US federal tax dictionary

US federal tax terminology defined for exam candidates and practitioners. Definitions describe what each term means; dollar thresholds and rates change annually and are not stated here.

36 terms defined

Adjusted gross income

AGI. Total gross income less specific above-the-line deductions. Used as the basis for many phase-outs and limitations.

Above-the-line deduction

A deduction subtracted from gross income to arrive at adjusted gross income, available whether or not the taxpayer itemises.

Below-the-line deduction

A deduction taken from adjusted gross income, comprising either the standard deduction or itemised deductions.

Standard deduction

A fixed deduction from adjusted gross income available to taxpayers who do not itemise, with the amount depending on filing status.

Itemised deductions

Specific deductible expenses — such as qualifying mortgage interest, state and local taxes and charitable contributions — claimed in place of the standard deduction.

Taxable income

Adjusted gross income less the standard or itemised deductions and any qualified business income deduction. The amount to which tax rates are applied.

Marginal tax rate

The rate applied to the last dollar of taxable income. Distinct from the effective rate, which is total tax divided by total income.

Tax credit

A dollar-for-dollar reduction of tax liability. More valuable per dollar than a deduction, which only reduces taxable income.

Refundable credit

A credit that can reduce tax liability below zero, producing a refund. A non-refundable credit can only reduce liability to zero.

Filing status

The category determining a taxpayer's standard deduction and rate brackets: single, married filing jointly, married filing separately, head of household, or qualifying surviving spouse.

Dependent

A qualifying child or qualifying relative who meets the relationship, residency, support and other tests, entitling the taxpayer to certain benefits.

Form 1040

The US Individual Income Tax Return, the primary form on which individuals report income and compute federal income tax.

Form 1120

The US Corporation Income Tax Return, filed by C corporations to report income and compute corporate income tax.

Form 1065

The US Return of Partnership Income, an information return through which a partnership reports results that flow through to its partners.

Schedule K-1

The statement issued by a partnership, S corporation or trust reporting each owner's or beneficiary's share of income, deductions and credits.

Pass-through entity

An entity — such as a partnership, S corporation or LLC taxed as either — whose income is not taxed at entity level but flows through to its owners' returns.

C corporation

A corporation taxed as a separate entity under Subchapter C, with earnings potentially taxed again as dividends when distributed to shareholders.

S corporation

A corporation electing Subchapter S treatment, passing income through to shareholders and avoiding entity-level federal income tax, subject to eligibility restrictions.

Basis

A taxpayer's investment in an asset for tax purposes, used to compute gain or loss on disposal and limits on deductible losses.

Capital gain

The gain on disposal of a capital asset. Classified as short-term or long-term depending on the holding period, with different rates applying.

Depreciation recapture

The rule requiring gain on disposal of depreciable property to be treated as ordinary income to the extent of depreciation previously deducted.

Section 179 deduction

An election to expense the cost of qualifying business property in the year it is placed in service, rather than depreciating it over time, subject to limits.

MACRS

The Modified Accelerated Cost Recovery System. The prescribed method for depreciating most tangible business property for US federal tax purposes.

Qualified business income deduction

A deduction available to owners of pass-through businesses, computed as a percentage of qualified business income and subject to income-based limitations.

Self-employment tax

Social Security and Medicare tax paid by self-employed individuals on net earnings from self-employment, covering both the employer and employee portions.

Estimated tax

Quarterly payments of tax on income not subject to withholding, required where liability would otherwise exceed a threshold at filing.

Withholding

Tax deducted at source from wages and certain other payments and remitted to the IRS on the recipient's behalf.

Statute of limitations

The period within which the IRS may assess additional tax or a taxpayer may claim a refund. The general assessment period runs from the filing date, with extensions in defined circumstances.

Enrolled Agent

A tax practitioner licensed by the US Department of the Treasury with unlimited rights to represent taxpayers before the IRS in any state.

Circular 230

Treasury Department regulations governing practice before the IRS, setting the duties and restrictions applying to enrolled agents, CPAs and attorneys.

PTIN

Preparer Tax Identification Number. The identifier the IRS requires of anyone who prepares federal tax returns for compensation.

Power of attorney

Authorisation, filed on Form 2848, permitting a representative to act on a taxpayer's behalf before the IRS.

Audit

An IRS examination of a return and supporting records to verify that income, deductions and credits have been reported correctly.

Offer in compromise

An agreement settling a tax liability for less than the amount owed, available where collection in full is doubtful or would cause economic hardship.

Installment agreement

An arrangement permitting a taxpayer to pay an outstanding tax liability in periodic payments over time rather than in a single sum.

Penalty abatement

Relief from an assessed penalty where the taxpayer demonstrates reasonable cause, or qualifies for administrative relief such as first-time abatement.