Tax Glossary- Tax Terms L thru O
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Land Value
The value of the land in a sale where the total sale price includes
land as well as any improvements to the land.
Last In, First Out (LIFO)
An accounting method for valuing inventories for tax purposes. Under
this method, the last items purchased are treated as being the first items
sold. Ending inventory is valued using the cost of the items with the
earlier purchase dates.
Legally Separated
Separated under a decree of separate maintenance that requires the
spouses to live apart.
Lessee
One who rents property from another. In the case of real estate, the lessee
is also known as the tenant.
Lessor
One who rents property to another. In the case of real estate, the
lessor is also known as the landlord.
Lien for Taxes
The U.S. Treasury, as part of its tax collection effort, may attach a
lien (a legal claim) on the property of a taxpayer who is delinquent in the
payment of amounts owed to the IRS and who has not made arrangements to
pay.
Lifetime Learning Credit
A nonrefundable credit equal to 20 percent of the first $5,000 (for
2001) of qualified higher education tuition and fees paid during the year
on behalf of the taxpayer, his or her spouse, or his or her dependents.
Like-Kind Exchange
An exchange of property held for productive use in a trade or business
or for investment (except inventory and stocks and bonds) for property of
the same type. Unless different property is received (called boot), the
exchange is nontaxable in the current year. Any gain or loss is not
recognized until the property received in the exchange is sold or disposed
of. Like-kind exchanges are reported on Form 8824.
Like-Kind Property
Business or investment properties that are the same type.
Liquidation
(1) The process of converting securities or other property into cash.
Liquidation Distributions
A return of capital received because of a partial or complete
liquidation (going out of business) of a corporation. The basis of the
stock on which liquidation distributions are paid is reduced by the amount
of the distributions. Any amount received in excess of basis in the stock
is taxable. In a liquidation that results in cancellation of the stock, a
loss can be claimed the year the final distribution is received if total
distributions are less than the taxpayer's basis. Report liquidation
distributions on Schedule D, Form 1040.
Listed Property
Listed property includes passenger autos and other property used for
transportation, property generally used for purposes of entertainment,
recreation, or amusement, computers not used exclusively at a regular
business establishment, cellular telephones, and other property to be
specified by the IRS. Restrictions apply to the depreciation of listed
property.
Load
The portion of the price of buying shares in a mutual fund that goes
for the salesperson's fees and the costs of making the transaction and
maintaining the fund.
Lodging
A portion of total support. Lodging includes the fair rental value of a
room, apartment, or house in which the dependent lives, a reasonable
allowance for the use of furniture and appliances, and all utilities.
Long-Term Capital Gains and Losses
Gains and losses on the sale or exchange of capital assets that have
been held for more than 12 months. A net long-term capital gain is the
excess of long-term gains over long-term losses, or vice versa for a net
long-term capital loss.
Lower of Cost or Market Method of Inventory Valuation
Inventory valuation considering the actual cost or the replacement cost
of merchandise on the inventory date. The lower value is used, creating a
reduced gross profit for the period in which the decline occurred. An
approximately normal gross profit is realized during the period in which
the item is sold.
Lump-Sum Distribution
Payment of the entire amount due at one time rather than in
installments. Such distributions must come from qualified employer plans.
The recipient of a lump-sum distribution may be eligible for special tax
treatment of the distribution.
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Main Home
Regular, permanent place of abode.
Margin
A percentage of the full price of a security that must be paid as a
down payment by an investor buying on credit. The required margin
fluctuates subject to federal regulations.
Marriage
A legal union between one man and one woman as husband and wife.
Married Filing Jointly
The filing status used by a couple who are married at the end of the
tax year and not legally separated under a final decree of divorce or
separate maintenance and who record total income, exemptions, and
deductions of both spouses on one tax return.
Married Filing Separately
The filing status used by a married couple who choose to record their
respective incomes, exemptions, and deductions on separate individual tax
returns.
Material Participation Income
Active income, as distinguished from passive income, from employment as
well as business and other for-profit activities in which the taxpayer
takes a significant and active role.
Medical Expenses
Qualified medical expenses of an individual, spouse, and dependents are
allowed as an itemized deduction to the extent that such amounts (less
reimbursements) exceed 7.5 percent of adjusted gross income.
Medical Savings Account (MSA)
A trust or custodial account created or organized exclusively for the
purpose of paying the qualified medical expenses of a high deductible
health plan of the account holder. Eligible individuals or small employers
can establish MSAs with qualified trustees or custodians. Contributions to
MSAs are deductible, within limits, as an adjustment to income.
Medicare Part A
The medicare tax withheld from an employee's wages, or the same
tax paid by a self-employed person on net self-employment income. The
medicare A tax rate is 1.45 percent (2.9 percent for self-employed
individuals).
Medicare Part B
The medicare insurance premium withheld from the benefits of
social security recipients. The basic premium for 2001 is $50.00 per month
($600 for the entire year).
Medicare Tips
Tips reported to an employer by a tipped employee. Such tips are
subject to Medicare withholding.
Medicare Wages
Total wages paid to an employee that are subject to Medicare tax. This
amount doesn't include tips, which are reported separately.
Midpoint Class Life
The "average" period for depreciating an asset under the CLADR System.
Midpoint class life is used to determine the asset's recovery period under
ACRS and MACRS.
Mileage Rate (Optional Method)
The method of deducting automobile expenses based on business miles
driven. The standard mileage rate for 2001 is 34.5 cents per mile.
Modified Accelerated Cost Recovery System (MACRS)
The method of depreciation introduced by the Tax Reform Act of 1986.
MACRS is not an entirely new system of depreciation, but rather a series of
significant modifications to the ACRS system. (See Accelerated Cost
Recovery System.) MACRS is mandatory for most depreciable assets placed in
service after December 31, 1986, and was available on an optional basis for
assets placed in service after July 31, 1986, and before January 1, 1987.
Under MACRS, costs of qualified property are written off over predetermined
periods.
Modified AGI (Adoption Credit)
For purposes of computing the adoption credit, modified adjusted gross
income is regular AGI plus: (1) any foreign earned income exclusion, (2)
any foreign housing exclusion or deduction, and (3) any exclusion of income
from U.S. possessions and Puerto Rico.
Modified AGI (Child Tax Credit)
For purposes of computing the child tax credit, modified adjusted gross
income is regular AGI plus any excluded foreign, U.S. possession, or Puerto
Rican income.
Modified AGI (Earned Income Credit)
For purposes of computing the earned income credit for most taxpayers,
modified AGI is regular AGI without regard to any excess of capital losses
over capital gains; net loss from estates and trusts; net loss from
nonbusiness rents and royalties; and 75 percent of any net loss from
businesses computed separately with respect to (1) nonfarm businesses
conducted as a sole proprietor, (2) farm businesses conducted as a sole
proprietor, and (3) other trades or businesses (not including income as an
employee).
Modified AGI (MAGI)
Modified adjusted gross income. For purposes of computing a specific
deduction or credit, MAGI begins with the taxpayer's regular adjusted gross
income which is then modified to account for certain types of losses,
exclusions, and deductions. For example, for child tax credit purposes, the
MAGI is regular AGI plus any excluded foreign, U.S. possession, or Puerto
Rican income.
Modified AGI (Social Security)
For purposes of determining the taxable portion (if any) of social
security or Railroad Retirement benefits, modified AGI is the sum of AGI
plus (1) tax-exempt or excluded interest, and (2) any amounts exempted or
excluded for foreign earned income, foreign housing, American Samoan
income, or Puerto Rican income.
Mortgage Credit Certificate
Qualified taxpayers who receive a mortgage credit certificate from a
state or local government to buy, rehabilitate, or improve their main homes
may claim a credit for a percentage of their home mortgage interest. The
percentage is set by the government and ranges from 10 to 50 percent. If
the percentage exceeds 20 percent, the maximum credit is $2,000 per year.
The itemized deduction for home mortgage interest must be reduced by the
amount of the credit. The credit is not refundable, but any portion that is
unused because it exceeds tax liability may be carried over to the
following three years where it can be added to any credit for the current
year. The credit is computed on Form 8396. Mortgage credit certificates may
be subject to a recapture rule if the home is sold within nine years.
Moving Expenses
An adjustment to income permitted to employees and self-employed
individuals who move for work-related reasons, providing certain
requirements are met. Form 3903 is used to compute deductible moving
expenses.
Multiple Support Agreement
If two or more persons who would otherwise be entitled to an exemption
for a dependent, together furnish more than half the dependent's support
(but no one individual provides more than half), any one of them who
furnishes more than 10 percent of the support is entitled to the exemption
if all the others who furnished more than 10 percent of the support file
written declarations that they will not claim an exemption for the
individual for that taxable year. Form 2120 is used for this purpose.
Mutual Fund
An open-ended investment company that invests money of its shareholders
in a usually diversified group of securities of other corporations.
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Necessary
An expense that is appropriate and helpful in furthering the taxpayer's
business or income-producing activity. See also Ordinary defined elsewhere
in this glossary.
Negligence
A lack of such reasonable care and caution as would be expected of a
prudent person. A penalty may be assessed if any part of an underpayment of
tax is due to negligent or intentional disregard of rules and regulations.
Net Operating Loss (NOL)
A net loss for the year attributable to business or casualty losses. In
order to mitigate the effect of the annual accounting period concept, the
law allows taxpayers to use an excess loss of one year as a deduction for
certain past or future years. In this regard, a carryback period of two
years (three or five years for certain losses) and a carryforward period of
20 years is allowed.
Nonbusiness Bad Debts
A bad debt loss not incurred in connection with a creditor's trade or
business. A nonbusiness bad debt is deductible as a short-term capital loss
and is allowed only in the year the debt becomes entirely worthless.
Noncustodial Parent
The parent who does not have physical custody of the child.
Nonrecourse Debt
An obligation for which the endorser is not personally liable.
Nonrecovery Property
Property that does not qualify for a cost recovery deduction under ACRS
or MACRS or property the taxpayer elects to exclude from ACRS or MACRS by
choosing a depreciation method not based on a number of years.
Nonrefundable Credit
A credit that cannot exceed the taxpayer's tax liability.
Nonresident Alien
A person who is not a U.S. citizen and does not live in the United
States, or lives in the United States under a nonresident visa, or does not
meet the substantial presence test.
Nontaxable Distributions
A general term applied to stock dividend distributions that are not
taxable. These distributions generally take the form of return of capital,
stock dividends, stock splits, and/or tax-free distributions.
Nontaxable Earned Income
Income a taxpayer receives for services that is excludable from gross
income. Examples include military housing allowances, ministers' housing
allowances, excludable combat pay, and deferred compensation. Nontaxable
earned income is earned income for purposes of computing the earned income
credit.
Nontaxable Exchange
An exchange on which no gain or loss is recognized in the current
year.
Nontaxable Income
Income that is by law exempt from tax.
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Open Year
A taxable year for which the statute of limitations has not yet
expired.
Operator
One who holds the working or operating rights in a gas or oil activity
and is obligated for the costs of development and production.
Option
An agreement to buy or sell property on or before a specified date at
an established price. The sale or exchange of an option to buy or sell
property results in capital gain or loss if the property is a capital
asset.
Ordinary
Common and accepted in the general industry or type of activity in
which the taxpayer is engaged. It is one of the tests for the deductibility
of expenses incurred or paid in connection with a trade or business; for
the production of income; for the management, conservation, or maintenance
of property held for the production of income; or in connection with the
determination, collection, or refund of any tax.
Ordinary Income or Loss
Income or loss that is fully includable in (or deductible from) gross
income and that does not have the characteristics of capital gain or loss.
Over the Counter
The market for securities issued by companies usually not listed on any
stock exchange. Over the counter (OTC) trading is the principal market for
U.S. government and municipal bonds.
Owner-Employee
A sole proprietor (self-employed individual).