Tax Glossary


Adjusted Gross Income (AGI): An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income.
After-Tax Return: The return from an investment after the effects of taxes have been taken into account.
Audit: The examination of the accounting and financial documents of a firm by an objective professional. The audit is done to determine the records' accuracy, consistency, and conformity to legal and accounting principles.

Book Value: The net value of a company's assets, less its liabilities and the liquidation price of its preferred issues. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock's market value.

Capital Gain or Loss: The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.
Certified Public Accountant (CPA): A professional license granted by a state board of accountancy to an individual who has passed the Uniform CPA Examination (administered by the American Institute of Certified Public Accountants) and has fulfilled that state's educational and professional experience requirements for certification.
Community Property: State laws vary, but generally all property acquired during a marriage - excluding property one spouse receives from a will, inheritance, or gift - is considered community property, and each partner is entitled to one half. This includes debt accumulated. There are currently nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Compound Interest: Interest that is computed on the principal and on the accrued interest. Compound interest may be computed continuously, daily, monthly, quarterly, semiannually, or annually.

Deduction: An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.
Defined Benefit Plan: A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation.
Defined Contribution Plan: A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee's compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee's account.
Dividend: A pro rata portion of earnings distributed in cash by a corporation to its stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends may vary with the fortunes of the company.

Employer-Sponsored Retirement Plan: A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.
Estate Tax: Upon the death of a decedent, federal and state governments impose taxes on the value of the estate left to others (with limitations).

401(k) Plan: A defined contribution plan that may be established by a company for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.
403(b) Plan: A defined contribution plan that may be established by a nonprofit organization or school for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.

Gift Taxes: A federal tax levied on the transfer of property as a gift. This tax is paid by the donor. The first $12,000 a year from a donor to each recipient is exempt from tax. Most states also impose a gift tax. The gift tax exemption is indexed annually for inflation.

Individual Retirement Account (IRA): Contributions to a traditional IRA are deductible from earned income in the calculation of federal and state income taxes if the taxpayer meets certain requirements. The earnings accumulate tax deferred until withdrawn, and then they are taxed as ordinary income. Individuals not eligible to make deductible contributions may make nondeductible contributions, the earnings on which would be tax deferred.

Jointly Held Property: Property owned by two or more persons under joint tenancy, tenancy in common, or, in some states, community property.

Keogh Plan: This retirement plan, named for Eugene Keogh, is designed for self-employed individuals. Up to $46,000 of self-employed income may be deducted from compensation and set aside into the plan.

Lump-Sum Distribution: The disbursement of the entire value of a profit-sharing plan, pension plan, annuity, or similar account to the account owner or beneficiary. Lump-sum distributions may be rolled over into another tax-deferred account.

Marginal Tax Bracket: The range of taxable income that is taxable at a certain rate. Currently, there are six marginal tax brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.
Marital Deduction: A provision of the tax codes that allows all assets of a deceased spouse to pass to the surviving spouse free of estate taxes. This provision is also referred to as the unlimited marital deduction.

Net Asset Value: The price at which a mutual fund sells or redeems its shares. The net asset value is calculated by dividing the net market value of the fund's assets by the number of outstanding shares.

Principal: In a security, the principal is the amount of money that is invested, excluding earnings. In a debt instrument such as a bond, it is the face amount.
Profit-Sharing Plan: An agreement under which employees share in the profits of their employer. The company makes annual contributions to the employees' accounts. These funds usually accumulate tax deferred until the employee retires or leaves the company.

Qualified Retirement Plan: A pension, profit-sharing, or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules. Contributions accumulate tax deferred until withdrawn and are deductible to the employer as a current business expense.

Rollover: A method by which an individual can transfer the assets from one retirement program to another without the recognition of income for tax purposes. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.
Roth IRA: A nondeductible IRA that allows tax-free withdrawals when certain conditions are met. Income and contribution limits apply.

Simplified Employee Pension Plan (SEP): A type of plan under which the employer contributes to an employee's IRA. Contributions may be made up to a certain limit and are immediately vested.
Spousal IRA: An IRA designed for a spouse with no earned income. Between a spousal IRA and a regular IRA, the maximum combined contribution that a couple can make is $10,000 in 2008 ($11,000 if one spouse is age 50 or older or $12,000 if both are age 50 or older) or 100 percent of earned income, whichever is less. This total may be split between the two IRAs as the couple wishes, provided the contribution to either IRA does not exceed $5,000 ($6,000 for those aged 50 or older).

Tax Bracket: The range of taxable income that is taxed at a certain rate. Brackets are expressed by their marginal rate.
Tax Credit: Tax credits, the most appealing type of tax deductions, are subtracted directly, dollar for dollar, from your income tax bill.
Tax Deferred: Interest, dividends, or capital gains that grow untaxed in certain accounts or plans until they are withdrawn.
Tax-Exempt Bonds: Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes.
Taxable Income: The amount of income used to compute tax liability. It is determined by subtracting adjustments, itemized deductions or the standard deduction, and personal exemptions from gross income.

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Tax Glossary Adjusted Gross Income (AGI) An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income. After-Tax Return The return from an investment after the effects of taxes have been taken into account. Audit The examination of the accounting and financial documents of a firm by an objective professional. The audit is done to determine the records' accuracy, consistency, and conformity to legal and accounting principles. Book Value The net value of a company's assets, less its liabilities and the liquidation price of its preferred issues. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock's market value. Capital Gain or Loss The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss. Certified Public Accountant (CPA) A professional license granted by a state board of accountancy to an individual who has passed the Uniform CPA Examination (administered by the American Institute of Certified Public Accountants) and has fulfilled that state's educational and professional experience requirements for certification. Community Property State laws vary, but generally all property acquired during a marriage - excluding property one spouse receives from a will, inheritance, or gift - is considered community property, and each partner is entitled to one half. This includes debt accumulated. There are currently nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Compound Interest Interest that is computed on the principal and on the accrued interest. Compound interest may be computed continuously, daily, monthly, quarterly, semiannually, or annually. Deduction An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed. Defined Benefit Plan A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation. Defined Contribution Plan A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee's compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee's account. Dividend A pro rata portion of earnings distributed in cash by a corporation to its stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends may vary with the fortunes of the company. Employer-Sponsored Retirement Plan A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans. Estate Tax Upon the death of a decedent, federal and state governments impose taxes on the value of the estate left to others (with limitations). 401(k) Plan A defined contribution plan that may be established by a company for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½. 403(b) Plan A defined contribution plan that may be established by a nonprofit organization or school for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½. Gift Taxes A federal tax levied on the transfer of property as a gift. This tax is paid by the donor. The first $12,000 a year from a donor to each recipient is exempt from tax. Most states also impose a gift tax. The gift tax exemption is indexed annually for inflation. Individual Retirement Account (IRA) Contributions to a traditional IRA are deductible from earned income in the calculation of federal and state income taxes if the taxpayer meets certain requirements. The earnings accumulate tax deferred until withdrawn, and then they are taxed as ordinary income. Individuals not eligible to make deductible contributions may make nondeductible contributions, the earnings on which would be tax deferred. Jointly Held Property Property owned by two or more persons under joint tenancy, tenancy in common, or, in some states, community property. Keogh Plan This retirement plan, named for Eugene Keogh, is designed for self-employed individuals. Up to $46,000 of self-employed income may be deducted from compensation and set aside into the plan. Lump-Sum Distribution The disbursement of the entire value of a profit-sharing plan, pension plan, annuity, or similar account to the account owner or beneficiary. Lump-sum distributions may be rolled over into another tax-deferred account. Marginal Tax Bracket The range of taxable income that is taxable at a certain rate. Currently, there are six marginal tax brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent. Marital Deduction A provision of the tax codes that allows all assets of a deceased spouse to pass to the surviving spouse free of estate taxes. This provision is also referred to as the unlimited marital deduction. Net Asset Value The price at which a mutual fund sells or redeems its shares. The net asset value is calculated by dividing the net market value of the fund's assets by the number of outstanding shares. Principal In a security, the principal is the amount of money that is invested, excluding earnings. In a debt instrument such as a bond, it is the face amount. Profit-Sharing Plan An agreement under which employees share in the profits of their employer. The company makes annual contributions to the employees' accounts. These funds usually accumulate tax deferred until the employee retires or leaves the company. Qualified Retirement Plan A pension, profit-sharing, or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules. Contributions accumulate tax deferred until withdrawn and are deductible to the employer as a current business expense. Rollover A method by which an individual can transfer the assets from one retirement program to another without the recognition of income for tax purposes. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution. Roth IRA A nondeductible IRA that allows tax-free withdrawals when certain conditions are met. Income and contribution limits apply. Simplified Employee Pension Plan (SEP) A type of plan under which the employer contributes to an employee's IRA. Contributions may be made up to a certain limit and are immediately vested. Spousal IRA An IRA designed for a spouse with no earned income. Between a spousal IRA and a regular IRA, the maximum combined contribution that a couple can make is $10,000 in 2008 ($11,000 if one spouse is age 50 or older or $12,000 if both are age 50 or older) or 100 percent of earned income, whichever is less. This total may be split between the two IRAs as the couple wishes, provided the contribution to either IRA does not exceed $5,000 ($6,000 for those aged 50 or older). Tax Bracket The range of taxable income that is taxed at a certain rate. Brackets are expressed by their marginal rate. Tax Credit Tax credits, the most appealing type of tax deductions, are subtracted directly, dollar for dollar, from your income tax bill. Tax Deferred Interest, dividends, or capital gains that grow untaxed in certain accounts or plans until they are withdrawn. Tax-Exempt Bonds Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes. Taxable Income The amount of income used to compute tax liability. It is determined by subtracting adjustments, itemized deductions or the standard deduction, and personal exemptions from gross income. A B C D E F G I J K L M N P Q R S T Search the Glossary for specific terms or phrases:
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Tax Glossary