Tax Glossary- Tax Terms G thru K
Please use the "Tax Glossary" below to search out tax terms and their meanings
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Gain
The excess of the amount realized from a sale or exchange over the adjusted
basis of the property sold or exchanged.
General Depreciation System
The most commonly used MACRS system. Personal property is depreciated
using the declining-balance method (double or 150 percent, depending on the
recovery class) switching to straight line when that method results in the
larger deduction. Residential rental property is depreciated using the
straight-line method over 27.5 years, and nonresidential real property is
depreciated using the straight-line method over 39 years (31.5 years for
property placed in service before May 13, 1993).
General Rule
Used to determine the taxable portion of a pension or annuity.
General Straight-Line Depreciation System
A MACRS system of depreciation using the straight-line method over the
normal MACRS recovery period for the asset.
Gift
A transfer of property from one person or entity to another without
consideration or compensation. For income tax purposes, the words "gift"
and "contribution" usually have separate meanings, the latter word being
used in connection with contributions to charitable, religious, etc.,
organizations, whereas the word "gift" refers to transfers of money or
property to private individuals, needy persons, friends, relatives, etc.
The recipient of a gift is not required to include it in his gross income,
and the maker of the gift is not entitled to deduct it (except for business
gifts to customers of $25 or less per donee per year).
Gift Tax
A graduated federal tax paid by donors on gifts exceeding $10,000 (for
2001) per year per donee.
Golden Parachute
An agreement entered into by a corporation with its top executives to
make substantial payments to the executives in the event of a change in
corporate control. Such payments are treated as compensation.
Goodwill
The ability of a business to generate income in excess of a normal rate
on assets due to superior managerial skills, market position, new product
technology, etc. In the purchase of a business, goodwill represents the
difference between the purchase price and the value of the net assets.
Goodwill acquired after August 10, 1993, must be amortized over a 15-year
period and is subject to recapture when the business is sold. Amortization
is computed on Form 4562.
Government Bonds Issued at a Discount
Certain U.S. Government bonds (Series E and EE) are issued at a
discount and do not pay interest during the life of the bond. Instead, the
bonds are redeemable at increasing fixed amounts. Thus, the difference
between the purchase price and the amount received upon redemption
represents interest income to the holder. A cash-basis taxpayer may defer
recognition of taxable income until such bonds are redeemed or until the
year of final maturity, whichever is earlier. Alternatively, the taxpayer
may elect to include the annual increase in the value of the bond in gross
income on an annual basis.
Gross Income
Total worldwide income received in the form of money, property, or
services that is subject to tax unless specifically exempt or excluded by
law.
Gross Rents
Total income from rents before expenses or the depreciation or cost
recovery deduction.
Group Term Life Insurance
Life insurance coverage purchased by an employer for a group of
employees. Such insurance is renewable on a year-to-year basis and does not
accumulate in value; that is, no cash surrender value is built up. The
premiums paid by the employer on such insurance are usually not taxed to an
employee unless coverage exceeds $50,000.
Guaranteed Return
A specific amount to be paid by an annuity. This may be a certain
payment for a given number of years or a given amount to be paid regardless
of death.
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Hardship Withdrawal
A withdrawal from a section 401(k), section 403(b), or section 457
plan that is permitted when the plan participant has an immediate and heavy
financial need and the withdrawal is necessary to meet that need.
Head of Household
The filing status used by an unmarried taxpayer who pays over half the
cost of maintaining his home that is the principal residence for over half
the tax year of his unmarried child or other lineal descendent (this child
does not have to be a dependent) or of his dependent married child or other
qualified relative. A dependent parent who does not live with the taxpayer
may also qualify the taxpayer for the head of household status if
qualifications are met.
Hobby Loss
A nondeductible loss arising from a personal hobby as contrasted with a
loss arising from an activity engaged in for profit.
Holding Period
The period of time property has been owned for income tax purposes. The
holding period determines if gain or loss from the sale or exchange of a
capital asset is long or short term.
Home Office Expenses
Expenses of operating a portion of a residence used for business or
employment-related purposes. Several restrictions limit the deduction for
home-office expenses.
Hope Scholarship Credit
A nonrefundable credit of up to $1,500 per qualified student for tuition
and fees paid for the first two years of post-secondary education.
Household Employee
An individual who performs non-business services for the taxpayer in or
around the taxpayer's home. Such services include child and dependent care,
house cleaning, cooking, and yard work.
Household Expenses
A portion of total support; the value of lodging plus food consumed in
the home, utilities paid, and repairs made. The total is divided equally
among all family members. Each member's share of household expenses is part
of his or her total support.
Husband and Wife
A status that, among other things, entitles a couple to file a joint
income tax return. For the purpose of joint returns, common-law marriages
are recognized only if the state in which the two persons reside recognizes
such marriages or if the state in which the marriage began recognizes
common-law marriages. The status as husband and wife on the last day of the
tax year governs the right to file a joint return.
Hybrid Method of Accounting
A combination of accounting methods, usually of the cash and accrual
methods.
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Identifying Numbers
All taxpayers and dependents must have identifying numbers.
Individuals, with rare exceptions, use their social security numbers.
Businesses, estates, trusts, partnerships, and payers of dividends and
interest, use employer identification numbers. Certain resident and
nonresident aliens use an individual taxpayer identification number.
Certain children in the process of being adopted may receive an adoption
tax identification number.
Imputed (or Unstated) Interest
In the case of certain long-term sales of property, the IRS has the
authority to convert some of the gain from the sale into interest income if
the contract does not provide for a minimum rate of interest to be paid by
the purchaser. Such converted interest is called imputed interest.
Incentive Stock Option
A statutory stock option that allows an employee to purchase stock of
the employer below current market price. No income tax consequences result
from the grant or exercise of such an option and, if holding period
requirements are met, gain on the eventual sale of the stock is long-term
capital gain.
Income
The word "income," in its broad sense, is the gain derived from capital,
labor, or a combination of the two. It is distinguishable from the capital
itself. Ordinarily, for income tax purposes, the word "income" is not used
alone. Rather it is used within such descriptive terms as gross income,
taxable income, and adjusted gross income, all of which are defined
elsewhere in this glossary.
Income Averaging
A method by which farmers may sometimes reduce tax liability by
computing their income tax as if their current farm income had been spread
evenly over the preceding three years.
Independent Contractor
A taxpayer who contracts to do work according to his own methods and
who is not subject to control except as to the results of such work. An
employee, by contrast, is subject to the control of the employer as to the
methods to be used to obtain the desired results.
Individual Retirement Arrangement (IRA)
There are three types of IRAs: traditional IRAs, Roth IRAs, and
education IRAs.
Information Returns
These are returns, such as Form W-2 and the various 1099 forms, which
report to the IRS income and property transactions. The payer, broker, or
other designated person is required to file these returns and is subject to
penalties for noncompliance.
Inheritance
As distinguished from a bequest or devise, an inheritance is property
acquired through laws of descent and distribution from a person who dies
without leaving a will. Property so acquired usually takes as its basis,
for gain or loss on later disposition or for depreciation, the fair market
value at the date of the decedent's death. An inheritance of property is
not a taxable event, but the income from an inheritance is taxable.
Insolvency
A financial condition in which a taxpayer's total liabilities (debts
owed) exceed the total fair market value of all his or her assets (cash and
other property). A taxpayer is insolvent to the extent his or her
liabilities exceed his or her assets.
Installment Method
A method of accounting enabling a taxpayer to spread the recognition of
gain on the sale of property over the payment period. Under this procedure,
the seller computes the gross profit percent from the sale (that is, the
gain divided by the contract price) and applies it to each payment received
to arrive at the amount of the gain to be recognized.
Insurance Dividends
Amounts paid to policy holders are not dividends on capital stock, but
are a rebate of a portion of the premiums paid for the insurance. Such
dividends reduce the cost of the insurance and are not taxable unless in
excess of the total premiums paid. Interest paid when the dividends are
left with the insurance company is reported to the taxpayer as interest and
is taxable.
Intangible Personal Property
Property, other than real property, with no intrinsic value; its value
lies in the rights conveyed. Examples include cash, insurance, stock,
goodwill, and patents.
Interest Received
An amount received for the use of money that is to be repaid in full at
a specified time or on demand.
Interlocutory Decree See Divorce Decree (Interlocutory)
Internal Revenue
Internal Revenue sums raised by the United States through imposition of
taxes on incomes, transfers, facilities, products, manufactures, and sales,
all relating to domestic transactions, as broadly distinguished from
customs duties on goods imported.
Internal Revenue Service (IRS)
The division of the U.S. Treasury Department responsible for collecting
taxes.
Inventory
A list of articles of property. For income tax purposes, inventory
refers only to a list of articles comprising stock in trade--articles held
for sale to customers in the regular course of a trade or business. The
cost of goods sold during the year is determined by adding to the inventory
at the beginning of the year the purchases during the year, and subtracting
from this sum the inventory at the close of the year.
Investment Interest
Interest paid on loans acquired to purchase or hold investment
property. Investment interest is deductible as an itemized deduction to the
extent of net investment income.
Investment Property
Property owned primarily for its potential increased value. Examples
include land, stock, works of art, and collectibles.
Investment Tax Credit
Prior to 1986, a credit was allowed for the purchase of certain
depreciable personal property used in business.
Involuntary Conversion
The receipt of money or other property as reimbursement for the loss or
destruction of property through theft, casualty, or condemnation. Any gain
realized on an involuntary conversion can, at the taxpayer's election, be
considered non-recognizable for federal income tax purposes if the owner
reinvests the proceeds within a prescribed period of time in similar
property.
Itemized Deductions
Certain personal expenditures allowed by the tax Code as deductions
from adjusted gross income. Examples are certain medical expenses,
qualified interest on home mortgages, and charitable contributions.
Itemized deductions are reported on Schedule A, Form 1040. A taxpayer who
itemizes deductions may not claim the standard deduction.
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Jointly Owned Property
Property held in the name of more than one person.
Joint Return
A return combining the income, exemptions, credits, and deductions of a
husband and wife.
Joint Tenancy
A form of joint ownership. Each tenant has an undivided interest in the
entire property. On death of one of the owners, the survivor becomes the
owner of the whole. A joint tenancy may involve more than two persons.
Joint Venture
An enterprise participated in by associates acting together, with a
community of interests, each associate having the right to participate in
its management. For income tax purposes, a joint venture is treated as a
partnership, not taxable in its own capacity, but regarded as a taxpayer
for the purpose of computing its taxable income, which is distributable
among the associates in the proportions agreed upon. Such distributive
shares are reported by the associates on their individual income tax
returns.
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Keogh Plan
A retirement plan set up for a self-employed taxpayer that permits him
or her to deduct a portion of his or her compensation from total income.