My Free Taxes - United Way of Greater Toledo

My Free
Taxes
Created by the Free Tax Preparation Program
of United Way of Greater Toledo
Introduction:
The MyFreeTaxes Partnership provides free, state and federal tax preparation, and
filing assistance for qualified individuals. It’s easy, safe, secure, and 100 percent free.
Powered by the Walmart Foundation — in cooperation with Goodwill Industries
International, National Disability Institute, and United Way — the MyFreeTaxes
Partnership’s online and in-person tax preparation and filing services have helped
millions of families claim nearly $8 billion in tax credits and refunds since 2009. Tax
filing software is provided through MyFreeTaxes.com and powered by H&R Block. This
software is free for all individuals or families that have a combined income of less then
$60,000 in 2014.
To access the website simply go to: www.myfreetaxes.com
Disclaimer:
United Way of Greater Toledo is not responsible for the information you provide for your
return. Also, United Way of Greater Toledo does not have access to your tax return and
if you have any questions please contact the MyFreeTaxes Hotline at 1-855-698-9435.
Note from the author:
This manual was created to help aid you through the software accessed by going to
myfreetaxes.com. This is the first manual of its kind and it was created to help you
follow along with a step by step process through your federal and state tax return. This
manual is not intended to provide tax advice. If you are interested in learning more
about tax law please visit one of our education sessions, for dates, times, and locations
dial 2-1-1. There are a few examples in the manual that help to aid on what to do in
certain sections of the software. We wish you the best in filing your own taxes for free.
If you should have any questions or are seeking additional information, you should call
your local filing site at 1-855-MyTx-Help (1-855-698-9435).
2
Table of Contents
Introduction…………………………………………………………………………
1
Table of Contents………………………………………………………………….
2
Beginning My Free Taxes………………………………………………………...
3
Part 1: Federal Taxes……………………………………………………………..
Personal Information
Income
Adjustments and Deductions
Credit
Taxes
Wrap-Up
6
Part 2: State Taxes……………………………………………………………….
Personal Information
Income
Credits
Taxes
Wrap-Up
33
List of Commonly Used Terms…………………………………………………
44
3
When you type in the above address to
myfreetaxes.com, it will take you to this
homepage to begin working on your
taxes. When you are ready to begin filing,
click on the yellow link to the right of the
option “Step 3: Use Your Refund”.
Your screen should look like the image below informing you that the software is loading
and preparing to begin.
4
After the software has loaded and begun it should take you to this page where you have
the option to “Start My Taxes”. If you are a new user, it will have you register with the
program, but if you are a returning user your screen should look like the above image.
You should write down your username and password, so that you do not forget
them. Once you are ready to begin, click on “Start My Taxes”.
Throughout filing your taxes, you will have the options to go back to the previous page
by clicking “Back” or you can move on to the next page to continue filling out the
necessary information by clicking “Next”.
.
5
After clicking “Start My Taxes”, myfreetaxes.com will take you to a page where it asks if
you would like to import your information based on if you are a returning user. This may
or may not charge you a fee if you choose to have your information imported. We
strongly encourage you NOT to import your information due to this fact. If you are a
new user or wish to not import your previous tax information, just click the “Skip Import”
button at the bottom of the page.
Now that you are ready, you will begin by filing your federal taxes. Your federal taxes
are divided up into five sections on myfreetaxes.com. You will start by entering in some
personal information on the next screen.
6
Part 1: Federal
Taxes
Section 1: Personal Information
7
After you have skipped the option to import your information, you will come to a screen
that asks you about personal information involving your relationship and family status,
housing option, bills, and job status. Select all that apply to you ONLY over the past
year and click “Next” at the bottom of the page.
Next you will select your filing status. If you are not sure what your status is, simply
click the button “Guide Me” to help you figure out what you should select as your filing
status.
After choosing your status, click “Next”.
8
The next few steps will go through the “Guide Me” process step by step. Simply answer
the questions asked and you will be able to determine your filing status.
Guide Me Process:
9
After going through “Guide Me,” your filing status with be shown in a page that looks
similar to the above screen. After you have declared your status click “Next” to continue
filing your taxes.
10
After determining your filing status, you will be asked to fill out the rest of your personal
information in the screen above. Fill out all information on your screen (if it says
optional such as the mobile number information then this is not required) and click
“Next” to continue.
The next screen will ask you questions
similar to the page where you declared
your filing status. Select all the options
that apply over this past tax year, then
click “Next” to continue.
If you are unsure if you
should select an option, put
the mouse over the “Learn
more” just to the right of
the selection to figure out if
you should be considered
under this option.
11
The next screen will ask you about all the dependents* you wish to claim on your return.
If you are eligible to report dependents on your return, you will have to have the name
and social security number to claim them. For more dependents just select the “Add
Dependent” button to add additional spots.
* Dependent - A person, other than the taxpayer or the taxpayer's spouse, for whom an
exemption can be claimed. To be your dependent, a person must be your qualifying child or
qualifying relative (See Qualifying Child and Qualifying Relative). This information can be found
in Publication 17, which highlights who and what qualifies as a dependent.
After you select “Next” you will be brought to a page that asks you to check over your
entered Personal Information. Double check to make sure that everything above is
completed accurately. Once you have completed this, select “Next” to move onto the
next section Income.
12
Section 2: Income
To begin the income part of your federal taxes, the screen should show you all of the
documents that you will need to help you complete the next portion of your return(s).
Make sure while you are working along in this section you have all the documents that
apply to you so that you can answer all information. If you do not have the information
with you, you are able to save your current information and access it later once you
have all the documents.
Note from the author:
Remember to write down your username and password in order to it finish later. At any
point if you need to stop working, make sure you have your username and password so
that you can resume later.
13
Example 2-1: Income (Employment Wages Example)
If you are unsure if you
should select an option, put
the mouse over the “Learn
more” just to the right of
the selection to figure out if
you should be considered
under this option.
In the income section, the first page that you will see is the above image. While on this
page you will need to select all the income options that apply to you. Once you have
selected all that apply, click “Next” to continue. For the purpose of giving an example,
we will select “Employment Wages” to follow along with.
After selecting “Employment Wages” you will be brought to a screen that asks you
about all your W-2s. Fill out all the information listed above as stated on your W-2s.
Once you have finished select “Next” to continue.
14
After entering all your wages, salaries, and tips, you then need to report whether you
have any source of income coming from Foreign Accounts and Trusts. If you do, follow
along with the directions by selecting “Yes”. If not, select “No” and continue on by
clicking “Next”.
If you are unsure about
how they calculated the
amount, put the mouse over
the “Explain amount” just
to the right of the amount
to figure out how this was
calculated.
If you would like to go to or
edit a section, select “Go
To” to edit or redo a section.
Now we have completed the income portion of myfreetaxes.com. Again you will be
asked to check and make sure there are no known errors in your work or by the
computer. If a number does not make since you can click “Go To” to figure out why the
amount is as listed.
Example 2-2
If you wish to edit or enter a section that has not yet been done such as “Farm” then
under the farm option select “Go To” and follow along below…
15
Above is the process you will go through for editing farming. Select the options that fit
your current income situation and to all farms owned. Also if there is any interest or
financial assets from foreign accounts and/or trust that are related to farming, select
“Yes” otherwise select “No” and click “Next” to continue.
16
Now once you return back to the income form sheet, you can selected more options that
may apply to you. For use of example we will select the first option “Business you own,
self-employed, freelancing, contracting, or other independent work”. The next screen
will show you the step by step process to complete this part.
17
After you have completed all the parts of Income and have made sure that all the
amounts are correct, you can click next to move on to the next section Adjustments and
Deductions to continue your tax return.
18
Section 3: Adjustments and Deductions
The first screen that you will see is a list of all documents that you will need in order to
complete this portion of your taxes. After you have retrieved all documents that will be
needed, select “Next” to continue.
If you are unsure if you
qualify for one of the
selections, you can click
“What qualifies” for a
further explanation.
Select all adjustments and deductions that apply to you by marking them with a check.
After you have completed the selection process, select “Next” to continue.
19
After you have made your selection, myfreetaxes.com will recommend which option
they think will be of benefit for you. You can change the option if you wish to.
Otherwise, click “Next” to continue onto the next page.
After you have made your decision you will be taken to this page, where you can go
back and edit or change previous information by clicking “Go To”. If you would like
additional information select “Explain amount”. When you have completed this section
click “Next” to continue.
20
Example 3-1: Adjustments and Deductions (Student Loan Interest)
For purpose of an example, let’s select Student Loan Interest and follow along with the
directions.
21
Example 3-2: Adjustments and Deductions (Student Loan Interest)
Let’s do another example, doing alimony you paid.
22
23
After you have completed all the portions that apply to you and also select the deduction
you wish to take according to your filing status*, you have finished the Adjustments and
Deductions and will be moving on to the Credits section of the tax return.
*The chart below represents the amount of 2014 Standard Deductions as written by the IRS.
Each deduction is figured depending on your filing status, which you have already figured out in
the “Personal Information” section.
2014 Standard Deduction Table
Filing Status
Standard Deduction
Single
$6,200
Head of Household
$9,100
Married Filing Separately
$6,100
Married Filing Jointly
$12,400
Qualifying Widow(er)
$12,400
* Data from IRS Authorized, efile.com
24
Section 4: Credits
Next we will begin working on the Credits portion of the Federal Tax Return. Your next
screen should show you the documents and paperwork you will need to complete the
next portion. Click “Next” when you are ready to continue.
If you are unsure if you
qualify for one of the
selections, you can click
“What qualifies” for a
further explanation.
If you want a list of more
credit options, click the
plus to expand your
options.
The next page will ask you to select all the credits that apply to you currently. Select all
that apply and click “Next” to continue.
25
Example 4-1: Carry Forward
New lets go through an example selecting Adoption expenses or credit for carry
forward. You can follow along with the directions.
26
27
28
Now you will have the opportunity to change or edit other categories as they apply to
you. After you have completed all the portions that apply to you, you have finished the
credits portion and will be moving on to the Taxes section of the tax return.
29
Section 5: Taxes
Now we will begin on the Taxes part of the Federal Tax Return. Your screen should
show you all documents and forms you should need in order to complete this portion of
the return.
Example 4-1: Common Taxes and Penalties
For use of an example we will select “Under age 24,” which is the second option under
the Common Taxes and Penalties header. For this portion, follow along with the
directions in order to complete this part.
30
.
After you have finished the tax selection that you have selected you will go to this page
where you will be able to change and/or edit any option that applies to you. After you
have finished with this part, click “Next” to continue.
31
Section 6: Wrap-Up
Now you have completed the Federal part of your tax return. The section titled “Check
Any That Apply” are optional. If none apply skip this page and click “Next” to finish up
your taxes.
You will be asked for your day time phone number just in case there are any errors or
missing information that you will need to be contacted to correct. You will be contacted
by My Free Taxes, not United Way of Greater Toledo. If you have any questions about
your return, please call 1-855-698-9435.
32
After the above accuracy review has been run, myfreetaxes.com will show you your
final Federal Tax Return summary.
You will be able to see if you are
due a refund or if you owe. After you are done, click “Next” to continue onto your State
Taxes.
33
Part 2: State Taxes
34
Section 1: Personal Information
After you have completed your Federal Tax portion, it should continue to the State Tax
portion. If for some reason it does not go directly to the State portion, you can click on
the tab labeled “STATE” at the top of the program. Then click begin.
Next, you will have to clarify your residency status in the state of Ohio. After you have
selected the correct option, click “Next.”
35
Now select the county in which you reside.
Type the school district code that you live in. If you do not know the code, you can click
on the “Code Look-Up” button and follow the instructions to find your school district
code.
Note from the author:
For the next few sections you will be asked to fill out information about your income,
credit, and taxes. Since you have filled out the federal tax portion most of the
information will already be saved in the system, so you will not have to repeat certain
sections. However, in each section it will ask if there is any other information that you
need to fill out that was not included in the federal tax part. Go through the next couple
of sections answering all that apply to you. It will not ask something that you were
asked when completing your federal return.
36
Section 2: Income
If you are unsure if you
should select an option, put
the mouse over the “Learn
more” just to the right of
the selection to figure out if
you should be considered
under this option.
If you have received any other income that was not reported on your federal taxes, and
then select from the list above. If none of these apply to you just continue by clicking
“Next”.
37
If you are unsure about
how they calculated the
amount, put the mouse over
the “Explain amount” just
to the right of the amount
to figure out how this was
calculated.
If you would like to go to or
edit a section, select “Go
To” to edit or redo a section.
38
Section 3: Credits
If you have received any additional credits that were not reported on your federal taxes,
select all of these that apply to you. If none of these apply to you just continue by
clicking “Next”.
39
Section 4: Taxes
If you had any other taxes withheld that were not reported on your federal taxes, select
all of these that apply to you. If none of these apply to you just continue by clicking
“Next”.
40
Section 5: Wrap-Up
41
After you have added any additional state information, myfreetaxes.com will run the
software to check for errors and come up with your final State Tax Return summary.
You will be able to see if you are receiving a refund or if you owe.
After you are done, select “Yes, I’ll file my Ohio return for $0.00.”, then click “Next” to
complete your tax returns and file them online. If you wish to complete them and file
them yourself, select “No thanks, I’ll complete and file my Ohio return on my own” in
order to get to a print screen to do so yourself.
Note from author:
You have finished your tax return on myfreetaxes.com. I hope this manual was
beneficial to the process for you. If you chose to file online, you are done for this tax
season. If you chose to paper file you will need to print your return and mail it to:
Federal
If you are enclosing payment:
Internal Revenue Service
PO Box 802501
Cincinnati, OH 45280-2501
If you are not enclosing payment:
Department of the Treasury
Internal Revenue Service
Fresno, CA 93888-0002
42
Ohio
If you are enclosing payment
If you are not enclosing payment
Ohio Department of Taxation
Ohio Department of Taxation
PO Box 2057
PO Box 2679
Columbus, OH 43218-2057
Columbus, OH 43218-2679
Amended Returns
Federal:
Ohio:
Department of the Treasury
Ohio Department of Taxation
Internal Revenue Service Center PO Box 1460
Fresno, CA 93888-0422
Columbus, OH 43216-1460
Congratulations on completing your Federal and State tax return.
43
List of Commonly Used Terms
A
Active pay
The military income a service member receives while on active duty (versus
retirement or retainer pay).
Adjusted basis
The original cost of property, plus certain additions and improvements, minus certain
deductions such as depreciation allowed or allowable and casualty losses.
Adopted child
An adopted child is always treated as your own child. The term adopted child
includes a child who was lawfully placed with you for legal adoption.
Adoption Taxpayer Identification Number (ATIN)
A number issued by the Internal Revenue Service as a temporary taxpayer
identification number for the child in a domestic adoption where the adopting
taxpayers do not have and/or are unable to obtain the child's Social Security number
(SSN). The ATIN is used by the adopting taxpayers on their federal income tax
return to identify the child while final domestic adoption is pending.
Adjusted gross income (AGI)
Total income reduced by certain amounts such as contributions made to a traditional
IRA or for student loan interest payments.
Adjustments to income
Deductions that are subtracted from gross income in figuring adjusted gross income.
They include deductions for moving expenses, alimony paid, a penalty on early
withdrawal of savings, and contributions to an individual retirement arrangement
(IRA). Adjustments to income can be taken even if itemized deductions are not
claimed.
Age test
One of the dependency tests for qualifying child. The child must be (a) under age 19
at the end of the year and younger than you (or your spouse, if filing jointly), (b)
under age 24 at the end of the year, a full-time student and younger than you (or
your spouse, if filing jointly) or (c) any age if permanently and totally disabled.
Alimony
Payment to a spouse or former spouse under a divorce or separation instrument.
The payments do not have to be made directly to the ex-spouse. For example,
payments made on behalf of the ex-spouse for expenses specified in the instrument,
such as medical bills, housing costs, and other expenses can qualify as alimony.
Alimony does not include child support or voluntary payments outside the
instrument. The person paying alimony can subtract it as an adjustment to income;
the person receiving alimony must treat it as income.
44
Amended return
Form 1040X is used to file an amended return to correct a previously filed Form
1040, 1040A, 1040EZ. Other reasons would be to make certain elections after the
prescribed deadline, change amounts previously adjusted by the IRS, and make a
claim for a carryback due to a loss or unused credit.
Annuity
A series of payments under a contract from an insurance company, a trust company,
or an individual. Annuity payments are made at regular intervals over a period of
more than one full year.
B
Basis
Basis is the amount of your investment in property for tax purposes. The basis of
property you buy is usually the cost. Basis is used to figure gain or loss on the sale
or disposition of investment property.
Blind for tax purposes
If you are blind on the last day of the year and you do not itemize deductions, you
are entitled to a higher standard deduction. You qualify for this benefit if you are
totally or partly blind. If you are partly blind, you must get a certified statement from
an eye doctor or registered optometrist that:
1. You cannot see better than 20/200 in the better eye with glasses or contact
lenses, or
2. Your field of vision is not more than 20 degrees.
If your eye condition will never improve beyond these limits, the statement should
include this fact. You must keep the statement in your records. If your vision can be
corrected beyond these limits only by contact lenses that you can wear only briefly
because of pain, infection, or ulcers, you can take the higher standard deduction for
blindness if you otherwise qualify.
Business assets
Property used in the conduct of a trade or business, such as business machinery
and office furniture.
Business expenses
Business expenses are amounts that are ordinary and necessary to carry on a
business.
Business use
Usually, a percentage showing how much an item of property, such as an
automobile, is used for business purposes.
C
45
Capital gain distribution
An allocated amount paid to, or treated as paid to, a shareholder by a mutual fund,
regulated investment company, or real estate investment trust from its net realized
long-term capital gains. This amount is in addition to any ordinary dividend paid to
the shareholder. You will receive a statement from the payer if this applies to you.
Capital gains
Almost everything owned and used for personal or investment purposes is a capital
asset. Examples are a home, home furnishings, and stocks or bonds held in a
personal account. When a capital asset is sold, the difference between the basis in
the asset and the amount it is sold for is a capital gain or a capital loss.
Capitalization
Adding costs, such as improvements, to the basis of assets.
Candidate for a degree
A student who meets either of the following requirements.
1. Attends a primary or secondary school or pursues a degree at a college or
university, or
2. Attends an accredited educational institution that is authorized to provide:
a. A program that is acceptable for full credit toward a bachelor's or
higher degree, or
b. A program of training to prepare students for gainful employment in a
recognized occupation.
Cancellation of debt
If you borrow money from a commercial lender and the lender later cancels or
forgives the debt, you may have to include the canceled amount in income for tax
purposes, depending on the circumstances. When you borrowed the money you
were not required to include the loan proceeds in income because you had an
obligation to repay the lender. When that obligation is subsequently forgiven, the
amount you received as loan proceeds is normally reportable as income because
you no longer have an obligation to repay the lender. The lender is usually required
to report the amount of the canceled debt to you and the IRS on a Form 1099-C,
Cancellation of Debt.
Capitalized
Expended or treated as an item of a capital nature. A capitalized amount is not
deductible as a current expense and must be included in the basis of property.
Casualty loss
A loss that results from the damage, destruction or loss of your property from any
sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire,
earthquake or even volcanic eruption.
46
Child and dependent care credit
A nonrefundable credit that allows taxpayers to claim a credit for paying someone to
care for their qualifying Dependents under the age of 13 or Spouses or dependents
who are unable to care for themselves.
Citizen or resident test
One of the dependency tests. You cannot claim a person as a dependent unless that
person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or
Mexico. There is an exception for certain adopted children.
Commuting
Travel between a personal home and work or job site within the area of an
individual's tax home.
Compensation
Wages, salaries, commissions, tips, bonuses, professional fees, earnings from selfemployment, and alimony.
Credit
A direct reduction of the taxpayer's liability. Credits are allowed for such purposes as
child care expenses, higher education costs, qualifying children, and earned income
of low-income taxpayers.
D
Degree candidate
A student who meets either of the following requirements.
1. Attends a primary or secondary school or pursues a degree at a college or
university, or
2. Attends an accredited educational institution that is authorized to provide:
a. A program that is acceptable for full credit toward a bachelor's or
higher degree, or
b. A program of training to prepare students for gainful employment in a
recognized occupation..
Dependent
A person, other than the taxpayer or the taxpayer's spouse, for whom an exemption
can be claimed. To be your dependent, a person must be your qualifying child or
qualifying relative.
Dependent care benefits
These benefits include amounts employers pay to a taxpayer or directly to the care
provider.
Dependent taxpayer test
47
One of the dependency tests. You cannot claim any dependents if you, or your
spouse if filing jointly, could be claimed as a dependent by another taxpayer.
Depreciation
An annual deduction that allows taxpayers to recover the cost of property used in a
trade or business or held for the production of income. The amount of depreciation
depends on the basis of the property, its recovery period, and the depreciation
method.
Disability income
This income comes from an employer's disability insurance, health plan, or pension
plan. The payments replace wages for the time the taxpayer missed work because
of the disability. The plan must provide for disability retirement for the payments to
be considered disability income.
Disability pension
Generally paid to a taxpayer who retires because of a disability before the minimum
retirement age (set by the employer). The disability pension is considered regular
pension income when the taxpayer reaches the minimum retirement age.
Disabled child (permanently and totally disabled)
A permanently and totally disabled child must meet both of the following tests: the
child cannot engage in any substantial gainful activity because of a physical or
mental condition and a doctor determines the condition has lasted or can be
expected to last continuously for at least a year or can lead to death.
Dividend
A distribution of money or other property made by a corporation to its shareholders
out of its earnings and profits.
Dual status alien
An alien who is both a nonresident and resident alien during the same tax year. The
most common dual-status tax years are the years of arrival and departure.
E
Earned income
Includes all income from employment, but only if it is includable in gross income.
Examples of earned income are: wages; salaries; tips; and other taxable employee
compensation. Earned income also includes net earnings from self-employment.
Earned income does not include amounts such as pensions and annuities, welfare
benefits, unemployment compensation, worker's compensation benefits, or social
security benefits. For tax years after 2003, members of the military who receive
excludable combat zone compensation may elect to include it in earned income.
Earned income credit (EIC)
A credit that can be paid to low-income workers, even if no income tax was withheld
from the worker's pay. To receive the credit, a taxpayer must file a tax return.
48
Eligible educational institution

American opportunity credit. Any college, university, vocational school, or
other postsecondary educational institution eligible to participate in a student
aid program administered by the Department of Education. It includes virtually
all accredited public, nonprofit, and proprietary (privately owned profit-making)
postsecondary institutions.

Coverdell education savings account (ESA). Any college, university,
vocational school, or other postsecondary educational institution eligible to
participate in a student aid program administered by the Department of
Education. It includes virtually all accredited public, nonprofit, and proprietary
(privately owned profit-making) postsecondary institutions. Also included is
any public, private, or religious school that provides elementary or secondary
education (kindergarten through grade 12), as determined under state law.

Education savings bond program. Same as American opportunity credit in
this category.

IRA, early distributions from. Same as American opportunity credit in this
category.

Lifetime learning credit. Same as American opportunity credit in this
category.

Qualified tuition program (QTP). Same as American opportunity credit in
this category.

Scholarships and fellowships. An institution that maintains a regular faculty
and curriculum and normally has a regularly enrolled body of students in
attendance at the place where it carries on its educational activities.

Student loan, cancellation of. Same as Scholarships and fellowships in this
category.

Student loan interest deduction. Any college, university, vocational school,
or other postsecondary educational institution eligible to participate in a
student aid program administered by the Department of Education. It includes
virtually all accredited public, nonprofit, and proprietary (privately owned
profit-making) postsecondary institutions. Also included is an institution that
conducts an internship or residency program leading to a degree or certificate
from an institution of higher education, a hospital, or a health care facility that
offers postgraduate training.

Tuition and fees deduction. Same as American opportunity credit in this
category.
Eligible student

American opportunity credit. A student who meets all of the following
requirements for the tax year for which the credit is being determined.
1. Did not have expenses that were used to figure an American
opportunity or Hope credit in any 4 earlier tax years.
49
2. Had not completed the first 4 years of postsecondary education
(generally the freshman through senior years).
3. For at least one academic period beginning in the tax year, was
enrolled at least half-time in a program leading to a degree, certificate,
or other recognized educational credential at an eligible educational
institution.
4. Was free of any federal or state felony conviction for possessing or
distributing a controlled substance as of the end of the tax year.

Lifetime learning credit. A student who is enrolled in one or more courses at
an eligible educational institution.

Student loan interest deduction. A student who was enrolled at least halftime in a program leading to a postsecondary degree, certificate, or other
recognized educational credential at an eligible educational institution.

Tuition and fees deduction. A student who has either a high school diploma
or a General Educational Development (GED) credential, and who is enrolled
in one or more courses at an eligible educational institution.
Employer identification number (EIN)
A nine-digit number assigned by the IRS in the following format: XX-XXXXXXX. It is
used to identify the tax accounts of employers and certain others who have no
employees.
Estimated tax
Method used to pay tax on income that is not subject to withholding (for example,
earnings from self-employment, interest, dividends, rents, alimony, etc.)
Exempt (from withholding)
Free from withholding of federal income tax. Must meet certain income, tax liability,
and dependency criteria. Does not exempt a person from other kinds of tax
withholding, such as social security tax.
Exemption
Amount that taxpayers can claim for themselves, their spouses, and eligible
dependents. The total is subtracted from adjusted gross income before tax is figured
on the remaining income (taxable income).
F
Fair market value (FMV)
The price at which property would change hands between a willing buyer and a
willing seller, both having reason able knowledge of the relevant facts.
Fellowship
Generally an amount paid to an individual for the purpose of research.
50
Fiduciary
The one who acts on behalf of another as a guardian, trustee, executor,
administrator, receiver, or conservator.
Filing statuses
Five taxpayer categories that determine the amount of tax and/or tax credits that
apply to different taxpayers. There are five filing statuses: Single, Married Filing
Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with
Dependent Child. Your filing status is used to determine your filing requirements,
standard deduction, eligibility for certain credits, and your correct tax. If more than
one filing status applies to you, choose the one that will result in the lowest amount
of tax.
Flexible spending arrangements (FSA)
Allows employees to be reimbursed for medical expenses. FSAs are usually funded
through voluntary salary reduction agreements with your employer. No employment
or federal income taxes are deducted from your contributions. The employer may
also contribute.
Foreign earned income exclusion
The foreign earned income exclusion allows eligible taxpayers to avoid paying
federal income tax on their foreign earned income.
Foreign tax credit
U.S. tax credit used to offset any foreign income tax taxpayers have paid on
qualified income that is also subject to U.S. federal income tax.
Free application for student aid (FAFSA)
A form that can be prepared annually by current and prospective college students to
determine their eligibility for student financial aid and work-study programs.
Full-time student
A child who during any part of 5 calendar months of the year was enrolled as a fulltime student at a school, or took a full-time, on-farm training course given by a
school or a state, county, or local government agency. A school includes a technical,
trade, or mechanical school. It does not include an on-the-job training course,
correspondence school, or school offering courses only through the Internet.
G
Gross income
All income from all sources (other than tax-exempt income) that must be included on
your tax return. Gross income is the total of your earned and unearned income.
Gross income test
One of the dependency tests for qualifying relative. A qualifying relative's gross
income for the year must be less than $3,650. There is an exception if the person is
disabled and has income from a sheltered workshop.
51
Gross receipts
Total amounts received from all sources for the year without subtracting any costs or
expenses.
Guaranteed payments
Payment paid to a partner that is determined without regard to the partnership
income and is made to a partner acting in his or her capacity as a partner.
H
Half-time student
A student who is enrolled for at least half the full-time academic work load for the
course of study the student is pursuing, as determined under the standards of the
school where the student is enrolled.
Head of household
Filing status is generally for unmarried taxpayers who paid more than half the cost of
keeping up a home for a qualified person during the tax year.
Health savings account
A tax-exempt account that you set up with a trustee, such as a bank or insurance
company, to pay or reimburse certain medical expenses you incur. An HSA is similar
to a MSA, but is more attractive. Funds may be rolled from an Archer MSA to an
HSA, but not the other way around. You can claim a tax deduction for contributions
you make. Contributions made by your employer may be excluded from your gross
income. The contributions remain in your account from year to year until you use
them. The earnings generated within the account are tax free. You are the owner of
the HSA. It is portable so you continue to own the account even if you change jobs
or leave the workforce. You must be covered under a High Deductible Health Plan
(HDHP) and meet other requirements to be eligible to have contributions made to
your HSA.
High deductible health plan (HDHP)
An HDHP has:

A higher annual deductible than typical health plans, and,

A maximum limit on the sum of the annual deductible and out-of-pocket
expenses that you must pay for covered expenses. Out-of-pocket expenses
include copayments and other amounts, but do not include premiums.
An HDHP may provide preventive care benefits without a deductible or with a
deductible below the minimum annual deductible.
Holding period
The length of time an asset was held. The time between the trade date of the
purchase and the trade date of the sale. The holding period determines whether a
gain or loss is short-term or long-term for tax purposes.
52
I
Income taxes
Taxes on income, both earned (for example, salaries, wages, tips, commissions)
and unearned (for example, interest and dividends). Income taxes can be levied
both on individuals (personal income tax) and businesses (business and corporate
income taxes).
Individual retirement arrangement (IRA)
A tax-sheltered savings plan set up by the taxpayer, generally for retirement income.
Individual Taxpayer Identification Number (ITIN)
A tax processing number issued by the Internal Revenue Service to individuals who
are required to have a U.S. taxpayer identification number but who do not have, and
are not eligible to obtain, a Social Security number (SSN) from the Social Security
Administration (SSA).
Injured spouse exception
When a joint return is filed and the refund is used to pay one spouse's past-due child
support, spousal support, or a federal debt, the other spouse can be considered an
injured spouse. An injured spouse can get a refund for his or her share of the
overpayment that would otherwise be used to pay the past-due amount.
You are considered an injured spouse if:
1. You are not legally obligated to pay the past-due amount and
2. You meet any of the following conditions:
a. You made and reported tax payments (such as federal income tax
withheld from wages or estimated tax payments).
b. You had earned income (such as wages, salaries, or self-employment
income) and claimed the earned income credit or the additional child
tax credit.
c. You claimed a refundable credit, such as the health coverage tax credit
or the refundable credit for prior year minimum tax.
Insolvent
A taxpayer is insolvent when his or her total liabilities exceed his or her total assets.
Interest income
Income a person receives from certain financial accounts or from lending money to
someone else.
Interest
Compensation for the use or forbearance of money.
Investment income
53
Investment income includes taxable interest and dividends, tax-exempt interest,
capital gain net income, net income from rents and royalties not derived from a trade
or business, and net income from passive activities
Investment interest
The interest you paid or accrued on money you borrowed that is allocable to
property held for investment.
Itemized deductions
Deductions allowed on Schedule A (Form 1040) for medical and dental expenses,
taxes, home mortgage interest and investment interest, charitable contributions,
casualty and theft losses, and miscellaneous deductions. They are subtracted from
adjusted gross income in figuring taxable income. Itemized deductions cannot be
claimed if the standard deduction is chosen.
J
Joint return test
One of the dependency tests. You cannot claim a married person who files a joint
return as a dependent unless that joint return is only a claim for refund and there
would be no tax liability for either spouse on separate returns.
Joint return
Filing status for taxpayers who are married to each other or live together in a
common law marriage and combine their income and deductions on the same tax
return. The status also applies to taxpayers who are separated but not divorced and
to taxpayers whose spouse died during the tax year and has not remarried, as long
as one tax return is used for both individuals.
L
Lump-sum distribution
The distribution or payment, within a single tax year, of a plan participant's entire
balance from all of the employer's qualified pension, profit-sharing, or stock bonus
plans. All the participant's accounts under the employer's qualified pension, profitsharing, or stock bonus plans must be distributed in order to be a lump-sum
distribution.
M
Market discount
The stated redemption price of a bond at maturity minus your basis in the bond
immediately after you acquire it. Market discount arises when the value of a debt
obligation decreases after its issue date.
Married filing jointly
Filing status for taxpayers who are married to each other or live together in a
common law marriage and combine their income and deductions on the same tax
return. The status also applies to taxpayers who are separated but not divorced and
54
to taxpayers whose spouse died during the tax year and has not remarried, as long
as one tax return is used for both individuals.
Married filing separately
Filing status for taxpayers who are married to each other or live together in a
common law marriage and report their own incomes and deductions on separate
returns.
Material participation
Generally, you materially participated in an activity for the tax year if you were
involved in its operations on a regular, continuous, and substantial basis during the
year. Specifically for individuals, you materially participated for the tax year in an
activity if you satisfy at least one of the following tests.
1. You participated in the activity for more than 500 hours.
2. Your participation in the activity for the tax year was substantially all of the
participation in the activity of all individuals (including individuals who did not
own any interest in the activity) for the year.
3. You participated in the activity for more than 100 hours during the tax year,
and you participated at least as much as any other individual (including
individuals who did not own any interest in the activity) for the year.
4. The activity is a significant participation activity for the tax year, and you
participated in all significant participation activities during the year for more
than 500 hours. A significant participation activity is any trade or business
activity in which you participated for more than 100 hours during the year and
in which you did not materially participate under any of the material
participation tests (other than this fourth test).
5. You materially participated in the activity for any 5 (whether or not
consecutive) of the 10 immediately preceding tax years.
6. The activity is a personal service activity in which you materially participated
for any 3 (whether or not consecutive) preceding tax years. An activity is a
personal service activity if it involves the performance of personal services in
the fields of health, law, engineering, architecture, accounting, actuarial
science, performing arts, consulting, or in any other trade or business in
which capital is not a material income-producing factor.
7. Based on all the facts and circumstances, you participated in the activity on a
regular, continuous, and substantial basis during the tax year. You did not
materially participate in the activity under this seventh test, however, if you
participated in the activity for 100 hours or less during the tax year. Your
participation in managing the activity does not count in determining whether
you materially participated under this test if:
a. Any person (except you) received compensation for performing
services in the management of the activity, or
b. Any individual spent more hours during the tax year performing
services in the management of the activity than you did (regardless of
55
whether the individual was compensated for the management
services).
Archer medical savings account
A tax-exempt account that you set up with a trustee, such as a bank or insurance
company, to pay or reimburse certain medical expenses you incur. You can claim a
tax deduction for contributions you make. The contributions remain in your account
from year to year until you use them. The earnings generated within the account are
tax free. You are the owner of the MSA. An MSA is portable so you retain ownership
of the account even if you change jobs or leave the workforce. You must be covered
under a High Deductible Health Plan (HDHP) and meet other requirements to be
eligible to have contributions made to your MSA.
Member of household test
One of the dependency tests. To meet this test, a person must either:

Live with you all year as a member of your household, or

Be related to you in one of the following ways:

Your child, stepchild, foster child, or a descendant of any of them (for
example, your grandchild). A legally adopted child is considered your
child.

Your brother, sister, half brother, half sister, stepbrother, or stepsister.

Your father, mother, grandparent or other direct ancestor, but not
foster parent.

Your stepfather or stepmother.

A son or daughter of your brother or sister.

A brother or sister of your father or mother.

Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brotherin-law, or sister-in-law.
Modified adjusted gross income (MAGI)
The adjusted gross income before consideration of certain deductions.

American opportunity credit. Adjusted gross income (AGI) as figured on the
federal income tax return, modified by adding back any:
1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Foreign housing deduction,
4. Exclusion of income by bona fide residents of American Samoa, and
5. Exclusion of income by bona fide residents of Puerto Rico.

Coverdell education savings account (ESA). Same as American
opportunity credit in this category.
56

Education savings bond program. Adjusted gross income (AGI) as figured
on the federal income tax return without taking into account any savings bond
interest exclusion and modified by adding back any:
1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Foreign housing deduction,
4. Exclusion of income by bona fide residents of American Samoa,
5. Exclusion of income by bona fide residents of Puerto Rico,
6. Exclusion for adoption benefits received under an employer's adoption
assistance program,
7. Deduction for student loan interest,
8. Deduction for tuition and fees, and
9. Deduction for domestic production activities.

Lifetime learning credit. Same as American opportunity credit in this
category.

Qualified adoption expenses. Adjusted gross income (AGI) as figured on
the federal income tax return, modified by adding back any:
1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Foreign housing deduction,
4. Exclusion of income by bona fide residents of American Samoa, and
5. Exclusion of income by bona fide residents of Puerto Rico.

Rental real estate activities with active participation. Adjusted gross
income (AGI) as figured on the federal income tax return less passive activity
income, taxable social security benefits and modified by adding back any:
1. Passive activity loss,
2. Rental real estate loss allowed to real estate professionals,
3. Any overall loss from a publicly traded partnership (PTP),
4. Deduction for one-half of self-employment tax,
5. Deduction for IRA contributions,
6. Deduction for student loan interest,
7. Deduction for tuition and fees,
8. Deduction for domestic production activities,
9. Exclusion of income from interest from series EE and I U.S. savings
bonds used to pay higher education expenses,
57
10. Exclusion for adoption benefits received under an employer's adoption
assistance program,

Student loan interest deduction. Adjusted gross income (AGI) as figured on
the federal income tax return without taking into account any student loan
interest deduction, tuition and fees deduction, or domestic production
activities deduction, and modified by adding back any:
1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Foreign housing deduction,
4. Exclusion of income by bona fide residents of American Samoa, and
5. Exclusion of income by bona fide residents of Puerto Rico.

Traditional IRA contributions deduction. Adjusted gross income (AGI) as
figured on the federal income tax return without taking into account any IRA
contribution deduction and modified by adding back any:
1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Foreign housing deduction,
4. Exclusion for adoption benefits received under an employer's adoption
assistance program,
5. Deduction for student loan interest,
6. Deduction for tuition and fees, and
7. Deduction for domestic production activities.

Tuition and fees deduction. Adjusted gross income (AGI) as figured on the
federal income tax return without taking into account any tuition and fees
deduction or domestic production activities deduction, and modified by adding
back any:
1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Foreign housing deduction,
4. Exclusion of income by bona fide residents of American Samoa, and
5. Exclusion of income by bona fide residents of Puerto Rico.
Mortgage interest
The interest paid on a loan secured by your home (main home or a second home).
The loan may be a mortgage to buy your home, a second mortgage, a line of credit,
or a home equity loan.
N
58
Net capital gain
The excess of net long-term capital gain over any net short-term capital loss.
Net investment income
The total of all investment income (other than tax-exempt income) reduced by the
sum of:
1. Any adjustments to income related to the investment income, plus
2. The larger of:
a. $950 plus the portion of the child's itemized deductions on Schedule A
(Form 1040), line 29, that are directly connected with producing the
investment income, or
b. $1,900.
Nondeductible traditional IRA contributions
Traditional IRA contributions that taxpayers may not deduct from their adjusted
gross income because the taxpayers do not meet the requirements; also includes
remaining contributions from a partial IRA deduction.
Nonrefundable credit
Occurs when the amount of a credit is greater than the tax owed. However,
taxpayers can only reduce their tax to zero; they cannot receive a "refund" for any
excess nonrefundable credit.
Nontaxable income
Any income exempt from federal income tax. Although some types of nontaxable
income are reported on the return, it is not added into the amount of income subject
to tax.
O
Original issue discount (OID)
The amount by which the stated redemption price at maturity of a debt instrument is
more than its sue price.
P
Pension
A series of definitely determinable payments made to an employee or survivor (the
beneficiary of a deceased employee's pension) after the employee retires from work.
Per diem
The phrase is often used when referring to daily employee expenses or
reimbursements.
Period of stay
59
Physical presence test
To meet the physical presence test for the foreign earned income exclusion, a
taxpayer must be physically present in a foreign country 330 full days during a
period of twelve consecutive months.
Points
Term used to describe certain charges paid, or treated as paid, by a borrower to
obtain a home mortgage. Points may be called loan origination fees, maximum loan
charges, loan discount, or discount points.
Post-secondary education
An advanced level of academic instruction following the completion of a school
providing a secondary education, such as high school, often referred to as college or
university. This type of program can be focused on academic (Associates,
Bachelor's or Master's degrees), career-oriented (professional certification or
licensing), and/or continuing professional (Master's) purposes.
Personal property taxes
Taxes on property, especially real estate. It can also be levied on boats, automobiles
(often paid along with license fees), recreational vehicles, and business inventories.
Q
Qualified dividends
Dividends eligible for the lower tax rates that apply to a net capital gain. They are
reported to you in box 1b of Form 1099-DIV.
Qualified education expenses

American opportunity credit. Tuition and certain related expenses
(including student activity fees) required for enrollment or attendance at an
eligible educational institution. Books, supplies, and equipment needed for a
course of study are included even if not purchased from the educational
institution. Does not include expenses for room and board. Does not include
expenses for courses involving sports, games, or hobbies (including noncredit
courses) that are not part of the student's postsecondary degree program.

Coverdell education savings account (ESA). Expenses related to or
required for enrollment or attendance of the designated beneficiary at an
eligible elementary, secondary, or postsecondary school. Many specialized
expenses included for K–12. Also includes expenses for special needs
services and contributions to a qualified tuition program (QTP).

Education savings bond program. Tuition and fees required to enroll at or
attend an eligible educational institution. Also includes contributions to a
qualified tuition program (QTP) or Coverdell education savings account
(ESA). Does not include expenses for room and board. Does not include
expenses for courses involving sports, games, or hobbies that are not part of
a degree or certificate granting program.
60

IRA, early distributions from. Tuition, fees, books, supplies, and equipment
required for enrollment or attendance at an eligible educational institution,
plus certain limited costs of room and board for students who are enrolled at
least half time. Also includes expenses for special needs services incurred by
or for special needs students in connection with their enrollment or
attendance.

Lifetime learning credit. Tuition and certain related expenses required for
enrollment in a course at an eligible educational institution. The course must
be either part of a postsecondary degree program or taken by the student to
acquire or improve job skills. Student-activity fees and expenses for courserelated books, supplies, and equipment are included only if the fees and
expenses must be paid to the institution as a condition of enrollment or
attendance. Does not include expenses for room and board. Does not include
expenses for courses involving sports, games, or hobbies (including noncredit
courses) that are not part of the student's postsecondary degree program or a
course taken by the student to acquire or improve job skills.

Qualified tuition program (QTP). Tuition, fees, books, supplies, and
equipment required for enrollment or attendance at an eligible educational
institution, plus certain limited costs of room and board for students who are
enrolled at least half time. Includes expenses for special needs services and
computer access.

Scholarships and fellowships. Expenses for tuition and fees required to
enroll at or attend an eligible educational institution, and course-related
expenses, such as fees, books, supplies, and equipment that are required for
the courses at the eligible educational institution. Course-related items must
be required of all students in the course of instruction.

Student loan interest deduction. Total costs of attending an eligible
educational institution, including graduate school (however, limitations may
apply to the cost of room and board allowed).

Tuition and fees deduction. Tuition and certain related expenses required
for enrollment or attendance at an eligible educational institution. Studentactivity fees and expenses for course-related books, supplies, and equipment
are included only if the fees and expenses must be paid to the institution as a
condition of enrollment or attendance. Does not include expenses for room
and board. Does not include expenses for courses involving sports, games, or
hobbies (including noncredit courses) that are not part of the student's
postsecondary degree program.
Qualifying child
To be your dependent, a person must be either your qualifying child or your
qualifying relative. Generally, a person is your qualifying child if that person:

Is your child, stepchild, foster child, brother, sister, stepbrother, stepsister, or
a descendant of any of them,

Lived with you for more than half of the year,
61

Did not provide more than half of his or her own support for the year,

Was under age 19 at the end of the year and younger than you (or your
spouse if filing jointly) (or was under age 24 at the end of the year, a student,
and younger than you (or your spouse if filing jointly), or was any age and
permanently and totally disabled), and

Did not file a joint return with his or her spouse..
Qualifying relative
To be your dependent, a person must be either your qualifying child or your
qualifying relative. Generally, a person is your qualifying relative if that person:

Lives with or is related to you and qualifies as a relative who does not have to
live with you,

Does not have $3,650 or more of gross (total) income,

Is supported (generally more than 50%) by you, and

Is neither your qualifying child nor the qualifying child of anyone else.
Qualifying widow(er) with dependent child
Filing status is for widow or widower with one or more qualifying dependent children
who lived in your home all year.
R
Railroad retirement benefits (RRBs)
Benefits paid to railroad employees working in jobs that are covered by the Railroad
Retirement Act. The RRA has two components. Tier 1 is the equivalent of social
security benefits and Tier 2 is like an employer's pension plan.
Real estate taxes
Most state and local governments charge an annual tax on the value of real property
that you own. This is called a real estate tax and is also sometimes referred to as a
property tax. Real estate taxes paid on your primary and second residence are
generally deductible. Deductible real estate taxes include any state, local, or foreign
taxes on real property levied for the general public welfare. Deductible real estate
taxes do not include taxes charged for local benefits and improvements that
increase the value of the property.
Regular method
Most common method for computing self-employment tax. Under the regular
method, the net self-employment income entered on Schedule SE is the sum of net
self-employment earnings from the taxpayer's Schedules C, C-EZ, F, and K-1.
Relationship test
One of the dependency tests for qualifying child. The child must be your son,
daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother,
stepsister, or a descendant of any of them.
62
Resident alien
An individual is considered to be a U.S. resident alien if he or she meets either the
Green Card Test or the Substantial Presence Test.
Refundable credit
Occurs when the amount of a credit is greater than the tax owed. Taxpayers not only
can have their tax reduced to zero; they can also receive a "refund" of excess credit.
Relative
Someone related to the taxpayer by blood, marriage, or adoption, including the
following:

Child, grandchild, great grandchild

Stepchild, stepbrother, stepsister

Brother, sister

Half-brother, half sister

Parent, grandparent, or other direct ancestor (but not foster parent)

Stepmother or stepfather

Brother or sister of one's father or mother

Son or daughter of one's brother or sister

Father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law.
Rollover
A tax-free distribution to you of cash or other assets from a tax-favored plan that you
contribute to another tax-favored plan.
Roth IRA
An individual retirement arrangement where contributions are not deductible. If you
satisfy the requirements, qualified distributions are tax free. Contributions can be
made to a Roth IRA after 70 ½ and you can leave amounts in the Roth IRA as long
as you live.
S
Sales tax
A tax levied by a state, county or city and collected by retailers and certain service
providers when they make taxable retail sales.
Scholarship
Generally an amount paid or allowed to a student at an educational institution for the
purpose of study.
Section 179 deduction
63
Self-employment income
Earned income from a trade, business, farming or profession that is not paid by an
employer. For example, seamstresses and lawn care workers who work for
themselves (and not for someone else) are considered self-employed.
Self-employment individual
An individual in business for himself or herself, and whose business is not
incorporated, is self-employed. Sole proprietors and partners are self-employed.
Self-employment can include part-time work.
Self-employment tax
Social security and Medicare tax primarily for individuals who work for themselves. It
is similar to the social security and Medicare taxes withheld from the pay of most
wage earners. SE tax is calculated using Schedule SE (Form 1040). Social security
and Medicare taxes of most wage earners are figured by their employers. You can
deduct half of your SE tax in figuring your adjusted gross income. Wage earners
cannot deduct social security and Medicare taxes.
Seller-financed mortgage
If you sell your home and hold a note, mortgage, or other financial agreement, the
payments you receive generally consist of both interest and principal. You must
separately report as interest income the interest you receive as part of each
payment. If the buyer of your home uses the property as a main or second home,
you must also report the name, address, and social security number (SSN) of the
buyer on line 1 of Schedule B (Form 1040A or Form 1040). The buyer must give you
his or her SSN and you must give the buyer your SSN. Failure to meet these
requirements may result in a $50 penalty for each failure.
Short sale
The sale of property that you generally do not own. You borrow the property to
deliver to a buyer and, at a later date, you buy substantially identical property and
deliver it to the lender.
Simplified employee pension plan (SEP)
A plan in which an employer contributes on a tax-favored basis to IRAs owned by its
employees. If the employer meets certain conditions, it is not subject to the reporting
and disclosure requirements of most retirement plans. Under a SEP, an IRA is set
up by or for an employee to accept the employer's contributions.
Single
Filing status that applies to a taxpayer who, on the last day of the year, is unmarried
or legally separated from their spouse under a divorce or separate maintenance
decree, and does not qualify for another filing status.
Social Security Administration (SSA)
An independent government agency that manages the social insurance program,
consisting of retirement, disability and survivors benefits. To qualify for these
64
benefits, most American workers pay Social Security taxes on their earnings; future
benefits are based on the employees' contributions.
Social security benefits
Payments made under Title II of the Social Security Act. They include old-age,
survivors, disability insurance, and some workers' compensation benefits.
Standard deduction
A deduction that reduces the amount of income on which you are taxed. You cannot
take the standard deduction if you claim itemized deductions. Your standard
deduction consists of the basic standard deduction amount based on your filing
status and additional standard deduction amounts for age and blindness.
Standard mileage method
One of two methods for calculating business automobile expenses. For the standard
mileage method, the taxpayer multiplies the business miles by the mileage rate for
that tax year. (The other method is the actual expense method).
Standard mileage rate
The established amount for optional use in determining a tax deduction for
automobiles instead of deducting depreciation and actual operating expenses.
Stock dividends
Stock dividends merely increase the taxpayer's number of shares in the company
and generally are not taxable.
Stock options
If you receive an option to buy or sell stock or other property as payment for your
services, you may have income when you receive the option (the grant), when you
exercise the option (use it to buy or sell the stock or other property), or when you sell
or otherwise dispose of the option or property acquired through exercise of the
option. The timing, type, and amount of income inclusion depend on whether you
receive a no statutory stock option or a statutory stock option. Your employer can tell
you which kind of option you hold
Student loan interest
The interest paid during the year on a loan for qualified higher education expenses
that were for the taxpayer, the taxpayer's spouse, or a person who was the
taxpayer's dependent when the loan was obtained.
Supplemental security income (SSI)
A federal income supplement program funded by general tax revenues (not Social
Security taxes):

It is designed to help aged, blind, and disabled people, who have little or no
income; and

It provides cash to meet basic needs for food, clothing, and shelter.
65
Support
All amounts spent to provide the child with food, lodging, clothing, education,
medical and dental care, recreation, transportation, and similar necessities. To figure
your child's support, count support provided by you, your child, and others.
T
Tax-exempt
Not subject to tax.
Tax-exempt interest
Interest that is exempt from federal income tax such as bonds issued by state and
political subdivisions (county or city), District of Columbia, and U.S. possessions and
political subdivisions.
Tax liability (or total tax bill)
The amount of tax that must be paid. Taxpayers meet (or pay) their federal income
tax liability through withholding, estimated tax payments, and payments made with
the tax forms they file with the government.
Tax year
The time period covered by a tax return. Usually this is January 1 to December 31, a
calendar year, but taxpayers can elect a fiscal tax year with different beginning and
ending dates.
Taxable income
Gross income minus any adjustments to income, any allowable exemptions, and
either itemized deductions or the standard deduction.
Third-party designee
Person authorized by a taxpayer to discuss the taxpayer's return with the IRS, give
the IRS information missing from the return, request copies of notices or transcripts
related to the return, and respond to certain IRS notices. The taxpayer designates
third party by checking the Yes box and entering the person's name, phone number,
and personal identification number (PIN) in the "Third party designee" section of the
return.
Traditional IRA
IRAs other than Roth IRAs, SIMPLE IRAs, or Coverdell education savings accounts
(ESAs). Contributions to the nontraditional IRAs are not deductible as adjustments to
income.
Transportation expenses
Expenses service members incur when traveling to locations within their city or
general area that is their tax home or post of duty (versus travel expenses).
Travel expenses
Expenses service members incur when traveling away from their tax home or post of
duty (versus transportation expenses).
66
U
Unadjusted basis
The basis of an item of property for purposes of figuring gain on a sale without taking
into account any depreciation taken in earlier years but with adjustments for other
amounts, including amortization, the section 179 deduction, any special depreciation
allowance, any deduction claimed for clean-fuel vehicles or clean-fuel vehicle
refueling property placed in service before January 1, 2006, and any electric vehicle
credit.
Underpayment of estimated tax penalty
The United States income tax is a pay-as-you-go tax, which means that tax must be
paid as you earn or receive your income during the year. You can either do this
through withholding or by making estimated tax payments. If you did not pay enough
tax throughout the year, either through withholding or by making estimated tax
payments, you may have to pay a penalty for underpayment of estimated tax.
Unearned income
Income other than earned income. This is investment-type income and includes
interest, dividends, and capital gains. Distributions of interest, dividends, capital
gains, and other unearned income from a trust are also unearned income to a
beneficiary of the trust. However, for purposes of completing Form 8615, a taxable
distribution from a qualified disability trust is considered earned income.
Use tax
A tax on purchases made outside the state for use in the state. Residents are
responsible for paying the tax on purchases for which no state sales tax has been
charged. The tax applies to transactions that would be subject to sales tax if the
purchase were made in the state.
W
Wash sale
A sale of stock or securities at a loss within 30 days before or after you buy or
acquire in a fully taxable trade, or acquire a contract or option to buy, substantially
identical stock or securities.
Withholding allowance
Claimed by an employee on Form W-4. An employer uses the number of allowances
claimed, together with income earned and marital status, to determine how much
income tax to withhold from wages.
Withholding tax
Money that employers withhold from employees' paychecks. This money is
deposited for the government. (It will be credited against the employees' tax liability
when they file their returns.) Employers withhold money for federal income taxes,
federal social security taxes, and state and local income taxes in some states and
localities.
67