Tax Glossary
Scroll through the list of terms below or click a letter to jump directly to that section of the glossary.
Terms in boldface may be found elsewhere in the glossary.
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AARP - American Association of Retired Persons
This nonprofit organization (technically, a collective of nonprofit entities) serves Americans age 50 and older by providing health and safety guidance, retail discount offers and other benefits. People can join AARP regardless of their status as working or retired. The organization actively lobbies Congress on tax, healthcare and related issues affecting older and retired Americans.
ABLE Account
Named for the Achieving a Better Life Experience Act of 2014, an ABLE account is a tax-advantaged savings plan for a person with a qualifying disability. People with qualifying disabilities may set up these accounts for themselves, or the account may be established by the person's designated agent, a relative or someone else authorized by the IRS or Social Security Administration. The disabled individual must be the sole beneficiary of the account. Anyone may make after-tax contributions to an ABLE account, as long as the total of all contributions does not exceed the annual contribution limit. Generally, ABLE accounts can grow in value tax-free, and beneficiaries may receive tax-free distributions throughout their lives, as long as the funds are used for qualified disability-related expenses.
Above-the-Line Deductions
Officially called adjustments to income by the IRS, above-the-line deductions are tax deductions that people may claim before figuring their adjusted gross income (AGI) on their tax returns. (Hence, these deductions appear above the AGI line on the return form.) Generally, if you qualify for these deductions, you may claim them regardless of whether you use the standard deduction or itemize deductions.
Accelerated Depreciation
See Bonus Depreciation.
Accounting Methods
The IRS allows businesses, including individuals with self-employment income, to track income and expenses in several different ways. The main accounting methods for tax purposes are accrual accounting and cash accounting. Some small businesses and self-employed people may also qualify to use hybrid accounting, which blends the two other methods.
Accrual Accounting
Accrual accounting is one of two major bookkeeping methods (the other being the cash method) that businesses may use for tax purposes. With accrual accounting, a business reports income when it is earned, regardless of when payments are actually received (technically, constructively received). Similarly, expenses are recorded when they are incurred, regardless of the date of payment. The IRS allows many small businesses to choose between accrual and cash accounting, or to use a combination of the two (hybrid accounting). However, businesses in some industries, along with those with sales above a specified threshold, must use accrual bookkeeping methods.
Active Participation (Rental Income)
The actual expense method is one of two methods that businesses and self-employed people may use to calculate and deduct expenses related to business vehicle use. To use this method, tally up all relevant vehicle expenses, such as fuel and maintenance costs, auto loan interest, and parking fees and tolls. For a vehicle used for both business and personal purposes, prorate all expenses based on the vehicle's business use percentage (measure by mileage). Alternatively, vehicle expense deductions may be calculated by using the standard mileage rate. Note that enterprises that operate a fleet of five or more vehicles generally must report actual expenses instead of using the standard rate.
Additional Child Tax Credit
People who qualify for the Child Tax Credit (CTC), but cannot claim the full credit amount because it exceeds their tax liability, may be eligible for the Additional Child Tax Credit (ACTC). This refundable credit can allow a person to claim part or all of their unused CTC as a tax refund.
Additional Medicare Tax
People whose earned income for a year exceeds a threshold set by the IRS must pay the Additional Medicare Tax. This tax is assessed on top of the standard Medicare tax component of FICA taxes. The income threshold depends on a person's filing status. In most cases, an employer automatically withholds Additional Medicare Tax from an employee's pay once the employee's earnings for the year cross the threshold. However, people with multiple jobs or self-employment income may need to figure their Additional Medicare Tax on their tax returns, and may need to make quarterly estimated tax payments.
Adjusted Basis
This term can play a key role in calculating capital gains and losses. If you purchase investment property, then your cost basis in the property is typically the amount you paid for it, including commissions and fees. For gifted or inherited property, or property acquired in a trade, your initial basis might be based on the original owner's basis, or on fair market values (FMVs) at the time of the transfer. Certain activities may subsequently decrease your basis, like claiming depreciation deductions for property used in a trade or business. Meanwhile, making substantial improvements to property may increase your basis. Taking all of these factors into account enables you to calculate your adjusted basis, which in turn must be used to figure a capital gain or loss.
Adjusted Gross Income (AGI)
Adjusted gross income (AGI) is the total of a person's earned income and unearned income (their gross income), with certain exclusions and above-the-line deductions subtracted away. Your AGI (or the related MAGI) may affect your eligibility for tax benefits, such as the Child Tax Credit (CTC) and Premium Tax Credit (PTC). It may also affect the maximum value of your itemized deductions.
Adjustments to Income
See Above-the-Line Deductions.
Adoption Taxpayer Identification Number (ATIN)
An Adoption Taxpayer Identification Number (ATIN) is a temporary, 9-digit ID that the IRS issues for a child in the process of being adopted. Sometimes, a child is placed in a home before the adoption process is finalized, and the adoptive parents cannot immediately obtain a Social Security Number (SSN) for the child. In these circumstances, the adoptive parents may obtain an ATIN, which enables them to claim the child as a dependent and/or qualifying child for certain tax benefits. Adoptive parents may apply for an ATIN by filing Form W-7A.
Advance Premium Tax Credit (APTC)
Many people who qualify for the Premium Tax Credit (PTC) under the Affordable Care Act (ACA) may choose to receive the credit as an adjustment to their health insurance premiums. This adjustment, called the Advance Premium Tax Credit (APTC), can significantly reduce the cost of healthcare coverage for an individual or family. If you receive the APTC, you will need to reconcile your monthly APTC premium reductions with your total PTC for the year when you file your tax return. To avoid issues with incorrect APTC amounts, inform the Health Insurance Marketplace where you purchased your coverage of any changes in your income, family size or other circumstances that may affect your PTC.
Affordable Care Act (ACA)
The Affordable Care Act (ACA) created the official Health Insurance Marketplace, where individuals and families can purchase private health insurance. Those who obtain coverage through the marketplace and have incomes below specified limits may qualify for the Premium Tax Credit (PTC), which is a refundable credit. Eligible people may choose to receive this credit as a reduction in their monthly health insurance premiums, known as the Advance Premium Tax Credit (APTC). The ACA also established minimum standards for health insurance coverage, and increased the number of Americans who qualify for free or very low-cost coverage through the Medicaid Expansion.
After-Tax Contributions
This term refers to contributions to certain tax-advantaged accounts like Roth IRAs and qualified tuition programs that are not tax-deductible. After-tax contributions do not reduce your tax liability for the year when they are made. However, later withdrawals from the account may be shielded from tax, resulting in tax-free growth. Also see pre-tax contributions.
Age Test
Various federal tax benefits, such as the Child Tax Credit (CTC), are only available to people with a qualifying child they can claim as a dependent. The IRS uses a number of tests to determine whether someone is your qualifying child. Age tests set a maximum age for qualifying children, which may depend on whether the child is a full-time student. Note that various IRS programs have their own age tests, so your qualifying child for one tax deduction or tax credit may not meet the test for another tax benefit.
Alimony
Alimony is a payment to a spouse or former spouse under a legal separation or divorce agreement. Depending on when the divorce occurred, alimony payments may or may not be taxable income for the recipient. Similarly, the person paying alimony may or may not be able to claim a tax deduction for the payments.
Allocated Tips
In most cases, employees who receive tips must report those tips to their employers, as well as to the IRS on their tax returns. If you work in a food or beverage establishment and the tips you report add up to less than a percentage of gross revenue specified by the IRS, then your employer may assign additional tips to you, called allocated tips. Generally, you must report the full amount of allocated tips assigned to you on your tax return. However, if you have records proving that your actual tips were less than the amount allocated by your employer, then you can qualify for an exception to this rule.
Alternative Minimum Tax (AMT)
​When some people with higher incomes compute their tax using standard IRS formulas, their resulting tax liability falls below a minimum level set by law. For example, a person might qualify for very large tax deductions, resulting in little or no tax. In such cases, the person may have to pay a special tax called alternative minimum tax (AMT), which brings their total tax bill up to the required minimum threshold.
Alternative Fuel Motor Vehicle Credit (Credit for Alternative Fuel Vehicles)
The first version of this federal tax credit was created by Congress in 2006. The original law has since been extended, updated and/or replaced multiple times, most recently in the form of the Qualified Plug-In Electric Drive Motor Vehicle Credit (Electric Vehicle Credit). Generally, all of these programs allow people to claim a tax credit when they purchase certain electric, plug-in hybrid or other alternative fuel vehicles for personal or business use. In some cases, a person may assign the tax credit to the car seller, resulting in an immediate reduction of the vehicle's purchase price. Alternative fuel vehicle credits are typically subject to income limits and other restrictions.
Amended Return / Amended Tax Return
People who discover that they filed an incorrect tax return, such as a return with errors or omissions that affect their tax liability, may need to file an amended return. Generally, an amended return must show the figures reported on the original return, the corrected figures, and the difference between them. In most cases, IRS Form 1040-X is used for this purpose.
American Opportunity Tax Credit (AOTC)
The IRS offers the American Opportunity Tax Credit (AOTC) for qualifying students for their first four years of higher (post-secondary) education. This partially refundable tax credit for tuition and required school fees may be claimed by either the student or another person (such as a parent) who claims the student as a dependent. To qualify, the student must be pursuing a degree or other recognized credential. In addition, the person taking the credit must have a modified adjusted gross income (MAGI) below the limit set by the IRS. In order to claim the AOTC on your tax return, you will need to obtain IRS Form 1098-T (Tuition Statement) from a qualifying higher education institution.
Amortization
The term amortization generally refers to depreciation expenses related to intangible assets like intellectual property. Tax deductions for amortization are figured in the same way as other depreciation deductions, but determining an intangible asset's useful life may be a somewhat complicated process.
Amount Realized
When you sell property with the potential result of a capital gain or loss, your "amount realized" is the selling price minus certain expenses necessary for the sale. Those expenses may include commissions, loan charges (such as points), and advertising and legal fees.
Annual Contribution Limits
The IRS sets yearly limits on the amount of money that people may contribute to various tax-advantaged accounts. Savings plans subject to such annual contribution limits include health FSAs, MSAs, ABLE accounts, IRAs and various other qualified retirement plans. Exceeding an annual contribution limit may disqualify a person from receiving the account's usual tax advantages.
Annual Gift and Estate Tax Exclusion
The annual gift exclusion allows people to give away a certain amount of money or property each year without having gift and estate tax reporting or payment obligations. Gifts below the annual exclusion threshold do not count toward the donor's lifetime exclusion. Importantly, the annual exclusion applies to the amount given away per beneficiary, and there is no limit on the number of beneficiaries a person may make gifts to during a given year. Note that gifts in excess of the annual exclusion amount generally must be reported to the IRS, but do not necessarily get taxed. In most cases, gifts only become taxable events once the donor has exceeded the lifetime exclusion.
Annuity
An annuity is a contract with an insurance company, trust or other entity that provides a person with long-term income. An annuity may be purchased with either a lump-sum payment or a series of payments specified in the contract. Thereafter, the individual receives regular payments (usually monthly or annually) over the length of the contract. Most commonly, annuity agreements last for 10, 15 or 20 years. Annuity payments are generally taxed as ordinary income.
Alternative Minimum Tax (AMT)
​When some people with higher incomes compute their tax using standard IRS formulas, their resulting tax liability falls below a minimum level set by law. For example, a person might qualify for very large tax deductions, resulting in little or no tax. In such cases, the person may have to pay a special tax called alternative minimum tax (AMT), which brings their total tax bill up to the required minimum threshold.
Alternative Fuel Motor Vehicle Credit (Credit for Alternative Fuel Vehicles)
The first version of this federal tax credit was created by Congress in 2006. The original law has since been extended, updated and/or replaced multiple times, most recently in the form of the Qualified Plug-In Electric Drive Motor Vehicle Credit (Electric Vehicle Credit). Generally, all of these programs allow people to claim a tax credit when they purchase certain electric, plug-in hybrid or other alternative fuel vehicles for personal or business use. In some cases, a person may assign the tax credit to the car seller, resulting in an immediate reduction of the vehicle's purchase price. Alternative fuel vehicle credits are typically subject to income limits and other restrictions.