Tax Glossary- Tax Terms D thru F
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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
An accelerated method of depreciation. The percent is determined by the
type of property. The depreciable basis for the next year is reduced by the
depreciation deduction taken in the current year.
Deduction
An amount that may be subtracted from income that is otherwise
taxable.
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
Non-recognition of realized gain at the time of a tax-deferred
exchange. Deferred gain on the sale of a principal residence generally
applies only to those sales made before May 7, 1997.
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 for an individual who qualifies as the taxpayer's
dependent ($2,800 for 2000).
Dependent
An individual who qualifies to be claimed as a dependent exemption on
another person's income tax return.
Dependent Care Credit
A nonrefundable credit based on expenses paid for a dependent's care.
Such care must enable the taxpayer to be gainfully employed or to look for
gainful employment. The credit is computed on Form 2441 for Form 1040
filers and on Schedule 2 for Form 1040A filers.
Depletion
The process by which the cost or other basis of a natural resource (for
example, an oil and gas interest) is recovered upon extraction and sale of
the resource. The two ways to determine the depletion allowance are the
cost and percentage methods, both of which are defined elsewhere in this
glossary.
Depreciable Asset
Tangible personal property or real property used in business or held
for the production of income with a determinable useful life of more than
one year.
Depreciation
The deduction of a reasonable allowance for the wear and tear of assets
(excluding inventory) used in a trade or business or held for the
production of income. In a more narrow sense, the term depreciation refers
to the method used to write off the cost or other basis of assets placed in
service before 1981 over their estimated useful lives.
Devise
A transfer of real property to a beneficiary under the terms of a
decedent's will. For income tax purposes, the term is used mainly in
connection with determining the basis of property so acquired. Basis is the
value of the property at the date of death of the decedent, or the later
alternate valuation date if chosen for estate tax purposes. Receipt of
property by devise is not a taxable event.
Disability Pension
A taxable pension from an employer-funded disability plan until the
recipient reaches normal retirement age, or a disability provision of a
retirement plan. Disability pensions generally are reported on line 7 of
Forms 1040 and 1040A (or line 1 of Form 1040EZ) and are treated as wages
for purposes of the child care and earned income credits.
Disaster Loss
If a casualty is sustained in an area designated as a disaster area by
the President of the United States, the casualty is designated a disaster
loss. A disaster loss may be treated as having occurred in the taxable year
immediately preceding the year in which the disaster actually occurred.
Thus, immediate tax benefits are provided to victims of the disaster.
Distribution
Money or property a taxpayer receives from a retirement plan such as an
individual retirement arrangement or an employer-maintained retirement
plan.
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 dividend, and therefore taxable
income, or it may be a return of capital.
Dividend
A stockholder's share of the profits of a corporation. An insurance
dividend is not a true dividend but a return of premium. Dividends from a
savings and loan association or credit union are interest, not dividends.
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.
Dollar Amount Paid
Cash plus the principal amount of a loan on the property that the
taxpayer is legally obligated to pay.
Drought Sale
The sale of more animals in a particular year than is the farmer's
usual practice because of drought conditions. If certain conditions are
met, the farmer may elect to report the proceeds from such sales either in
the year of the sale or in the following year.
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Earned Income
Income from personal services as distinguished from income generated by
property or other sources. Earned income includes all amounts received as
wages, tips, bonuses, other employee compensation, and self-employment
income, whether in the form of money, services, or property.
Earned Income Credit
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.
Covendell Educaction Savings Account (ESA)
A tax-favored savings plan under which any number of taxpayers mya
contribute up to a total of $500 (for 2001) per year per eligible
beneficiary. Contributions are nondeductible . Earnings withdrawals are tax
free and penalty free if used to pay 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.
Estate
A taxable entity that is established upon the death of a taxpayer. It
consists of all the decedent's property and personal effects. The estate
exists until the final distribution of its assets to the heirs and other
beneficiaries. During the period of administration, the executor must
usually file a return.
Estimated Tax
The amount of tax a taxpayer expects to owe for the year after subtracting
expected amounts withheld and the amount of any expected credits.
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.
Excess Social Security Tax Withheld
If a taxpayer worked for more than one employer during 2001, and more
than $4,984.80 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 not included in adjusted gross income because
the Tax Code excludes it.
Exclusion Percentage
Used to compute the excludable amount of a pension under the general
rule. This percentage is determined by dividing the taxpayer's total
contribution by the expected return.
Exemption
An amount ($2,900 for 2001) allowed by law as a reduction of income
that would otherwise be taxed. There are two kinds of exemptions: personal
and dependency.
Expected Return
For a lifetime pension, this is determined by multiplying the annual
pension by the taxpayer's expected life multiple from government actuarial
tables.
Expenses
For federal income tax purposes, expenses are divided into four
categories: (1) trade or business expenses, (2) expenses in connection with
production of income, in connection with management, conservation, or
maintenance of property held for production of income, (3) expenses in
connection with the determination, collection, or refund of any tax, and
(4) personal, family, or living expenses. Expenses in the first three
categories are generally deductible in determining taxable income. Expenses
in the fourth category are not deductible, except in a few cases (medical
expenses, charitable contributions, etc.) in which they are specifically
allowed by law. Expenses are to be distinguished from "capital
expenditures," defined elsewhere in this glossary.
Expenses of Sale
When paid by the seller, these expenses reduce the sale price of
property. Examples are commissions to a broker or real estate agent, title
search, title insurance, legal fees, and transfer taxes.
Expensing
A term used to refer to the section 179 expense deduction, defined
elsewhere in this glossary.
Extension
You can file an extension if you are not sure whether you can file your
return by the tax deadline. Extensions should be filed whether you have a
balance due or are expecting a refund. By filing an extension, you have the
added security of an additional four months to file your return. You don't
have to pay to file an extension, but you will have to pay if you have a
balance due.
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You must file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, on or before the regular due date of your return.
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You must make a reasonable estimate of your tax for the year. If you do not make a proper estimate of your tax, you may be charged a penalty for late filing.
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If at least 90 percent of the tax due on your return is paid through withholding or estimated tax payments before the original due date of your tax return, or with form 4868, you will not be charged a late payment penalty during the extension period. Payments made after the automatic extension period will be subject to the late payment penalty.
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Fair Market Value (FMV)
The amount at which property would change hands between a willing buyer
and a willing seller, neither being under compulsion to buy or sell and
both having reasonable knowledge of the relevant facts.
Fair Rental Value
The amount the owner of property could reasonably expect to receive
from a stranger for the same type of lodging; generally, the amount at
which a home with its furnishings could be rented to a similar size family
in a similar location.
Federal Income Tax Withheld
The amount withheld from an income and submitted by the payer to the
IRS as an advance payment of the taxpayer's federal income tax.
FICA (Federal Insurance Contributions Act)
The law that provides for social security and Medicare benefits. This
program is financed by payroll taxes imposed equally on the employer and
the employee. For 2001, the employer is required to withhold 1.45 percent
from each employee's gross wages for medicare tax and 6.2 percent of each
employee's wages up to $80,400 for social security tax.
Fiduciary
One who acts for an estate or trust to manage the property of the
estate or trust.
Finance Charges
Amounts paid for the privilege of making purchases on a
deferred-payment basis.
First In, First Out (FIFO)
An accounting method for determining the cost of inventories. Under
this method, the first items purchased are treated as being the first items
sold. Ending inventory is valued using the cost of later purchases, or the
lower of cost or market.
Fiscal Year
An accounting year ending on the last day of any month except
December.
Flexible Spending Account
See Cafeteria Plan.
Foreign Corporation
A corporation not organized under the laws of one of the states or
territories of the United States.
Foreign Tax Credit or Deduction
A credit or deduction available to a U. S. citizen or resident alien,
and in limited circumstances to a U. S. nonresident alien, who incurs or
pays income taxes to a country other than the United States.
Foster Child
For most tax purposes, a child other than a natural or adopted child, who
lived with the taxpayer for the entire year anf for whom the taxpayer cared
for as his own child. See also Qualified Foster Child (Child Tax and Earned
Income Credits).
Fringe Benefits
Compensation or other benefits received by an employee that are not in
the form of cash. Some fringe benefits (for example, accident and health
plans, and group-term life insurance) may be excluded from the employee's
gross income and, therefore, are not subject to federal income tax.
Full-Time Student
An individual who is enrolled in a school for the number of hours or
courses considered by the school to be full-time. School includes
elementary and secondary schools, post-secondary colleges, on-the-farm
training courses, and technical and trade schools. It does not include
on-the-job training, correspondence schools, or night school. However, a
student will not be disqualified by night classes that are part of a
full-time course of study.
Fully Taxable Pensions
Pensions for which taxpayers contributed none of the cost or have
recovered their cost in previous years.