a taxpayer before the Internal Revenue Service.

 

Prizes and awards - The fair market value of a prize or award generally is included in gross income.

Proprietor - An individual who is the sole owner of a business.

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Qualified Charitable Organization - A nonprofit organization especially approved by the US Treasury as a recipient of tax-deductible charitable contributions.

Qualified Domestic Relations Order - A state court can allocate an interest in a qualified retirement plan to a former spouse through a qualified domestic relations order. Payments made to a former spouse as the result of QDRO will not result in the taxpayer being assessed a penalty for early withdrawal from the plan; the former spouse will be taxed on the benefits when received, or the benefits can be rolled over tax free into an IRA or other qualified retirement plans.

Qualified Plan - An employee-sponsored, government-approved plan in which none of the employer's contributions are taxed until withdrawn.

Qualifying Widow(er) - A filing status for a surviving spouse available for two tax years after the death of the spouse which entitles the living individual to use the same tax rate as if he/she were married and filing jointly.

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Real Property - Physical, unmovable property (real estate.)

Realized Gain or Loss - The difference between the amount you are to receive upon the sale of property and the adjusted basis of that property.

Reasonable Collection Potential - The total realizable value of the taxpayers assets plus any future income. The total is generally the minimum Offer in Compromise amount.

RCP Equation:

Total Income - Total Expenses = MDI (Monthly Disposable Income)
MDI x FIP Factor (Future Income Potential) = Future Income
Future Income + Equity in Assets = RCP

Recovery Property - Tangible depreciable property acquired between 1980 and 1987.

Refund Statute Expiration Date - A taxpayer may request a refund of an overpayment within three years from the time the return was filed or within two years from the time the tax was paid, whichever is later. If no return was filed by the taxpayer, the claim must be filed within two years from the time the tax was paid (IRC 6511(a)).

Regulated Investment Company (Mutual Fund) - An investment company subject to Security and Exchange Commission regulations that uses its capital to invest in other companies. This company does not pay any taxes as long as its income is distributed to its shareholders.

Reinvested Dividends - Taxable in the year received, these dividends are earnings that the shareholder chooses to reinvest in other stocks rather than receive the monetary payment for it.

Resident Alien - A citizen of another country who is a permanent resident of the United States.

Rollover - The distribution of a qualified plan that is reinvested in another plan tax-free. When one takes possession of this money, twenty percent is withheld for federal income taxes.

Roth IRA - Contributions to this IRA are not deductible and qualified distributions may be tax-free.

Royalty - Taxable income received from the sale or use of materials and property you own, such as mineral property, a book, a movie or a patent.

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Salvage Value - The estimated value of depreciated property after the end of its useful life.

S Corporation - A business, which benefits as an incorporation, yet is nontaxable as the burden of income tax falls on its individual shareholders.

Section 179 Expense Deduction - An election to deduct up to $105,000 for the cost of business equipment and property instead of depreciating it.

Section 401(k) plan - A section 401 (k) plan is a qualified retirement plan which grants employee participants a deferral of income for employer contributions to the plan. The plan allows taxpayers to elect to receive compensation or have the employer make a contribution to the retirement plan. The plan may be structured as a salary reduction plan. There is a maximum annual dollar limitation, as well as a limitation based on the employee’s compensation.

 

Section 1231 assets - Section 1231 assets include depreciable assets and real estate used in a trade or business, held for the long-term holding period. Under certain circumstances, the classification also includes timer, coal, domestic iron ore, livestock (held for draft, breeding, dairy, or sporting purposes), and unharvested crops.

Self-Employed Individuals - Individuals who work for themselves and pay their own expenses.

Self-Employment Act - Social security and Medicare taxes paid by self-employed individuals. This tax is computed on Schedule SE.

Self-employment income - Self-employment income is the taxpayer’s net earnings from self-employment which includes gross income from a taxpayer’s trade or business, less trade or business deductions. Self -employment income also includes the taxpayer’s share of income from a partnership trade or business.

 

Self-employment tax -  The self-employment tax consists of two components: the Social Security portion and the Medicare portion. The Social Security portion of the self-employment tax consists of a tax of 12.4 percent imposed on an individual’s net earnings from self-employment, up to a maximum, which changes yearly. The Medicare portion of the tax consists of a tax of 2.9 percent imposed on the individual’s net earnings from self-employment, with no maximum. In calculating the self-employment tax, a deduction is allowed for one-half of the otherwise applicable self-employment tax. This deduction is calculated by multiplying the taxpayer’s self-employment income, before the self-employment tax deduction, by one-half of the total self-employment tax rate. If a self -employed individual also receives wages subject to FICA, the maximum Social Security tax base on the self-employed earnings is reduced.

Separate Maintenance Payments - Amounts paid to one spouse by the other spouse while living apart, such as alimony.

Service Business - A business whereby income is produced solely based on services rendered, such as an accounting firm.

Short-Term Gain or Loss - The gain or loss on the exchange or sale of a capital asset held one year or less.

Simplified Employee Pension - An easily established retirement plan in which an employer makes contributions to your IRS.

Simple plans - Retirement plans for small business with no more than 100 employees called the Savings Incentive Match Plan for Employees, or simple plans.

Single - Required filing status for an individual who was unmarried as of the last day of the year.

Standard Business Mileage Rate - Used for claiming deductions for business related travel expenses, the rate changes each year and is listed a cents per mile.

Standard Deduction - A base amount of income used by taxpayers who do not itemize their deductions.

Status 53 - Status 53 is also referred to as Currently Non-Collectible, Currently Uncollectible, or CNC. Status 53 allows taxpayers to make no monthly payments to their delinquent tax debt due to minimal income to provide for themselves and their family.

Status 53 is reviewed by the IRS on a regular basis and the client's status can be changed back to "Collectible" if there is any change in the client's financial situation. Penalties and interest continues to accrue while the client is in Status 53.

Statute of Limitation - The IRS has set specific time periods before expiration of certain actions, i.e. to collect a tax, make an assessment to an account, to request a refund, to file bankruptcy, etc.

Stock Dividend - The distribution of additional shares of a corporation to its shareholders.

Straight-Line Depreciation Method - A method of depreciation whereby the deduction is taken in equal amounts each year for the useful life of its asset.

Subordination of Federal Tax Lien - The legal process whereby the IRS will subordinate its Federal Tax Lien to a third party by temporarily setting aside the lien to enable a refinance or sale of a piece of property. Normally the IRS must determine that it is in its best interest to subordinate, which translates, What are we going to get out of this?

Substitute for Return - If a taxpayer has not filed a return and the IRS feels it can collect from the money earned, an IRS Revenue Officer may file a SFR. When a SFR is filed, the agent lists all of the income reported to the IRS for that year, but only gives the taxpayer one exemption and only the standard deduction, i.e. nothing is itemized. Even if for the past 10 years the taxpayer has itemized, the IRS prepares the return in their favor. If the taxpayer has children the IRS tries to file the return based on the information from the previous years, i.e. married filing joint with 2 children. But IRS will only file this way if they have previous returns showing this info.

Support - Payments made on behalf of a dependent for food and lodging as well as nonessential expenditures.

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Tangible Personal Property - Property, other than real estate, that has value. Examples are equipment and vehicles.

Tax credit for elderly - Elderly taxpayers (age 65 and over) may receive a tax credit. The amount of the credit is dependent on the filing status of the taxpayer and the amount of the taxpayer’s adjusted gross income and nontaxable Social Security and pension benefits.

Taxable Income - The amount on which you actually pay. This is the adjusted gross income less itemized or standard deductions.

Tax-Exempt Income - Income that is not subject to taxation, such as municipal bonds.

Tax Home - This location is used to determine whether certain expenses are to be considered deductible as business related travel costs.

Tax Preference Items - Tax items that may result in subjecting you to the Alternative Minimum Tax (AMT.)

Tax Rate Schedule - Instead of Tax Tables, Tax rate schedules are used in figuring individual income tax for people with a taxable income of over $100,000.

Tax Table - Instead of Tax Rate Schedules, these tables are used in figuring individual income tax for people with a taxable income under $100,000.

Tenancy by the Entirety - A form of ownership in which a husband and wife jointly own property. After the death of one, the other takes possession of the entirety. Without consent of both parties, creditors may not force a sale of property for payment of debts.

Tenancy in Common - A form of ownership in which two or more individuals jointly own property. Unlike tenancy by the entirety, when one dies, the shares remain separate.

Trade Date - The date on which an asset is actually bought, sold or exchanged.

Trade or business expenses - Deductions for AGI, which are attributable to a taxpayer’s business or profession.

 

Travel expenses - Travel expenses include meals (50 percent deductible), lodging, and transportation expenses while away from home in the pursuit of a trade or business (including that as an employee).

Trust - Legal arrangement, which distributes one's assets amongst its beneficiaries.

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Unearned income - For tax purposes, unearned income (e.g., rent) is taxable in the year of receipt. In certain cases involving advance payments for goods and services, income may be deferred.

Useful Life - The amount of time a depreciable asset may be expected to be in use.

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Vacation home - The Code places restrictions upon taxpayers who rent their residence or vacation home for part of the tax year. The restrictions may result in the limitation of certain expenses related to the vacation home.

W

Wash Sale - The purchase of stock 30 days before or after the sale of similar stock at the loss. Losses from wash sales are not deductible.

Wink Tax Services - A DBA of Wink Inc. a small professional firm located in Troy Michigan specializing in tax prep.

Work Opportunity Credit - A credit available to certain employers who hire employees from specified disadvantaged groups.

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Disclaimer
We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

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Last modified: January 30, 2017