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Adequate Disclosure-Any taxpayer who files a tax return in a manner which is contrary to statute, regulations or IRS rules is required to adequately disclose the position taken on the return and the reason that the taxpayer believes that the provision of law or regulation is not proper, and that the position taken by the taxpayer results in better a determination of taxable income. ADVICE: DO NOT take a contrary position on your return without first consulting a competent, responsible tax professional. Years ago many every day people were beguiled to believing that if they became an ordained minister of some new "Church" that they would be exempt from paying all taxes and did not have to file tax returns even though they earned money from a variety of activities. Some paid a dear price.

Adjusted gross income - The total of all income received by you and your spouse, less certain adjustments (e.g. IRA deduction, medical savings account deduction, alimony paid to a former spouse, etc.). This amount is not adjusted for itemized deductions, standard deduction, or personal exemptions.

Adoption expenses - Reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child. For purposes of this section, an eligible child is:

  1. Any child under age 18. If the child turned 18 during the year, the child is an eligible child for the part of the year he or she was under age 18.

  2. Any disabled person not able to care for himself or herself.

Advance earned income credit payments - Payments you made to eligible employees in addition to their wages. You are only required to make these payments if the employee gives you a completed Form W-5, Earned Income Credit Advance Payment Certificate.

Amount Owed- The amount of the tax liability which at the time of filing the tax return remains unpaid. Taxes owed must be paid no later than the statutory due date of the return (i.e. before extensions) to avoid interest and possibly penalties)

Bona Fide Residence Test - This test is met when a U.S. citizen establishes a bona fide residence in a foreign country or countries for an uninterrupted period that includes an entire calendar year. The bona fide residence test requires that a person has a tax home outside the U.S. and the person is considered a resident of the foreign country.

Casualty or theft losses - Losses caused by theft, vandalism, fire, storm, or similar causes, and car, boat, and other accidents.

Child and dependent care expenses - Amounts paid for household services and care of a qualifying person while you worked or looked for work. For purposes of this section, a qualifying person is:

    1. Any child under age 13 whom you can claim as a dependent. If the child turned 13 during the year, the child is a qualifying person for the part of the year he or she was under age 13.

    2. Your disabled spouse who is not able to care for himself or herself.

    3. Any disabled person not able to care for himself or herself whom you can claim as a dependent.

Dependent - A person who meets the following five tests:

    1. Relationship Test - The person must be either your relative or have lived in your home as a family member all year. If the person is not your relative, the relationship must not violate local law.

    2. Joint Return Test - If the person is married, he or she cannot file a joint return. But the person can file a joint return if the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.

    3. Citizen or Resident Test - The person must be a U.S. citizen or resident alien, or a resident of Canada or Mexico. There is an exception for certain adopted children.

    4. Income Test - The person’s gross income must be less than the current personal exemption amount unless the person was either under age 19 at the end of the tax year or under age 24 at the end of the tax year and was a student.

    5. Support Test - You must have provided over half of the person’s total support during the tax year. There are two exceptions to this test: one for children of divorced or separated parents and one for persons supported by two or more taxpayers.

Depositor Account Number - A number up to seventeen characters (both numbers and letters). This number is generally found on the front of your checks, or may be obtained from your financial institution.

Due Date - Most calendar year tax returns are due April 15 (or the first Monday thereafter if the 15th falls on a weekend day. An additional automatic four month extension to file is available by filing an extension form by that day; however you must have all your taxes paid with the extension or the extension will not be valid and you will be subject to late filing penalties.

Earned Income- Personal service income, i.e. Wages, self employment income, etc.

Eligible student - A person who was enrolled in a degree, certificate, or other program (including a program of study abroad that was approved for credit by the institution at which the student was enrolled) leading to a recognized educational credential at an eligible educational institution, and carried at least half the normal full-time work load for the course of study he or she was pursuing.

Eligible educational institution - Any accredited public, nonprofit, or private college, university, vocational school, or other postsecondary institution.

Filing Status- Determines tax rates and other certain tax criteria which affects ultimate determination of tax liability. The categories are Single, Married-Joint Return, Married-Separate Returns, Head of Household, Qualified Widow(er) with Dependent Child.

Foreign Tax Credit - A credit against U.S. tax for tax due in a foreign country on foreign source income. The credit is limited to the lessor of the following two amounts:

    1. The U.S. tax on the net foreign source earnings, or

    2. The foreign taxes paid or accrued by the U.S. taxpayer during the year plus carryover of foreign taxes

Foreign-Earned Income Exclusion - A qualifying individual may exclude up to $74,000 of foreign earned income (income earned for services performed outside the U.S.) from gross income. To take the FEIE, the individual must meet one of two qualifying tests: bona fide residence or physical presence.

Generation-skipping transfer tax - A tax that is imposed if any of the following events occur:

    1. After the termination of an interest in a trust, all interests in the trust are held by persons assigned to a generation that is two or more generations below that of the transferor.

    2. A distribution is made from a trust to a person assigned to a generation that is two or more generations below that of the transferor.

    3. A transfer of an interest in property is made to a person assigned to a generation that is two or more generations below that of the transferor.

Gross Income- In general, all items of gross income, which are received in cash, are included in gross income, except for those items which are specifically excluded by law.

Income in respect of a decedent - Gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent’s final income tax return.

Individual Taxpayer Identification Number (ITIN) - A taxpayer identification number assigned by the IRS to nonresident taxpayers or resident foreign nationals who are not eligible for a U.S. social security number. It is necessary to apply for an ITIN by filing Form W-7. An ITIN is also required for nonresident or resident foreign national spouses and dependents listed on a U.S. tax return.

Installment sales - A sale of property where you receive at least one payment after the close of the tax year of the sale.

Lawful Permanent Resident Test - A foreign national is considered a U.S. resident taxpayer if he or she has been issued the official privilege of residing permanently in the U.S. by receiving an alien registration card, or "green card."

Married - If, as of the last day of the tax year, any of the following four situations apply to you, you are considered married.

    1. You are married and living together as husband and wife.

    2. You are living together in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began.

    3. You are married and living apart, but not legally separated under a decree of divorce or separate maintenance.

    4. You are separated under an interlocutory (not final) decree of divorce.

Materially participate - You materially participated in a trade or business activity during the tax year if you meet any of the following tests:

    1. You participated in the activity for more than 500 hours during the tax year.

    2. Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals for the tax 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 person for the tax year.

    4. The activity is a significant participation activity for the tax year, and you participated in all significant participation activities for more than 500 hours during the year. An activity is a "significant participation activity" if it involves the conduct of a trade or business, you participated in the activity for more than 100 hours during the tax year, and you did not materially participate under any of the other material participation tests.

    5. You materially participated in the activity for any 5 of the prior 10 tax years.

    6. The activity is a personal service activity in which you materially participated for any 3 prior tax years. A personal service activity is an activity that involves performing personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or 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. But you do not meet this test 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 if you meet this test if any person (except you) - (a) Received compensation for performing management services in connection with the activity, or (b) Spent more hours during the tax year than you spent performing management services in connection with the activity.

    8. If you had income and deductions from an oil or gas well in which you own a working interest directly or through an entity that does not limit your liability.

Medical savings account - A tax-exempt trust or custodial account set up in the United States exclusively for paying the qualified medical expenses of the account holder or the account holder's spouse or dependent (s) in conjunction with a high deductible health plan.

Method of accounting - A set of rules used to determine when and how income and expenses are reported. You may use any of the following accounting methods:

  1. Accrual - Under the accrual method of accounting, income is generally reported in the year earned and expenses are deducted or capitalized in the year incurred. The purpose of this method of accounting is to match income and expenses in the correct year.

  1. Cash - Under the cash method of accounting, income is generally reported in the year received and expenses are deducted in the year paid.

  1. Other - Any other IRS-approved method.

Method of inventory valuation - You may use one of the following inventory valuation methods:

  1. Cost - To properly value your inventory at cost, you must include all direct and indirect costs associated with it. The following rules apply:

    1. For merchandise on hand at the beginning of the tax year, cost means the inventory price of the goods.

    2. For merchandise purchased during the year, cost means the invoice price less appropriate discounts plus transportation or other charges incurred in acquiring the goods.

    3. For merchandise produced during the year, cost means all direct and indirect costs that have to be capitalized under the uniform capitalization rules.

  1. Lower of cost or market - Compare the market value of each item on hand on the inventory date with its cost and use the lower value as its inventory value.

  1. Other - Any other IRS-approved method.

Non-deductible contribution - The difference between your total permitted contributions and your total deductible contributions.

Overpayment- The amount by which tax payments and credits exceed the tax liability for the year.

Passive Income- Investment (interest, dividends, capital gains), real property rental, royalties, alimony income, etc.

Payments- Tax payments can be made "at source", such as taxes withheld from wages or in special circumstances other income such as interest, dividends or royalties, or it may be paid voluntarily (or involuntarily) during the year.

Penalties- Additional charges assessed against taxpayers who do not pay their taxes when due. Our tax system is based on "Pay as You Go". This means that if you earn wages, taxes must be withheld in the proper amount at source when the wages are paid. If you have other income from which there is no withholding, you must pay any unpaid liability no later than the due date for each quarterly tax installment (for Calendar Year taxpayers: April 15, June 15, September 15 of the tax year and January 15th immediately following the end of the tax year). Failure to pay tax installments when due will result in a tax underpayment penalty based on the number of days each payment is late. There are some limited exceptions used to avoid this penalty. Any other taxes not paid by April 15 (calendar year taxpayer) is subject to interest beginning April 15 until paid, plus 5%/month late filing penalties determined from that date. A Return filed late is subject to a monthly penalty of 1/2%

Permanently and totally disabled - A person who meets both of the following tests:

    1. The person cannot engage in any substantial gainful activity because of a physical or mental condition, and

    2. A physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death.

Personal Exemptions- An predetermined amount allowed as a subtraction from AGI, based on the number of qualifying persons for which the taxpayer provides financial support

Personal property taxes - Taxes paid on personal property, but only if based on value alone (e.g. value-based taxes on automobiles and mobile homes).

Physical Presence Test - This test requires that a U.S. citizen or resident be physically present in one or more foreign countries for at least 330 days during any 365 day period, and that the individual's tax home be in a foreign country during the 330 day period. Any partial days in the U.S. are treated as full U.S. days for purposes of this test.

Principal residence - The home you live in most of the time.

Qualified expenses - For education tax credit purposes, qualified expenses are amounts you paid for tuition and fees required for enrollment or attendance at an eligible educational institution for you, your spouse, or a dependent you claim on your tax return. Qualified expenses do not include amounts paid for room and board, insurance, transportation, books or equipment.

Qualified higher education expenses - For student loan interest deduction purposes, qualified higher education expenses generally include tuition, fees, room and board, and related expenses such as books and supplies. The expenses must be for education in a degree, certificate, or similar program at an eligible educational institution. An eligible educational institution includes most colleges, universities, and certain vocational schools. You must reduce the expenses by the following nontaxable benefits:

    1. Employer-provided educational assistance benefits that are not included in box 1 of your W-2 form(s).

    2. Excludable U.S. series EE savings bond interest from Form 8815.

    3. Qualified distributions from an education IRA.

    4. Any scholarship, educational assistance allowance, or other payment (but not gifts, inheritances, etc.) excluded from income.

Qualified student loan - Any loan you took out to pay the qualified higher education expenses for yourself, your spouse, or anyone who was your dependent when the loan was taken out. The person for whom the expenses were paid must have been an eligible student. However, a loan is not a qualified student loan if (1) any of the proceeds were used for other purposes or (2) the loan was from either a related person or a person who borrowed the proceeds under a qualified employer plan or a contract purchased under such a plan.

Refund/Applied- Tax overpayments may be either refunded to the taxpayer (either by mail or electronic transfer to a designated bank account) or applied against the following year's tax liability. The amount of tax optionally applied is usually determined by the taxpayer unless taxpayer owes tax for prior years.

Related party - Your spouse, child, grandchild, parent, brother, sister, or a related corporation, S corporation, partnership, estate, or trust.

REMIC - Real Estate Mortgage Investment Conduit

Routing Transit Number - A nine-digit number, of which, the first two digits are 01 through 12 or 21 through 32. This number is generally found on the front of your checks, or may be obtained from your financial institution.

Single - If, as of the last day of the tax year, you are unmarried, legally separated from your spouse under a divorce or a separate maintenance decree, or divorced under a final decree, you are considered single.

Substantial Presence Test - A foreign national is treated as a U.S resident taxpayer if the number of days of U.S. presence equals or exceeds 183 days in the current tax year, or 183 "equivalent days" during a three year period. An "equivalent" day is defined as:

    1. 100% of all current year days of presence,

    2. 1/3 of the days of presence for the first year preceding the current year, and

    3. 1/6 of the days of presence for the second year preceding the current year

Statutory employee - Statutory employees include full-time life insurance agents, certain agent or commission drivers and traveling sales-persons, and certain home workers.

Tax Rates- The percentages at which tax is calculated based on taxable income amounts. 

Tax Liability- The amount of income tax computed, before payments of withholding tax and pre-paid estimated tax installments and credits, as being owed by the taxpayer based on taxable income. 

Tax Credits- Dollar for dollar offsets against the tax liability amount. Credits are allowed pursuant to law as a means of either eliminating double taxation (as with the foreign tax credit) or providing a form of special interest relief (as with the Child Care Credit or Earned Income Credit)

Taxable Income-AGI less other allowable itemized deductions (or a standard allowance amount) and personal dependency exemptions

Unearned (Passive) Income- Investment (interest, dividends, capital gains), real property rental, royalties, alimony income, etc.

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