Tax Power™ U.S. Tax & Business Advisory Services and Solutions
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:
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:
Dependent - A person who meets the following five tests:
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.
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:
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:
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.
Materially participate - You materially participated in a trade or business activity during the tax year if you meet any of the following tests:
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:
Method of inventory valuation - You may use one of the following inventory valuation methods:
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:
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:
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
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:
Statutory employee - Statutory employees include full-time life insurance agents, certain agent or commission drivers and traveling sales-persons, and certain home workers.
Rates- The percentages at which tax is calculated based on taxable
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.
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.