Plain-English Definitions of Tax & Accounting Terms
95 definitions covering tax forms, deductions, business entities, IRS programs, and international compliance.
Individual Tax
28 termsAdjusted Gross Income (AGI)
Adjusted Gross Income is your total gross income reduced by specific above-the-line deductions, used as the starting point for calculating your federal taxable income.
Alternative Minimum Tax (AMT)
A parallel federal tax system that ensures high-income taxpayers pay a minimum amount of tax by limiting certain deductions and preferential treatments.
Backdoor Roth IRA
A two-step strategy of contributing to a non-deductible traditional IRA and converting it to Roth, used by high-income earners who exceed direct Roth IRA contribution limits.
Capital Gain
The profit realized from the sale of a capital asset such as stock, real estate, or cryptocurrency, taxed at preferential rates if held longer than one year.
Certified Public Accountant (CPA)
A licensed accounting professional who has passed the Uniform CPA Examination and met state-specific education and experience requirements.
Estimated Tax
Quarterly tax payments made by self-employed individuals, investors, and others whose income is not subject to sufficient withholding.
Federal Estate Tax Exemption
The amount a US individual can transfer at death (and via lifetime gifts) without federal estate or gift tax, indexed annually for inflation and now set at $15 million per person under OBBBA.
FICA Tax
The Federal Insurance Contributions Act payroll tax funding Social Security and Medicare, withheld from wages and matched by the employer.
Form 1040 (US Individual Income Tax Return)
The annual federal income tax return filed by US citizens and resident aliens to report income, deductions, credits, and tax liability.
Form 1099 (Information Returns)
A series of IRS forms used to report various types of non-employee income, including 1099-NEC for contractor payments and 1099-K for third-party payment processors.
Form 8949 (Sales and Other Dispositions of Capital Assets)
The IRS form used to report each individual sale or disposition of a capital asset, with totals flowing to Schedule D.
Form W-2 (Wage and Tax Statement)
The annual statement employers provide to employees and the Social Security Administration reporting wages paid and federal, state, and local taxes withheld.
Health Savings Account (HSA)
A triple-tax-advantaged savings account paired with a high-deductible health plan: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Itemized Deductions
Specific deductions claimed on Schedule A in lieu of the standard deduction, including state and local tax, mortgage interest, charitable contributions, and medical expenses.
Net Investment Income Tax (NIIT)
A 3.8 percent additional federal tax on net investment income for taxpayers with modified adjusted gross income above statutory thresholds.
Qualified Charitable Distribution (QCD)
A direct transfer from an IRA to a qualified charity by a taxpayer age 70 and a half or older, satisfying the RMD without inclusion in taxable income.
Required Minimum Distribution (RMD)
The annual minimum amount that must be withdrawn from most retirement accounts after a specified age, taxed as ordinary income.
SALT Deduction (State and Local Tax)
The federal itemized deduction for state and local income, sales, and property taxes, capped at $10,000 ($5,000 for married filing separately) under TCJA, with the cap raised under OBBBA.
Schedule C (Profit or Loss from Business)
The federal tax form filed with Form 1040 to report income and expenses of a sole proprietorship or single-member LLC treated as a disregarded entity.
Schedule E (Supplemental Income and Loss)
The federal tax form for reporting rental real estate income, royalties, and pass-through income from partnerships, S corporations, estates, and trusts.
SECURE 2.0 Act
A 2022 federal law amending retirement account rules, including RMD age changes, expanded catch-up contributions, automatic 401(k) enrollment, and new employer matching for student loan payments.
Self-Employment Tax
The Social Security and Medicare tax (15.3% combined) paid by self-employed taxpayers on their net earnings from self-employment.
Standard Deduction
A fixed dollar amount that reduces taxable income, available to taxpayers who do not itemize deductions on Schedule A.
Tax Basis
The amount of investment in an asset for tax purposes, used to determine gain or loss when the asset is sold or otherwise disposed of.
Tax Bracket
A range of taxable income subject to a specific marginal tax rate under the federal progressive income tax system.
Tax Credit
A dollar-for-dollar reduction of tax liability, more valuable than a deduction of equal size since deductions only reduce taxable income.
Tax Deduction
An amount subtracted from gross income to reduce taxable income, lowering tax liability by the deduction amount multiplied by the marginal tax rate.
Wash Sale Rule
An IRS rule disallowing the recognition of a capital loss when substantially identical securities are repurchased within 30 days before or after the loss-generating sale.
Business Tax
20 termsDepreciation
The deduction of the cost of a tangible business asset over its useful life, reflecting wear, tear, or obsolescence.
Form 1065 (US Return of Partnership Income)
The annual federal information return filed by partnerships and multi-member LLCs treated as partnerships, with income passed through to partners on Schedule K-1.
Form 1120 (US Corporation Income Tax Return)
The annual federal income tax return filed by C corporations to report income, deductions, and tax liability at the entity level.
Form 1120-S (S Corporation Income Tax Return)
The annual federal income tax return filed by S corporations, which pass income, deductions, and credits through to shareholders via Schedule K-1.
Form 2553 (S Corporation Election)
The IRS form used to elect S corporation tax status for an eligible domestic corporation or LLC, generally due within 75 days of the start of the tax year.
Form W-9 (Request for Taxpayer Identification Number)
A form used by businesses to collect a contractor or vendor's name, address, and Taxpayer Identification Number for 1099 reporting purposes.
Home Office Deduction
A deduction for the business-use portion of a home, available to self-employed taxpayers who use part of their home regularly and exclusively for business.
Limited Liability Company (LLC)
A flexible business structure that combines the liability protection of a corporation with the pass-through taxation and operational flexibility of a partnership.
Material Participation
The IRS standard for involvement in a trade or business that distinguishes active income (no passive loss limitation) from passive income (subject to PAL rules).
Partnership
A business entity owned by two or more persons who share in profits and losses, taxed as a pass-through with each partner reporting their share on their individual return.
Pass-Through Entity
A business entity that does not pay federal income tax at the entity level; instead, profits and losses pass through to owners who report them on their individual returns.
Pass-Through Entity Tax (PTET) Election
A state-level tax elected at the entity level to allow pass-through owners to circumvent the federal SALT deduction cap.
S Corporation
A pass-through tax election under Subchapter S of the Internal Revenue Code that avoids corporate double taxation while allowing shareholder-employees to reduce self-employment tax.
Schedule K-1
A tax document issued by partnerships, S corporations, estates, and trusts to report each owner's share of income, deductions, credits, and other tax items.
Section 168(k) Bonus Depreciation
A federal tax provision allowing first-year deduction of a percentage of the cost of qualifying business property, restored to 100 percent under OBBBA for assets placed in service after January 19, 2025.
Section 179 Expensing
A federal tax provision allowing businesses to fully expense the cost of qualifying tangible property and certain real estate improvements in the year of purchase, up to a statutory cap.
Section 199A QBI Deduction
A federal deduction of up to 20% of Qualified Business Income for owners of pass-through entities and sole proprietorships.
SEP-IRA
A simplified employee pension IRA allowing self-employed individuals and small business owners to contribute up to 25 percent of net earnings to a traditional IRA structure.
Solo 401(k)
A retirement plan for self-employed individuals and small business owners with no full-time employees, allowing both employee deferral and employer profit-sharing contributions.
Standard Mileage Deduction
A simplified method of deducting vehicle expenses based on business miles driven, using the IRS-published standard mileage rate.
International Tax
15 termsCloser Connection Exception
A provision allowing a non-citizen who would otherwise be a US tax resident under the Substantial Presence Test to remain a non-resident if they have a closer connection to a foreign country.
FATCA (Foreign Account Tax Compliance Act)
A US law requiring foreign financial institutions and certain US taxpayers to report foreign financial accounts and assets to the IRS.
FBAR (Report of Foreign Bank and Financial Accounts)
A FinCEN Form 114 filing required of US persons who hold foreign financial accounts with an aggregate value exceeding $10,000 at any point during the year.
Foreign Earned Income Exclusion (FEIE)
A tax provision allowing qualifying US citizens and residents living abroad to exclude a portion of foreign-earned wages and self-employment income from US taxation.
Foreign Tax Credit (FTC)
A dollar-for-dollar credit on the US tax return for income taxes paid to a foreign country, designed to prevent double taxation.
Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations)
An informational return required of US persons who own or control foreign corporations, with significant penalties for failure to file.
Form 8833 (Treaty-Based Position Disclosure)
The required disclosure form when a taxpayer claims a US tax treaty benefit that overrides or modifies an internal Revenue Code provision, with $1,000 (individual) or $10,000 (corporation) penalty per failure.
Form 8854 (Expatriation Statement and Exit Tax)
The required form for US citizens renouncing citizenship and long-term green card holders giving up residency, computing the mark-to-market exit tax under IRC Section 877A on covered expatriates.
Form 8938 (Statement of Specified Foreign Financial Assets)
A FATCA-related form filed with Form 1040 to report foreign financial assets that exceed specified thresholds.
GILTI (Global Intangible Low-Taxed Income)
A US tax on foreign income earned by Controlled Foreign Corporations in excess of a deemed routine return on tangible assets.
IRS Streamlined Filing Compliance Procedures
An IRS amnesty program for non-willful US taxpayers who failed to report foreign financial accounts and assets, allowing catch-up filing without standard penalties.
Social Security Totalization Agreement
A bilateral agreement between the US and a foreign country that prevents double Social Security contribution on the same wages and may allow combining work credits across countries to qualify for benefits.
Subpart F Income
Certain types of foreign income earned by Controlled Foreign Corporations that are taxed currently to US shareholders, regardless of distribution.
Substantial Presence Test
A US tax residency test under IRC Section 7701(b) treating a non-citizen as a US tax resident if they meet a specific weighted day-count of physical presence in the United States.
Tax Treaty
A bilateral agreement between the United States and a foreign country that allocates taxing rights and provides benefits to reduce or eliminate double taxation on cross-border income.
IRS Resolution
9 termsCP2000 Notice
An IRS notice proposing changes to a tax return based on information returns (W-2s, 1099s) that do not match what the taxpayer reported.
Enrolled Agent (EA)
A federally licensed tax professional authorized by the US Department of the Treasury to represent taxpayers before the IRS in all matters.
Federal Tax Lien
A statutory claim by the IRS against all property and rights to property of a taxpayer with assessed but unpaid federal tax debt.
Innocent Spouse Relief
An IRS provision that releases a spouse from joint and several liability for tax, interest, and penalties on a joint return when their spouse improperly reported items.
IRS Audit
A formal examination by the Internal Revenue Service of a taxpayer's records to verify that income, deductions, and credits were reported correctly.
IRS Installment Agreement
A formal payment plan with the IRS that allows taxpayers to pay tax debt over time, monthly, instead of in a single lump sum.
IRS Wage Garnishment
An IRS levy on a taxpayer's wages, requiring the employer to send a portion of each paycheck directly to the IRS until the debt is paid or the levy is released.
Offer in Compromise (OIC)
An IRS program that allows qualifying taxpayers to settle tax debt for less than the full amount owed, when full payment would create a financial hardship.
Penalty Abatement
IRS forgiveness of failure-to-file, failure-to-pay, or accuracy-related penalties under specific qualifying circumstances.
Tax Planning
6 terms529 College Savings Plan
A state-sponsored tax-advantaged investment account for education expenses, with tax-free growth and tax-free withdrawals for qualified education costs.
Charitable Bunching
A strategy of concentrating multiple years of charitable contributions into a single tax year to exceed the standard deduction threshold and itemize, then taking the standard deduction in alternating years.
Donor-Advised Fund (DAF)
A charitable giving vehicle held by a public charity sponsor that lets a donor make a tax-deductible contribution today and recommend grants to qualifying charities over time.
Mega Backdoor Roth
A strategy using after-tax (non-Roth) 401(k) contributions converted to a Roth account, allowing high earners to move significantly more into Roth than the standard $23,500 deferral limit.
Roth Conversion
The process of moving funds from a traditional pre-tax retirement account (IRA, 401(k)) to a Roth account, paying ordinary income tax on the converted amount in exchange for tax-free future growth and withdrawals.
Tax-Loss Harvesting
A strategy of selling investments at a loss to offset capital gains and up to $3,000 of ordinary income annually.
Real Estate Tax
4 termsCost Segregation Study
An engineering-based analysis that reclassifies portions of a building into shorter-life property categories to accelerate depreciation deductions in the early years of ownership.
Depreciation Recapture
The portion of gain on sale of depreciated property that is taxed at higher rates rather than long-term capital gain rates, recovering previously claimed depreciation deductions.
Like-Kind Exchange (Section 1031)
A tax-deferred exchange of investment or business real property for similar property under IRC Section 1031, deferring capital gains recognition.
Real Estate Professional Status (REPS)
A federal tax status under IRC Section 469(c)(7) that, when properly qualified, allows rental real estate losses to offset ordinary income with no passive activity loss limitation.
Equity Compensation
6 termsEmployee Stock Purchase Plan (ESPP)
A program letting employees buy company stock at a discount (typically 5 to 15 percent) through payroll deduction, with potentially favorable tax treatment if holding-period requirements are met.
Incentive Stock Option (ISO)
An employer-granted option to purchase company stock that, if held long enough, qualifies for preferential long-term capital gain treatment but creates Alternative Minimum Tax (AMT) on exercise.
Non-Qualified Stock Option (NQSO / NSO)
An employer-granted stock option that creates ordinary income at exercise equal to the bargain element, with employer-side payroll tax withholding.
Qualified Small Business Stock (QSBS / Section 1202)
Stock in a qualified C corporation that, if held more than five years and meeting issuance requirements, can exclude up to $10 million or 10x basis from federal capital gains tax.
Restricted Stock Unit (RSU)
A form of employer equity compensation that delivers shares (or cash equivalent) to an employee upon vesting, taxed as ordinary income at vesting.
Section 83(b) Election
An election filed within 30 days of receiving restricted stock to recognize ordinary income at grant rather than at vesting, locking in a low cost basis for future capital gain treatment.
Accounting
7 termsAccrual vs Cash Basis Accounting
Two methods for timing when income and expenses are recognized: cash basis records transactions when money changes hands, accrual records them when economic activity occurs.
Balance Sheet
A point-in-time financial statement showing what a business owns (assets), what it owes (liabilities), and the residual claim of owners (equity), with the fundamental equation Assets = Liabilities + Equity.
Bank Reconciliation
The monthly process of comparing the bank statement to the bookkeeping records to identify and resolve discrepancies between them.
Bookkeeping
The systematic recording, classification, and reconciliation of a business's financial transactions to produce accurate financial statements.
Chart of Accounts
The structured list of every account a business uses to record financial transactions, organized into assets, liabilities, equity, revenue, and expenses.
Generally Accepted Accounting Principles (GAAP)
The standard set of accounting rules and guidelines used by US businesses for financial reporting, set by the Financial Accounting Standards Board (FASB).
Profit and Loss Statement (P&L / Income Statement)
A financial report summarizing revenue and expenses over a period of time (month, quarter, year) to show net profit or loss.