Accrual Basis An accounting method of reporting income when earned, and expenses when incurred, as opposed to reporting income when received and expenses when paid. Antonym: Cash Basis.
Accrued Interest Interest that is added to the sales price of a bond when it is sold. This interest has accrued since the last interest payment up to but not including the settlement date.
Adjusted Basis The basis on which an individual's taxable income is calculated. It is the gross taxable income before any itemized deductions are taken.
Adjusted Gross Income The basis on which an individual's taxable income is calculated. It is the gross taxable income before any itemized deductions are taken.
Alternate Documentation In the audit process, an auditor will ask for specific forms of backup, and many times, when it is not possible to present the type asked for, another type will suffice.
Alternative Minimum Tax (AMT) A tax calculation required in addition to your normal tax calculation. The Alternative Minimum Tax base is much larger, and although the AMT tax rate is less, many of the deductions allowed in the regular tax calculation are eliminated for AMT purposes. Therefore, many times the Alternative Minimum Tax is greater and must be paid instead of the lower regular tax calculation.
Amortization The accounting process whereby the cost of an asset is spread out over its life. Certain intangible assets, such as the goodwill of a business, are amortized instead of depreciated (the same process, but for tangible property).
Annuity A form of insurance in which the insured pays a predetermined sum either all at once or in installments to a life insurance company. After this time period, which is determine at the start, the purchaser receives a sum of money for a specific period. During the time of contribution, the interest accumulates tax free until it is withdrawn, at a future date such as retirement. Many different types of annuities are available to the taxpayer, including self-directed annuities, that qualify for this tax-deferred treatment.
Appreciation An increase in property value for the purpose of tax assessment, resale, insurance, and so on.
Asset Any property, physical or intangible, that has monetary value.
Auditor One who inspects and makes a determination of accuracy and completeness of any set of books or records.
Balance Sheet The section of a business's financial statement that lists the assets, liabilities, and owner's equity.
Basis The tax cost of any property.
Bond An evidence of debt issued whenever a corporation or government entity borrows money.
Broker-Dealer The legal designation of a market professional who has a regular place of business and trades for the purpose of market facilitation with the hopes of obtaining a profit. Treats any holdings of stocks and options as if they were inventory items. See Dealer and Market Maker.
Business Property Any property used in the process of trying to generate income.
Business Expense Any expense incurred in the process of trying to generate income.
Call An option contract that gives the buyer the right to purchase something for a certain price within a specific period of time. In the case of calls on an index, such as the OEX, which are settled in cash, it is the right to receive an amount of money based on the call level and the index closing price.
Capital The sum of a company's long-term debt, capital stock, and surplus. Synonym: Paid-in-Surplus.
Capital Appreciation The increase in the market price of assets owned.
Capital Asset An asset that is defined in the tax code as property that is not (1) an inventory asset, (2) held for sale to customers, (3) a note receivable in the ordinary course of business, (4) depreciable business property, (5) real property used in trade or business, (6) a copyright, or (7) a government publication received from the government.
Capital assets are stocks, bonds, securities, or any form of these. Taxpayers must pay the full tax on the capital appreciation but are limited to a deduction of only $3,000 net loss for any year.
Capital Gain (Loss) The gain(loss) realized on the sale of a capital asset. The selling price less cost basis.
Carryforward Loss Any portion of capital loss not utilized in the current year can be carried forward to future years. It will then be subject to the same $3,000 limitation as in the original year. Individuals can carry capital losses forward for an unlimited amount of time, but corporations will lose them if they are not utilized within five years.
Cash Basis An accounting method of reporting income when received and expenses when paid, as opposed to reporting income when earned and expenses when incurred. Antonym: Accrual Basis. Cash Flow Money received by a business minus money paid out. Cash flow is also defined as net income plus depreciation and depletion that are noncash expenses.
Certificate of Deposit (CD) A certificate for a bank deposit that earns a specific interest rate for a given period of time ranging from several days to several years. CDs earn interest in two different ways that directly affect their tax treatment. In most cases, interest is added upon maturity and is taxed at that time. Income may be deferred into future years by investing in a CD to defer the receipt of interest until the maturity date. In some cases, however, interest is added to the CD periodically throughout its life, in which case it is taxed in the year it is received.
Charitable Contribution A donation to a federally approved charity that is an allowable deduction from adjusted gross income.
Charitable Remainder Trust A trust set up for the purposed of donating assets to a charity, and where the income stream goes to the donor. The "remainder" or the original property goes to a charity after a certain period of time, stipulated in the trust. This date can be set up as the date of death of the donor or any other date within twenty years of the establishment of the trust.
Charity An organization whose primary intent is not to create or accumulate wealth for itself. Rather, its primary purpose is to assist others. An approved charity is exempt from federal taxation, and a donation to this type of charity can be deducted on a taxpayer's tax return.
Clifford Trust A tax-saving device that calls for the return of capital to the grantor (donor) after ten years or more and the payment of income to a beneficiary during that time period. This type of trust was usually set up with a child or elderly parent as the beneficiary and put the income to be taxed for this period in a lower tax bracket. For the most part, the Tax Reform Act of 1986 eliminated the tax benefit of this type of trust.
Cost Basis Money on which tax has been paid. A return of cost basis is a return of capital and not subject to tax.
Compensation Payment for the performance of services, including fees, salary, commissions, fringe benefits, and similar items.
Current Asset Property that can be reasonably converted into cash, sold, or consumed during 12 months or less. Current assets include cash, U.S. government bonds and other highly marketable securities, accounts receivable, and inventories.
Custodian of a Minor One who manages a gift to a minor under the Uniform Gifts to Minors Act. Also, someone who takes charge of an incompetent's affairs is a custodian.
Dealer An individual or firm that buys and sells for its own account. Both brokers and specialists may act as dealers, selling to customers from their own inventory, and act as agents who enter into transactions on behalf of their customers. See Broker-Dealer and Market Maker.
Deduction An item subtracted from adjusted gross income to arrive at taxable income. Thus, deductions proportionately reduce the amount of tax that will be due.
Deferred Annuity An annuity that guarantees payment of income, installment payments, or a lump sum to be made at a future date. This type of annuity has preferred tax treatment. The tax on any income earned on the principal is deferred until the money is taken out of the annuity. See Annuity.
Deflation A persistent fall in the general level of prices.
Deferred Revenue Income that has been received but not earned, such as prepaid rent to a landlord. On the landlord's balance sheet it would be listed as a liability.
Depletion An amount charged against earnings to allow for the aging of plant and equipment owned by a firm, or any other decline in the value of physical assets. This method of spreading the expense of an asset out over its life, although the money might have been paid up front, is required. Since the amount is deducted directly from taxable income, the method of calculating depreciation is crucial. The major methods are straight line, double declining balance, and sum-of-the-years digits.
Discriminant Function System A point system the IRS uses to evaluate the taxpayer's return. The deductions are compared to what the IRS considers to be the "norm" for a person in his or her profession, geographic area, and income level. The greater the difference between your tax return and the "norm," the grater your chance is of being selected for an audit. This is only one of several different techniques that the IRS uses to determine who will be audited. See Taxpayer's Compliance Measurement Program and Target Group Selection.
Dividend A portion of a corporation's earnings it distributes to its stockholders in proportion to the number of shares owned. Considered to be part of investment income for tax purposes by the stockholder.
Dividend Exclusion Prior to 1986, there was a $200 per taxpayer, $400 per couple, exclusion on dividend income for individual taxpayers. This was eliminated with the Tax Reform Act of 1986.
Dividend Reinvest The option to have the company reinvest an investor's dividends automatically when they are paid instead of receiving them; most commonly this is done in mutual funds. The tax treatment if reinvested dividends is the same as for dividends that are not. They are fully taxes, regardless of whether the taxpayer actually received them. When the fund is ultimately sold, the taxpayer then adds the amount of dividends on which he or she has paid tax to his or her cost basis to arrive at the tax basis on the investment. In doing this, the investor will not be taxed, once again, on a dividend for which he or she has already paid tax.
Double Declining Balance Method An accounting method that charges more for depreciation on a fixed asset's early years and less later.
Dow Jones Industrial Average The most widely used market indicator, composed of 30 large and actively traded issues.
Earmark Shares of Stock Assign a purchase price to a specific stock. For example, let us assume that an investor had purchased a stock at two different prices. If the investor bought the first lot at $100 per share and the second lot at $110 per share, he or she would have the choice as to which lot would be sold first. Depending on the tax situation, an investor could choose to use either the higher or lower tax basis for the stock sold. This is called earmarking the stock. An alternative method for determining which tax basis to use would be the first-in first-out method whereby the first issues purchased become the first issues sold.
Earned Income Income that is derived from work performed, products sold, and so forth, as opposed to income from investment.
Employee Stock Ownership Plan (ESOP) The purchase by employees of stock in their own company, usually at less than market price. Prior to 1986, an employee could get preferred tax treatment of such a plan by not taking possession until after retirement; however, the benefit of such plans is now curtailed.
EE Savings Bonds Treasury bonds that mature at some later date, usually ten years. Interest is not paid until maturity, although they can be cashed in for less than full value at any time. These bonds have a preferred tax treatment in that you can choose not to declare any taxable income on them until they become due. Also, under certain circumstances, they can be cashed in tax free if the proceeds are going to pay for a dependent's college tuition. See Treasury Bonds.
Equity Ownership of a company that has value. A stock certificate represents such equity and is often referred to as being the equity.
Escrow The placement of assets with a third party to ensure the performance of the terms of a contract or some other condition.
Estate Tax The tax due when an individual dies. The tax is calculated on the taxable estate to which various credits are applied. There is free passage between husband and wife of items in the estate.
Exclusion An amount of income that is allowed to bypass the taxation process. Such would be the case in the dividend exclusion prior to 1986. Exclusions were significantly limited in the Tax Reform Act.
Exercise The rights of an option or warrant are implemented. For example, a call holder exercises a call or put by buying or selling 100 shares of the underlying stock at the agreed upon price (exercise price). Fiduciary A person legally appointed and authorized to represent and act on another's behalf.
Financial Statement A formal statement of the financial condition of an individual or business rendered by accountants at a particular point in time. For a business, the principal forms of financial statements are the balance sheet and the income statement.
First-in First-out (FIFO) A method of assessing inventory in which it is assumed that the first items acquired (in) are the first to be sold.
Fiscal Year Any 12-month period used for a tax or accounting year other than January 1 to December 31. A calendar year, on the other hand, is specifically the 12-month period from January 1 through December 31.
Fixed Assets Tangible physical property owned by a business that is used in the production of income.
Fraud The act of intentionally misstating income, usually presumed to be such if there is a misstatement of more than 25 percent of total income, although that number is not fixed. It is more a determination of circumstance and intent rather than of fact.
FTSE 100 The British equivalent to the Dow Jones Industrial Average.
Futures Contract A contract calling for the delivery of a commodity or financial instrument at a specific future time for a specific price. Futures contracts, for the most part, are marked to market at year end and treated as if sold, for tax purposes, even if they are not.
General Ledger The main accounting book for a business. Financial statements are taken directly from this book.
Generation-Skipping Transfer Tax A surtax above and beyond the normal gift and estate tax. This tax is levied upon any transfers made between skipped generations, such as from grandparent to grandchild.
Gift Tax A tax levied upon the transfer of wealth between two people who are not married. There are levels below which no tax is paid due to the unified credit.
Gifting The process of annually utilizing your maximum exemption so that you pass as much wealth down to future generations, tax free, as is possible. If you don't use your annual gift tax exclusion, you lose it; it cannot be carried forward to the next year.
Grandfathering The concept of linking an investment to the tax law under which it was purchased. For example, if municipal bonds were tax free one year and then become taxable the next, a grandfathering clause in the tax law would allow those people who purchased municipal bonds when they were tax free to continue to treat them that way as long as they owned the investment. Hassle Audit If the audit of one section of a taxpayer's tax return produces no change or very little change, the IRS should not audit the same sections again for at least three years.
Hedging Reducing risk of loss by taking a position in futures opposite to the position one holds in the current market. The tax treatment of hedges is complex and depends on the type of hedge and the specific business of the hedger.
Hobby Loss A business that produces a loss on a taxpayer's return for any three out of five years is presumed by the IRS to no longer be a business but, rather, a hobby that is not deductible. This is not to say that its decision is final, and you may have the opportunity to prove otherwise. Prior to tax reform, the period was a bit more liberal; it was for any two out of five years. There are exceptions to this presumption and the IRS will allow a loss for a longer period of time (such as in thoroughbred horse raising, or in the case of an artist).
Home-Office A deduction allowed for part of the expense of your house or apartment used for business. This can only be deducted now if there is income to deduct it form; you cannot use it to create a loss. In most cases, it must be a part of the house that is used exclusively for business, and generally must be your only place of business, although there are exceptions to this rule.
Illiquid The description of an asset that cannot be readily turned into cash without paying a penalty for haste.
Income Statement A financial statement that summarizes business or personal revenues and expenses for a specific fiscal period of time.
Index A measure of relative value compared with a base quantity for the same series. Stock indexes, such as the OEX, are frequently weighted to reflect the prices and number of shares outstanding. The Dow Jones Industry Average is another example of an index.
Index Option An option contract traded on an index most commonly settled for cash. The tax treatment for most index options, such as OEX index options, is identical to futures contracts, for example, marked to market at year end.
Individual Retirement Plan (IRA) A tax-sheltered investment plan that allows an investor to accumulate funds for retirement by making tax-deferred contributions to the account. The extent of the immediate tax benefit, through deduction of the contribution, though, depends on the tax circumstances of the taxpayer.
IRA Rollover The reinvestment of retirement assets to avoid payment of tax on a sum received when terminating a plan, terminating a job, or simply moving retirement assets to another plan.
Installment Sale The sale of an asset whereby the buyer pays the seller the sales price over a period of time. The gain is recognized in proportion to money received over that same period of time. Cannot be done with stocks and several other asset classes.
Intangible Asset An asset that does not exist physically but has value to an individual or a firm because it can generate income. Such assets are goodwill, franchises, and patents.
Interest A price paid for the use of money. Interest income is taxes as investment income when received for cash basis taxpayers. Interest expense is deducted when paid by cash basis taxpayers, subject to limitations.
Inventory General term for the products owned by a business that will be sold in some way. For a broker-dealer, the term refers to any stock or option carried for sale to others in the course of his or her business. Because of this treatment, the broker-dealer is not limited to a $3,000 per year loss on these items as is the individual investor or trader.
Investment Interest Expense The cost of money borrowed in order to carry an investment. Synonym: Margin Interest.
Investment Income Essentially, dividends, interest, and capital gains.
Investment Tax Credit The deduction of a percentage of the cost of new business equipment allowed by the federal government prior to tax reform.
Junk Bond A bond with a low quality rating and a high interest rate due to the higher percentage of defaults on these issues.
KEOGH A tax-deferred retirement savings plan for the self-employed.
Kiddie Tax The nickname for a surtax charged to children under 14 years of age who have more than $1,200 of investment income. This was created under the Tax Reform Act to limit the transfer of income to younger taxpayers in lower tax brackets. Essentially, anyone in this category pays a tax on unearned income above $1,200 at the parents' higher rate.
Last-In First-Out (LIFO) The accounting method in which items acquired last are counted as those sold first.
Leverage The use of borrowed capital to increase earnings.
Liabilities Debts owed by an individual or business entity.
Limited Partnership A form of business in which one or more partner is liable only to the extent of the amount of dollars they have invested. Limited partners are passive partners and cannot participate in management decisions.
Liquidity The ability to turn an investment into cash without it losing any significant value as a penalty for haste.
Loophole A gray area of the tax law that Congress probably would have ruled against if they had seen it. Loopholes are not the way to formulate a strategic tax plan and are used by desperate taxpayers who did not have the foresight to plan properly.
Margin The amount of equity as a percentage of current market vale required to be maintained in a margin account.
Margin Interest The amount of interest charged to an account for maintaining the margin position with less than full amounts of cash in the account. Synonym: Investment Interest.
Marked to Market The adjustment in a brokerage account to make it conform to a new market price. The convention of computing, for tax purposes, a gain or loss on futures positions at year-end closing value, regardless of whether the position is sold at that point.
Market Maker A dealer willing to take the risk of holding a security or option position in order to facilitate trading in that security or option. Synonym: Broker-Dealer and Dealer.
Miscellaneous Deductions The general category of itemized deductions within which certain expenses fall. Examples of this are investment expenses, accounting fees, etcetera. The Tax Reform Act of 1986 put strict limitations on the deduction of these expenses.
Mitigating Circumstance A factor under which the IRS may waive penalties such as underpayment of tax and late filing of a tax return. They are subjective to a certain extent and vary in interpretation from agent to agent.
Monetary Policy The policy of the Federal Reserve Board that determines the growth and size of the money supply that, in turn, affects interest rates.
Money Market Collective name for short-term credit instruments that are relatively safe, offer low yield, and are very liquid.
Municipal Bond ("Municipal") A debt security issued by a state, municipality, or other political subdivision (such as school, part, etc.) To raise money to finance expenditures. Bonds such as these are usually given some degree of tax preference on federal and state tax returns.
Mutual Fund A type of investment that offers for sale outstanding securities redeemable upon demand for current net asset value. The fund invests in a portfolio of assets and is collectively owned by the owners of shares in the fund. All owners of the fund also share in gains or losses of the fund. Synonym: Open-End Investment Company.
National Association of Securities Dealers (NASD) The self-regulatory agency for the over-the-counter (OTC) market.
National Association of Security Dealers Automated Quotation Systems (NASDAQ) The computerized service that provides its subscribers with information on over-the-counter securities. Commonly used as a reference for the OTC market itself.
Nikkei The Japanese equivalent of the Dow Jones Industrial Average.
Net Worth Assets minus liabilities of an individual or firm. For a corporation, it is shareholder equity.
No-Load A mutual fund that does not charge a sales commission, usually because it does not employ a sales staff. Shares may be purchased directly through the fund. In the newspaper, the price it is offered at is equal to the net asset value (NAV).
OEX A market index composed of 100 well-known stocks similar to the Dow Jones Industrial Average; however, it is somewhat broader based. OEX options traded on this index are settled monthly for cash. These options are treated as futures contracts for tax purposes.
Option A contract for the right to by (or call away from the owner) or the right to sell (or put to the buyer) a certain quantity of a commodity, security, or futures contract at a set price (strike price) by a set time (expiration date). Index options are settled for cash on expiration, and for tax purposes are generally treated as futures contracts.
Ordinary Income A common nomenclature for income that is not passive or investment in nature.
Original Issue Discount (OID) A bond issued at a discount from face value. The bond receives no interest, but the discount is taxes as if received annually as ordinary income.
Out-of-the-Money Description of a call whose strike price is higher than the market price of the underlying instrument, or a put whose strike price is lower than the market price of the underlying instrument.
Over-the-Counter (OTC) The market for securities that are not traded on any organized stock exchange.
Partnership A form of business organization in which two or more individuals enter into a business, pool their resources, and share the profits. The profits flow through to the partners and are taxed on their individual tax returns.
Passive Activity Loss (PAL) Loss from activities such as limited partnerships where the investors do not materially participate in the management of the business. These losses are only deductible against passive income for tax purposes. Prior to 1986 they were deductible against ordinary income as well and were therefore used extensively as tax shelters. Passive Income Income from activities such as limited partnerships where the investors do not materially participate in the management of the business.
Passive Income Generator (PIG) A profitable passive investment purchased with the expressed purpose of generating income against which PALs can be taken.
Penalty A fine imposed by a government agency that is not deductible on the tax return.
Pension A form of investment in which regular contributions are made over a period of time with the earnings reinvested and paid out after retirement.
Portfolio The total holdings of an individual including stocks, bonds, etcetera.
Portfolio Income Income generated from interest, dividends, and capital gains held as investments that are not classified as passive investments. Synonym: Investment Income.
Position The number of shares owned (long position) or the number of shares owed (short position) by an individual.
Premium The amount by which the selling price exceeds the value of the investment.
Prime Rate The rate of interest charged by commercial banks for short-term loans to its best ("prime") corporate customers.
Private Activity Bonds Municipal bonds sold by a municipality or subdivision and taxable in varying degrees under the Alternative Minimum Tax.
Problems Resolution Office The IRS office that facilitates solutions to problems that may arise between a taxpayer and the IRS.
Proceeds The actual amount received by the seller of an investment. Gross proceeds is the amount before deducting expenses incurred in the sale. Net proceeds is the amount after such expenses are subtracted.
Profit The excess of income over the cost of obtaining it. For investors, it is the difference between the security's cost basis and its sales price.
Proprietorship A business that has a single owner who is personally liable for all claims against it and solely responsible for raising capital to expand it. No separate income tax return must be filed for such an entity, as the income or loss is reported on the individual's income tax return (Schedule C).
Put An option contract that gives the buyer the right to sell (or "put to the buyer") a certain quantity of a commodity, security, or futures contract at a set price (strike price) by a set time (expiration date). Index puts, such as those on the OEX, are settled for cash upon expiration and for tax purposes are treated as futures contracts.
Put Warrants Puts on warrants. See Warrant.
Random Selection Another method of selecting tax returns for audit by the IRS. This selection process has nothing to do with the data on the return but, rather, is part of a certain percentage of returns selected at random.
Real Property Any real estate, including land. The taxation of real property was drastically altered by the Tax Reform Act of 1986 and now provides much less opportunity for use as a tax shelter.
Recession A slowdown in the business cycle of a nation's economy.
Retained Earnings The amount of business net income after all dividends have been paid to shareholders.
Retirement Plan An investment specifically set up as a vehicle to provide for one's retirement. These plans are often set up with a deferral of tax on all earnings within the plan until the money is withdrawn for use after retirement.
Return of Capital A nontaxable return of investment money to the investor. This has no tax consequence whatsoever.
Roller See IRA Rollover.
Sales Load The commission fee charged for the purchase of a mutual fund. Front loads are charged upon purchase and back loads are charged upon sale of the fund.
Self-Directed Term describing an IRA or KEOGH account actively managed by the owner.
Settlement Date The date on which a transaction must be settled with cash.
Short Against the Box The sale of a security the seller owns but prefers not to deliver. This is sometimes done for tax purposes to postpone the recognition of a gain on a security owned while still locking in profit on that security.
Short Stock Sale The sale of a security the seller does not own but rather borrows to sell. This sale is consummated for tax purposes when the security is either purchased back or delivered out of portfolio by the seller.
Short-Term Capital Gain (Loss) A capital transaction completed in one year or less.
Simplified Employee Pension (SEP) A retirement plan in which an employer contributes to an IRA and the employee also makes contributions. This plan is often used by sole proprietors who are the employees as well as the employers.
Small Capitalization Stocks Stocks with less outstanding shares than the larger blue chip companies.
Sole Proprietorship See Proprietorship.
Standard and Poors 500 (S & P 500) A market index composed of 400 industrial stocks, 20 transportation stocks, 40 financial stocks, and 40 utility stocks. Similar to the Dow Jones Industrial Average but broader based. Futures contracts, settled for cash, are traded based upon this average.
Stock A share of ownership in a corporation that represents a claim on its assets and earnings. For tax purposes, stock is considered to be a capital asset and is subject to the rules on capital gains and capital losses.
Stock Dividend A dividend in the form of stock rather than cash. In most cases, there is no tax consequence at the time of the dividend, but rather when the stock is sold.
Stock Index A statistical grouping of prices of selected stocks that tracks the changes in their value for purposes of analysis, investing, and hedging. The construction of such groupings varies. Some are weighted differently than others to reflect imbalances in shares outstanding as well as share price differences. The S&P 500 Index is an example of a stock index.
Stock Index Futures Futures contracts on various stock indexes that began trading on the commodity exchanges in 1982. One example of these are the S&P futures contracts based on the S&P 500 Index. These are typically settled in cash.
Stock Split The division of a company's outstanding shares of stock into a larger number of shares without any change in the total value of shares outstanding. As a result, the price of each share falls proportionally. For example, a 2 for 1 stock split of a $100 stock would result in each stockholder having twice as many shares of a stock now worth $50 per share. There is no direct tax consequence to a stock split.
Substantial Element of Pleasure A subjective determination the IRS occasionally makes in disallowing any number of business deductions or charitable contributions. The IRS will sometimes argue that the taxpayer derived significant enjoyment from an activity that effectively negates the business or charitable nature of these expenses.
Supply-Side Economics A school of economic thought promoted under the Reagan administration, which subscribed to the theory that to raise tax revenues the government must lower the tax rates.
Target Group Selection Certain professions that have a higher probability of being selected for audit are considered to be "targeted" for the selection process. Doctors and other high income professionals are thought of as some of the targeted groups.
Tax Deferred A characteristic of certain types of investments that can earn and accrue income for a period of time without tax being paid on the income at that time. The tax will become due at some future pont, usually the time the income is withdrawn from the investment.
Tax Shelter An investment whereby one not only can earn a return but also can avoid or postpone paying taxes on the income within the structure of the tax law. These have been severely limited in recent years.
Tax Simplification A catchy phrase to describe the process whereby Congress tries to revise and simplify the tax laws at the same time.
Taxpayer Compliance Measurement Program The official government program of randomly selecting tax returns for audit to determine the public's general level of compliance with the tax laws. This dreaded audit will often inspect every item on the tax return, from the birth certificates of dependents to the validity of the signatures on the tax return.
Total Return Investment Planning (TRIP) The process of factoring tax liability into the calculation of investment yield to arrive at true yield.
Trader A specific classification of investor who tries to capture very short-term trading moves. The designation of "trader" is a somewhat subjective one and the law is ambiguous. The tax advantages traders enjoy over investors are significant. They can deduct 100 percent of their trading interest and other trading expenses instead of being limited to many new restrictions passed under the Tax Reform Act. There are several cases that establish legal precedent for this designation. However, due to the higher stakes now involved, many cases will probably be challenged in the near future. Factors weighed by the courts include the level of trading activity, the basis for making a trade, and the profit objectives of the trader. This is not an easy area of the tax law and the determination can have significant ramifications for the taxpayer involved. Get professional help with this if you have any doubts as to how to set it up. Click here for a free Trader Status Evaluation
Treasury Bill (T-Bill) A marketable short-term U.S. government debt security with an expiration date between 30 days and one year from issuance. The T-bill is taxable upon redemption of held to maturity, and the interest is taxable on the federal return, but tax free on the state tax return.
Treasury Bond A marketable long-term U.S. government debt security with an expiration date between 10 and 30 years from its issuance. It has a fixed rate of interest. A treasury bond is also taxable upon redemption of held to maturity, and the interest is taxable on the federal return, although tax free on the state tax return. There is a provision for paying interest as it is earned, if the taxpayer prefers, instead of waiting until maturity. If the interest is used to pay for a dependent's higher education, in many situations, the interest will be tax free.
Treasury Note A marketable medium-term U.S. government debt security with an expiration date between one and ten years from issuance. A treasury note pays interest semiannually and the interest is taxable upon receipt, on the federal return, although tax free on the state tax return.
Trust The legal transfer of property to one person, called the trustee, who holds it for the benefit of another person, called the beneficiary. The trustee is usually expected to invest the property so that it yields income and generally has the power to sell, mortgage, or lease it as the need arises. The trustee has a fiduciary responsibility to the beneficiary, which simply means that the trustee must put the benefit of the beneficiary above all other factors.
Unearned Income Income derived from investments that is not related to any kind of service. It includes both investment income and passive income.
Unified Credit A lifetime exemption from gift or estate taxes of the first $600,000 of property. This is above and beyond the annual exclusions for gifts and the marital exemption for estates.
Unified Gift To Minors Act (UGMA) The act that permits gifts of money and securities to be given to minors while allowing adults to act as custodians.
Venture Capital Money earmarked for a high risk and potentially high rate of return investment. Often the capital is lost on many endeavors before a profitable one is found. It is anticipated that at some point a large enough profit will be made on at least one of the investments so as to offset and produce overall profit for the investor.
Vested To be put in control and given a percentage of ownership in a retirement plan. There are several different methods of becoming vested in one's retirement plan. See Chapter 11 for details.
Warrant A security giving the holder the right to purchase securities at a stipulated price. This is usually a long-term investment, affording the investor the option of buying shares at a later date at the subscription price, subject to the warrant's exercise.
Wash Sale A sale is considered to be a wash sale if it resulted in a loss and the item is purchased again within 30 days of the time it was sold. Wash sale losses cannot be taken as tax losses as they are deemed to be tax-motivated transactions. There are no restrictions, however, on selling an item for a gain and then repurchasing it within 30 days.
Write-Off The act of deducting an expenditure on your tax return.