Glossary

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401(k)

A retirement account to which an eligible employee can contribute a certain amount of his or her pretax salary; earnings are tax-deferred. Some employers may match a stated percentage of employee 401(k) contributions. The reduced cost and liability of 401(k) plans appeal to employers.

Accrual Basis

Income is accounted for when it is earned and expenses are deducted when they are incurred, regardless of whether or not the income has been collected or the expenses paid.  The alternative accounting method that is used is the Cash Basis.

Adjusted Gross Income (AGI)

An individual taxpayer's total gross income less certain expenses including Traditional IRA contributions, Student Loan interest, Alimony, and Tuition.  This figure is represented by Line 37 of Federal Income Tax Form 1040.

Alternative Minimum Tax (AMT)

Tax imposed on corporations and individuals to assure that taxpayers with income exceeding a certain threshold are paying at least some income tax.

Amortization

Similar to depreciation, amortization is the writing off of a percentage of a total cost of an intangible asset over a specified time period for tax purposes.  Amortization may also refer to the paying off of loans via a specified payment schedule.

Audit

A professional examination of financial statements by an accountant to determine that the statements have been presented fairly and using Generally Accepted Accounting Principles (GAAP.

Balance Sheet

A financial statement which summarizes a company's assets, liabilities, and owner's equity as of a specific date.

Budget

Financial plan that serves as an estimate of future revenues or expenses or both.

Calendar Year

The period of 12 months from January 1 through December 31.  See also Fiscal Year.

Cash Basis

Accounting method which reports income as it is received (in money or other property) and expenses when they are actually paid.  See also Accrual Basis.

Closing Entry

A journal entry made at the end of an accounting period which zeroes out the balances of temporary accounts in preparation for the new accounting period and summarizing the period's revenues and expenses.

Cost of Goods Sold

Figure representing the buying of raw materials and producing finished goods.

Credit

An entry on the right side of double entry bookkeeping which reduces and asset or expenses account and increases a liability or revenue account.

Debit

An entry on the left side of double entry bookkeeping which increases an asset or expense account and decreases a liability or revenue account.

Dependent

A specified relative (child, spouse, parent), or non-relative who is living with the taxpayer, for whom a taxpayer pays more than half of their support for a calendar year.  The taxpayer is allowed an additional deduction for a dependent.

Dependent Care Expenses

Qualified child care expenses will allow the taxpayer a credit, with limitations, against their tax liability.

Depreciation

Depreciation is often brough to mind when purchasing a vehicle as it is the decline in value of a tangible item.  For tax purposes, depreciation is also the deduction of a percentage of the total cost of the intangible asset over a specific time period - rather than expensing the total cost of the item or property all in the year in which it is purchased.  See also Amortization and Section 179.

Distributions

Payment by a business to its owners in the form of cash, stocks, or earnings.

Double Entry

A system of accounting/bookkeeping where each transaction is entered twice: once as a credit and again as a debit.

Equity

the owners' share of a business

Estimated Tax

Individuals, corporations, and estates must make estimated tax payments under certain circumstances on a quarterly basis.  Typically, individuals satisfy the estimated tax requirement via W-2 wages and withholdings, however those with small businesses may owe estimated tax payments on the earnings from their businesses in advance of the filing deadline.

Fiscal Year

Accounting period of 12 months ending on the last day of a month other than December.  See also Calendar Year.

Head of Household

The HOH filing status for income tax purposes receives a tax advantage over a single individual but less of an advantage over Married Filing Jointly.  To file as HOH, one is typically unmarried with at least one child, grandchild, or other relative (not a cousin) as a dependent.

Itemized Deductions

Certain expenses of a personal nature that are specifically allowed as deductions from taxable income.  For example, medical expenses, property taxes, mortgage interest, charitable contributions, unreimbursed employee expenses, and state and local income taxes are allowed as itemized deductions (some are subject to limitations).  TIn general, if the total of the allowable amount of itemized deductions exceeds the standard deduction for the year it may be used to further reduce taxable income.  See also Standard Deductions.

Long-Term Gain or Loss

Gains and losses on the sale of capital assets that were held for a period greater than 12 months.  Typically mentioned when reporting stock sales for income tax purposes and reported on Schedule D of Federal Form 1040.  See also Short-Term Gain or Loss.

Partnership

Relationship between two or more persons based on an oral or written agreement whereby they agree to carry on a trade or business for profit and to share the results.  The partners are liable for the debts of the partnership unlike the shareholders of a corporation.

Penalties

For tax purposes, there are two types of additions to taxes due on income - penalties and interest.  Penalties are not deductible and are usually imposed at a flat rate unlike interest.

Retained Earnings

Accumulated undistributed earnings of a company which are reserved for future needs or future distribution to owners.

S Corporation

A form of Corporation which has elected to be taxed at the individual income level meaning income and loss are reported on the income tax returns of the shareholders.  One benefit of an S Corporation that should be mentioned is the avoidance of self-employment tax.

Self-employment tax

The combined rate of tax on self-employment income is the sum of medicare (2.9%) and Social Security (12.4%).  This tax is to ensure that self-employed individuals are eligible for retirement benefits at the same age and rate as those who earn wages.  One-half of the self-employment tax may be deducted from gross income on an individual's income tax return.

Standard Deductions

The mimimum amount of itemized deductions that taxpayers receive as a deduction from their Adjusted Gross Income in order to arrive at taxable income.  The standard deduction is a fixed amount based on the filing status of the taxpayer (single or married) and which is adjusted for inflation annually.  This amount is used when it exceeds the total allowable amount of itemized deductions that a taxpayer is able to claim.  See also Adjusted Gross Income and Itemized Deductions.

Statute of Limitations

Period within which actions may be brought upon claims, in this case, pertaining to claims for tax refunds.  There is a three-year period in which a taxpayer may file a claim for refund of taxes paid due to an amendment to their prior year's tax return.  

Surviving Spouse

Surviving spouses are entitled to the benefits of filing a joint income tax return for the year in which the death of their spouse occurred.