ACAT ATP key terms

All income received in any form, whether money, property, or services, unless the tax law specifically excludes it. It is the starting point for calculating taxable income.

Gross income reduced by certain adjustments such as retirement contributions, self-employment tax, and student loan interest. AGI is a threshold figure used to phase out many deductions, credits, and exclusions.

A deduction subtracted from gross income to arrive at adjusted gross income, available whether or not the taxpayer itemizes. Common examples include contributions to traditional IRAs and health savings accounts.

A fixed deduction amount set by filing status that reduces taxable income without requiring proof of specific expenses. Taxpayers generally claim it when it exceeds their total itemized deductions.

An individual expense allowed as a deduction only if the taxpayer lists it and meets specific statutory limits, such as mortgage interest, state taxes, or charitable gifts. It is an alternative to the standard deduction.

An item of income that the tax law removes from gross income entirely, so it is never taxed. Examples include certain employer-provided health coverage and qualifying gifts received.

A provision that postpones taxation of income or gain to a later year rather than eliminating it. The tax is eventually paid when the income is recognized.

Property held for investment or personal use, such as stocks, bonds, and a personal residence, as opposed to inventory or business-use property. Its sale produces capital gain or loss.

The profit from selling a capital asset for more than its adjusted basis. Long-term gains are taxed at preferential rates, while short-term gains are taxed as ordinary income.

The length of time an asset is owned, measured from the day after acquisition through the sale date. Owning a capital asset for more than one year generally qualifies the gain as long-term.

The excess of capital losses over capital gains for the year. Individual taxpayers may deduct up to $3,000 of it against ordinary income annually and carry the remainder forward.

The amount representing a taxpayer's investment in property for tax purposes. It is subtracted from the sale proceeds to determine gain or loss and is adjusted for certain events over time.

A transaction in which business or investment real property is exchanged for other real property of the same nature, allowing gain to be deferred. The replacement property takes a carryover basis.

A sale in which at least one payment is received after the tax year of the sale. Gain is reported proportionally as payments are received, deferring tax on the unpaid portion.

An annual deduction that recovers the cost of business or income-producing property over its useful life. It reduces the property's adjusted basis and may be recaptured on sale.

An election allowing a business to deduct the full cost of qualifying tangible personal property in the year it is placed in service, subject to annual dollar limits. It is an alternative to depreciating the asset over time.

The category a taxpayer uses to report income and determine tax rates, standard deduction, and credit eligibility. Options include single, married filing jointly, married filing separately, and head of household.

A qualifying child or qualifying relative for whom a taxpayer may claim certain benefits, such as a dependency exemption credit or child-related credits. Specific relationship, age, support, and residency tests apply.

A nonrefundable credit for each qualifying child under age 17, with a portion potentially refundable. It phases out at higher income levels based on modified adjusted gross income.

A refundable credit for low- and moderate-income workers, calculated from earned income and the number of qualifying children. It is subject to income phase-outs and eligibility rules.

A tax credit that can reduce tax liability below zero, with the excess paid to the taxpayer as a refund. Nonrefundable credits can only reduce tax owed to zero.

An itemized deduction for gifts to qualified charitable organizations, subject to percentage-of-AGI limits and substantiation rules. Gifts of property are generally valued at fair market value if held long term.

An itemized deduction for unreimbursed medical costs that exceed a statutory percentage of AGI. Only qualifying expenses for the taxpayer, spouse, and dependents count.

A deduction for eligible owners of pass-through businesses equal to a percentage of qualified business income, subject to limitations based on wages and property. It is claimed below the line.

Social Security and Medicare tax owed by self-employed individuals on net earnings from self-employment. Half of the tax is allowed as an above-the-line deduction.

Quarterly prepayments of tax made by taxpayers whose withholding does not cover their expected liability. Underpayment can trigger a penalty unless an exception applies.

Tax withheld from wages or other payments by a payer and remitted to the government on the taxpayer's behalf. It is credited against the taxpayer's total liability when the return is filed.

A charge imposed when a taxpayer fails to pay enough tax through withholding and estimated payments during the year. It is calculated like interest on the shortfall.

Treasury regulations governing practice before the IRS, setting standards for tax return positions, advising clients, and professional conduct. It imposes duties and possible sanctions on practitioners.

The obligation of a tax return preparer to make reasonable inquiries and keep records supporting positions taken on a return. Failure can result in penalties under the Internal Revenue Code.

A civil penalty assessed against a preparer for conduct such as taking an unreasonable position or failing to meet due diligence duties. The amount depends on the violation and the preparer's conduct.

A unique number the IRS issues to individuals who prepare tax returns for compensation. It must be renewed annually and included on returns the preparer signs.

A person authorized to represent taxpayers before the IRS, such as an attorney, CPA, enrolled agent, or enrolled retirement plan agent. Practice rights depend on the type of credential held.

A written authorization letting a representative act on a taxpayer's behalf before the IRS, including receiving confidential information. It specifies the acts and tax matters covered.

The time period within which the IRS may assess tax or a taxpayer may claim a refund. It is generally three years from the filing date, with longer periods for substantial omissions or fraud.

The formal recording of a taxpayer's liability by the IRS, which begins the collection process. It generally follows the filing of a return or an audit adjustment.

A formal IRS letter informing a taxpayer of a proposed deficiency and the right to petition the Tax Court. It starts the period for contesting the adjustment before payment.

A formal request by a taxpayer for a refund of overpaid tax, generally filed on an amended return. It must be filed within the statutory period after the return was filed or tax paid.

A penalty imposed when the tax shown on a return understates the correct liability by more than the greater of a set percentage of tax or a dollar threshold. Reasonable cause may provide a defense.

A penalty for negligence, disregard of rules, or a substantial valuation misstatement on a return. It is generally a percentage of the underpayment and can be avoided with adequate disclosure and reasonable basis.