Here is a glossary of terms (a work in progress) with simplified definitions:
A | B | C | D | E | F | G | H | I | J | K | L | M
N | O | P | Q | R | S | T | U | V | W | X,Y & Z
A -
AMT: Stands for “alternative minimum tax.” AMT is an alternative tax calculation that affects higher-income individuals. The AMT calculation takes away personal exemptions and many itemized deductions in arriving at taxable income for AMT purposes.
B -
C -
C-Corporation: By default, any incorporated business entity is taxed as a C-Corporation. A corporation can elect to be taxed as an S-Corporation. A C-Corporation is a separate taxpaying entity. The results of C-Corporation operations stay within the corporation, and the corporation itself pays taxes on corporate net income.
Community Property: Most states follow “common law,” but 9 states in the United States follow “community property” laws. When married couples in community property states file separate tax returns, they must employ community property rules. Those rules require splitting income and deductions 50/50 between both spouses. The 9 states that follow community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
D -
Defense of Marriage Act (often abbreviated as DOMA): A federal law passed in 1996 that says, for all federal purposes, marriage is defined as “one man, one woman.” Because of DOMA, the federal government does not recognize any same-sex marriage, civil unions or domestic partnerships.
E -
Employer Identification Number (EIN) - A 9-digit number assigned by the IRS to businesses. All business entities other than sole proprietors must have EINs. Sole proprietors may need an EIN in certain circumstances.
Enrolled Agent: Federally licensed tax practitioners. In the tax world, Enrolled Agents have equal rights and privileges as attorneys and CPAs. Read more about Enrolled Agents here.
F -
FICA - Stands for “Federal Insurance Contributions Act.” FICA taxes fund Medicare and Social Security and are generally paid for through withholdings from paychecks (if an employee) or through paying self-employment tax (for people who are self-employed).
H -
Head of Household: A filing status on a tax return that provides a tax bracket that is halfway between that of a single person and that of a married person. A person can qualify for head of household if they are single and have a qualifying dependent living with them.
HSA: Stands for “health savings account.” An HSA allows you to save money, tax-advantaged, for medical expenses. Contributions to an HSA reduce your taxable income, and withdrawals from an HSA are tax-free if used for medical expenses. To qualify, you must meet certain requirements, such as being enrolled in a high-deductible health care plan. See IRS Publication 969 for more information.
L -
LLC: Stands for “Limited Liability Company.” LLCs are entities formed under state law. As with corporations, LLCs give liability protection but LLCs are usually simpler to form and administer. One-person LLCs are taxed as sole proprietorships by default and multi-member LLCs are taxed as partnerships by default, but an LLC can elect to be taxed as an S-Corporation or a C-Corporation.
M -
Medical Dependent: A person can be a dependent for purposes of medical expenses and health insurance coverage, without you actually claiming them as a dependent on your tax return. The test for someone to be your medical dependent is: did they live with you all year and did you provide more than half of their support? If so, they might be your medical dependent.
R -
Registered Domestic Partner (RDP): Same-sex couples in California, Nevada and Washington are not allowed to get married but they are allowed to enter into “registered domestic partnerships.” These partnerships are similar to marriage. Nevada and Washington don’t have state income taxes, but RDPs in California can file their California taxes as if they were married.
RTRP: Stands for “registered tax return preparer.” RTRPs are federally authorized to prepare tax returns but have less power than enrolled agents, CPAs or attorneys when dealing with the IRS. The status of the RTRP designation is presently unknown. A court ruled in early 2013 that the IRS did not have the authority to go through with the RTRP program, but the IRS has appealed. As of April 2013, the outcome of the court case is unknown.
S -
S-Corporation: A corporation that elects to be taxed under subchapter S of the Internal Revenue Code. S-Corporations are required to file an informational tax return on Form 1120-S, but generally do not pay taxes themselves. Instead, as with a partnership, S-Corporations are “flow-through” entities, meaning the results of the corporate operations flow through to the individual shareholders, who are taxed on the corporation’s operations on their personal tax returns.
Sole Proprietorship: A business entity that involves one person is not incorporated and is not an LLC. Results of sole proprietorship operations are reported on Schedule C, which is attached to the business owner’s personal Form 1040.
V -
Varnum Ruling: A 2009 ruling by the Iowa Supreme Court that legalized same-sex marriage in Iowa.
