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CFP - Steps in the Financial Planning Process > Income Tax Planning Definitions > Flashcards

Income Tax Planning Definitions Flashcards

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1
Q

Above-the-Line Deductions

A

Deduction for adjusted gross income

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2
Q

Accelerated Depreciation

A

Allows the owner of an asset to front-load the depreciation deductions so that more of the depreciation deduction is taken in the early years

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3
Q

Accountable Expense Reimbursement Plan

A

A plan under which an employer reimburses employees for certain actually incurred expenses and requires the employee to substantiate the expenditures by producing receipts.

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4
Q

Accountable Plan

A

A reimbursement plan that reimburses employees only for actual expenses incurred

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5
Q

Accrual Method

A

An accounting method under which income is reported when it is earned rather than when it is received in cash

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6
Q

Accuracy-Related Penalty

A

A penalty of 20 percent of the underpayment amount imposed on taxpayers who file incorrect tax returns in certain situations.

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7
Q

Acquisition Indebtedness

A

Indebtedness that is secured by the home and is used to acquire

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8
Q

Active Participation

A

Requires participation in making management decisions concerning the property

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9
Q

Activities of Daily Living

A

Eating

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10
Q

Adjusted Gross Income

A

Gross income less above-the-line deductions.

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11
Q

Adjustments

A

AMT changes made to adjusted gross income that either increase or decrease AMTI.

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12
Q

Adoption Assistance Program

A

An employer plan that assists employees with the cost of adoption and may not discriminate in favor of highly compensated or key employees.

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13
Q

Adoption Expenses Credit

A

A nonrefundable credit allowed for qualified adoption expenses paid by an individual to adopt an eligible child.

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14
Q

Alimony

A

A separate maintenance payment that is intended to replace income lost by one spouse as the result of a divorce and may be included in the gross income of the payee. Alimony will be included in income for divorce decrees signed prior to 2019.

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15
Q

Alimony Recapture

A

Rules designed to prevent taxpayers from transforming property settlements into deductible alimony payments.

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16
Q

Alternative Minimum Tax (AMT)

A

An anti-abuse technique designed to change the timing of tax payments.

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17
Q

Alternative Minimum Taxable Income (AMTI)

A

Adjusted gross income plus or minus certain adjustments and preferences.

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18
Q

American Opportunity Tax Credit

A

A credit (a portion of which is refundable) allowed for the qualified education expenses of an eligible student during the first four years of post-secondary education.

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19
Q

Amortization

A

Cost recovery deductions for intangible assets.

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20
Q

Amount Realized

A

The amount of money plus the value of property received in the sale or exchange of an asset.

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21
Q

Annuitized

A

When regular periodic payments on an annuity contract begin for life or for a specified period of time in excess of one year.

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22
Q

Annuity Contract

A

A contract under which an individual invests a lump sum or stream of payments with an insurance company and the income on the investment growth is deferred until the owner begins to take distributions from the annuity.

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23
Q

Archer Medical Savings Accounts (MSAS)

A

Tax-favored savings accounts for medical expenses that were established by HIPAA in 1996

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24
Q

Articles of Incorporation

A

The charter document for a corporation that must be filed with the Secretary of State in the state of organization.

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25
Q

Articles of Organization

A

Charter document for LLC filed with Secretary of State.

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26
Q

At-Risk Rule

A

Limits taxpayer’s deductible losses to at-risk amount.

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27
Q

Bartering

A

Exchange of goods or services without cash.

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28
Q

Basis

A

Total capital from after-tax income for investments.

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29
Q

Basis Limitation

A

Maximum deductible loss equals taxpayer’s investment basis.

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30
Q

Below-the-Line Deductions

A

Deductions from adjusted gross income

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31
Q

Bona Fide Resident Test

A

Test for foreign income exclusion based on residency intent.

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32
Q

Bonus Depreciation

A

Accelerated depreciation allowing 100% deduction for assets.

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33
Q

Boot

A

Non-like-kind property received in a Section 1031 exchange.

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34
Q

Cafeteria Plan

A

Plan allowing employees to choose compensation benefits.

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35
Q

Capital Asset

A

Assets not classified as ordinary income or Section 1231.

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36
Q

Cash Receipts and Disbursements Method

A

Income reported when received

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37
Q

Casualty Loss Deduction

A

Deduction for unexpected property loss or damage.

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38
Q

Checking the Box

A

Choice for entities to be taxed as corporation or partnership.

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39
Q

Child Tax Credit

A

Nonrefundable credit of $2

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40
Q

Community Property

A

Property regime where spouses share ownership equally.

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41
Q

Compensation

A

Salary and benefits received for services provided.

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42
Q

Compensatory Damages

A

Monetary award for losses or personal injury.

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43
Q

Conventions

A

Rules governing first-year depreciation deductions.

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44
Q

Corporate Recapitalization

A

Restructuring corporate equity for estate or succession planning.

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45
Q

Corporations

A

Legal entities formed by individuals under state law.

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46
Q

Cost Basis

A

Initial asset value acquired by investor.

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47
Q

Coverdell Education Savings Account

A

Plan allowing $2

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48
Q

Credit for Child and Dependent Care Expenses

A

Nonrefundable credit for employment-related care expenses.

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49
Q

Credit for Increasing Research Activities

A

Encourages businesses to increase research expenditures.

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50
Q

Credit for the Elderly or Disabled

A

Nonrefundable credit for elderly or disabled individuals.

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51
Q

Credits for Taxes Paid

A

Refundable credits for federal taxes paid in advance.

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52
Q

De Minimis Fringe Benefit

A

Insignificant fringe benefits not worth accounting.

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53
Q

Deductions

A

Items subtracted from gross income to determine taxable income.

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54
Q

Deferral Items

A

Tax credits usable in future years based on current tax.

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55
Q

Dependency Exemption

A

Deduction for qualifying child or relative before 2018.

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56
Q

Depletion

A

Depreciation method for natural resource assets.

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57
Q

Depreciation

A

Reduction in asset basis due to capital return.

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58
Q

Depreciation Recapture

A

Tax consequences when selling Section 1231 asset above basis.

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59
Q

Determination Letter

A

IRS letter advising on transaction reporting for taxes.

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60
Q

Disability Insurance

A

Benefits for individuals unable to work due to illness.

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61
Q

Disabled Access Credit

A

Encourages businesses to improve accessibility for disabilities.

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62
Q

Disallowed Losses

A

Realized losses not recognized for tax purposes.

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63
Q

Discriminant Inventory Function System

A

IRS program identifying tax returns for audit.

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64
Q

Distance Test

A

50-mile distance requirement for moving expense deduction.

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65
Q

Dividend Income

A

Corporate earnings distributed to shareholders

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66
Q

Doctrine of Constructive Receipt

A

Income must be reported when available

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67
Q

Double Basis Rule

A

Basis rules for gifts and related party transactions.

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68
Q

Double Declining Balance Method

A

Accelerated depreciation method using double the straight-line rate.

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69
Q

Earned Income

A

Income from wages

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70
Q

Earned Income Credit

A

Refundable credit for lower-income taxpayers earning income.

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71
Q

Educational Assistance Program

A

Employer plan providing educational assistance to employees.

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72
Q

Employee Business Expenses

A

Deductible expenses for employees not reimbursed by employers.

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73
Q

Employer-Provided Child Care Credit

A

Credit encouraging employers to support employee child care.

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74
Q

Endowment Contract

A

Insurance contract paying benefits upon death or reaching age.

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75
Q

Estimated Tax Payments

A

Quarterly payments to IRS credited against annual tax.

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76
Q

Exclusion Items

A

Adjustments causing permanent tax increases.

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77
Q

Exclusions

A

Income items exempt from taxation.

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78
Q

Failure to File Penalty

A

5% penalty per month for late tax return filing.

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79
Q

Failure to Pay Penalty

A

0.5% penalty per month for unpaid taxes.

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80
Q

Family Limited Partnership

A

Partnership for transferring assets to younger generations.

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81
Q

Federal Insurance Contributions Act (FICA)

A

Law governing employee pay withholding for OASDI benefits.

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82
Q

Final Regulations

A

Treasury regulations formally adopted after compliance.

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83
Q

5-Year Lookback Rule

A

Unrecaptured Section 1231 losses taxed as ordinary income.

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84
Q

Flexible Spending Account (FSA)

A

Cafeteria plan funded by employee salary reductions.

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85
Q

Foreign Earned Income

A

Income earned abroad by U.S. citizens or residents.

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86
Q

Foreign Tax Credit

A

Credit for taxes paid to foreign governments.

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87
Q

Fraud

A

Intentional disregard of tax rules by taxpayer.

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88
Q

Fringe Benefits

A

Non-cash benefits provided to employees beyond salary.

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89
Q

Functional Use Test

A

Replacement property must serve same functional purpose.

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90
Q

General Business Credit

A

Combination of over thirty nonrefundable tax credits.

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91
Q

General Partnership

A

Business venture with co-owners having unlimited liability.

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92
Q

Gross Income

A

Total income from all sources

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93
Q

Head of Household Filing Status

A

Filing status with better tax benefits than single.

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94
Q

Health Reimbursement Arrangements (HRAs)

A

Employer-funded plans reimbursing employees for medical expenses.

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95
Q

Health Savings Account (HSA)

A

Tax-free savings for medical expenses with high deductible plans.

96
Q

Highly Compensated Employees

A

Employees earning over $130

97
Q

Hobby Activity

A

Non-profit motive activity; no deductions allowed post-2017.

98
Q

Holding Period

A

Duration of asset ownership by taxpayer.

99
Q

Home Equity Indebtedness

A

Debt secured by home exceeding acquisition indebtedness.

100
Q

Hybrid Method

A

Accounting method combining various permitted reporting methods.

101
Q

Imputed Interest

A

Deemed payment when loan interest is below federal rate.

102
Q

Incentive Stock Option (ISO)

A

Tax-favored stock option for employees meeting specific criteria.

103
Q

Income

A

Gross money

104
Q

Individual Investor Exception

A

Allows $25

105
Q

Interest Income

A

Income from debt instruments like bonds and accounts.

106
Q

Interpretive Regulations

A

Treasury’s official interpretations of tax code.

107
Q

Inventory

A

Assets held for resale in normal business operations.

108
Q

Investment Credit

A

Sum of four business credits for tax purposes.

109
Q

Involuntary Conversion

A

Realization event beyond taxpayer’s control.

110
Q

Keogh Plan

A

Qualified retirement plan for self-employed individuals.

111
Q

Key Employee

A

Employee with significant ownership or high salary.

112
Q

Kiddie Tax

A

Tax on child’s unearned income at parent’s rate.

113
Q

Legislative Regulations

A

Regulations detailing laws determined by Treasury.

114
Q

Life Insurance Contract

A

Contract paying specified amount upon insured’s death.

115
Q

Lifetime Learning Credit

A

Nonrefundable credit for qualified education expenses.

116
Q

Like-Kind Assets

A

Property of similar nature for exchange purposes.

117
Q

Like-Kind Exchange

A

Tax deferral for exchanging productive business assets.

118
Q

Limited Liability Company

A

Legal entity offering liability protection and tax flexibility.

119
Q

Limited Liability Partnership

A

Hybrid entity providing partial liability protection.

120
Q

Limited Partnerships

A

Partnership with limited management participation.

121
Q

Listed Property

A

Property used for both business and personal purposes.

122
Q

Long-Term Care Insurance

A

Insurance for benefits when daily activities are impaired.

123
Q

Long-Term Holding Period

A

Asset ownership exceeding one year.

124
Q

Low-Income Housing Credit

A

Credit promoting construction of low-income housing.

125
Q

Managing Partner

A

Partner responsible for specific tasks or operations.

126
Q

Married Filing Jointly

A

Filing status for combined income and deductions.

127
Q

Married Filing Separately

A

Filing status for couples not filing jointly.

128
Q

Material Participation

A

Regular

129
Q

Medical Savings Account (MSA)

A

Tax-free growth for medical expense payments.

130
Q

Mixed-Use Rental Activity

A

Rental property used personally more than 14 days.

131
Q

Modified Accelerated Cost Recovery System (MACRS)

A

Accelerated depreciation system based on asset classes.

132
Q

Modified Endowment Contracts (MECS)

A

Life insurance contracts failing specific regulatory tests.

133
Q

Municipal Bonds

A

State-issued debt instruments with tax-exempt interest.

134
Q

Necessary Expense

A

Prudent business expense incurred during operations.

135
Q

Net Investment Income Tax (NIIT)

A

3.8% tax on high net investment income.

136
Q

Net Operating Losses

A

Higher expenses than income in a tax year.

137
Q

Net Unearned Income (NUI)

A

Child’s unearned income taxed at parent’s rate.

138
Q

No-Additional-Cost Services

A

Fringe benefits excluded from employee’s gross income.

139
Q

Non-Accountable Reimbursement Plans

A

Employer gives fixed sum for business expenses.

140
Q

Nonqualified Stock Option (NQSO)

A

Right to buy stock at market price on grant date.

141
Q

Nonrecourse Debt

A

Debt secured only by the pledged asset.

142
Q

Nonrefundable Tax Credits

A

Credits reducing tax to zero

143
Q

Nontaxable Rental Activity

A

Rental activity for less than 15 days annually.

144
Q

150 Percent Declining Balance Method

A

Accelerated depreciation method for specific MACRS assets.

145
Q

Operating Agreement

A

Rules for operation of a limited liability company.

146
Q

Ordinary Expense

A

Typical expense in normal business operations.

147
Q

Ordinary Income Assets

A

Assets generating gains taxed at ordinary rates.

148
Q

Original Issue Discount

A

Difference between redemption and purchase price of bonds.

149
Q

Original Issue Discount (OID) Bond

A

Bond issued below face value

150
Q

Passive Activity

A

Any activity in which a taxpayer does not materially participate

151
Q

Passive Activity Loss Rule

A

Provides that passive losses may only be used to offset gains from passive activities and may not be used to offset other types of income.

152
Q

Passive Credits

A

Non-refundable tax credits designed to encourage individuals to engage in certain types of passive activities.

153
Q

Passive Income

A

Income received by a taxpayer including income generated from investments in real estate and income generated by business entities in which the owner does not materially participate.

154
Q

Pass-Through Entities

A

Legal business forms that are not treated as separate taxable entities for income tax purposes. The income of a pass-through entity is taxed to each of the owners in proportion to their ownership interest.

155
Q

Personal Exemption

A

A deduction from adjusted gross income for the taxpayer and the taxpayer’s spouse for tax years before 2018 and after 2025.

156
Q

Personal Property

A

Any property that is not real property.

157
Q

Phantom Income

A

Income imputed to taxpayer without a corresponding receipt of cash.

158
Q

Physical Presence Test

A

Requirement for the Foreign Earned Income exclusion that requires the taxpayer to be present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

159
Q

Piercing the Veil

A

Occurs when a court disregards the status of the entity that gives the owners limited liability because the owners failed to maintain a clear and consistent identity for the entity.

160
Q

Portfolio Income

A

Income received by a taxpayer through the investment of capital

161
Q

Preferences

A

AMT changes made to adjusted gross income that increase AMTI.

162
Q

Premium Assistance Credit

A

A credit created by the 2010 Health Care Legislation to provide assistance to low income taxpayers who purchase health insurance through a state-sponsored health benefit exchange.

163
Q

Primarily Rental Use Activity

A

Rental activity in which the real estate is rented for 15 days or more per year and the owner’s personal use of the property is less than the greater of 14 days per year or 10 percent of the rental days.

164
Q

Private Activity Municipal Bonds

A

Securities issued by or on behalf of local governments that bear tax-exempt interest for regular income tax and are used to provide debt financing for private projects.

165
Q

Private Charities

A

Corporations or trusts structured to further the charitable intentions of a donor or the donor’s family.

166
Q

Private Letter Ruling

A

Rulings issued by the IRS that are binding on the IRS only with respect to the transaction and the taxpayer that are the subject of the ruling.

167
Q

Procedural Regulations

A

Housekeeping instructions indicating how the Treasury and IRS will conduct their affairs.

168
Q

Profit Motive

A

An actual and honest

169
Q

Proposed Regulations

A

Regulations that have been drafted by the Treasury

170
Q

Public Charities

A

Charitable organizations that receive support from a wide cross-section of the population

171
Q

Publicly Traded Partnership (PTP)

A

A partnership that trades on an active securities market.

172
Q

Punitive Damages

A

Payments intended to punish the offending party.

173
Q

Qualified Business Income (QBI)

A

The net amount of income

174
Q

Qualified Charitable Organization

A

An organization that is operated exclusively for religious

175
Q

Qualified Dividends

A

Dividends subject to favorable tax rates.

176
Q

Qualified Education Expenses

A

Educational expenses that receive favorable tax treatment. Such expenses may vary depending on the type of program or tax benefit.

177
Q

Qualified Employee Discounts

A

Employer-provided discounts on qualified property and services that can be excluded from an employee’s gross income.

178
Q

Qualified Moving Expense Reimbursement

A

Direct or indirect payments by an employer to pay the cost of moving an employee’s family and belongings (TCJA 2017 limited this provision to members of the Armed Forces after 2017).

179
Q

Qualified Residence Interest Deduction

A

Tax deduction that permits taxpayers to deduct the interest on up to $750

180
Q

Qualified Retirement Planning Services

A

Any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer-sponsored retirement plan.

181
Q

Qualified Transportation Fringe Benefits

A

Benefits in the form of (1) transportation between an employee’s residence and the place of employment in a commuter highway vehicle

182
Q

Qualified Tuition Programs

A

Also known as 529 Plans

183
Q

Qualifying Child

A

A person who meets the relationship test

184
Q

Qualifying Relative

A

A person who meets the relationship test

185
Q

Real Estate Professional Exception

A

Provides that if a taxpayer meets certain requirements

186
Q

Real Property

A

Land and anything permanently attached to it (such as buildings

187
Q

Realization Event

A

Generally occurs when an asset has been sold or exchanged. Gains on capital assets are subject to tax only when there has been both a realization event and a recognition event.

188
Q

Reasonable Expense

A

An expense that is incurred in a trade or business that is considered by the IRS to be reasonable based on the facts and circumstances surrounding the expense.

189
Q

Recognition Event

A

Occurs when a realized gain is included on a taxpayer’s income tax return. All realized gains are generally recognized unless a provision in the Code provides otherwise.

190
Q

Recourse Debt

A

Debt that the taxpayer is personally liable to repay regardless of whether the investment produces a return for the investor.

191
Q

Refundable Tax Credits

A

Tax credits that can be used not only to reduce or eliminate the current year’s tax

192
Q

Reinvestment Period

A

Period during which the taxpayer must acquire replacement property.

193
Q

Related Party

A

Anyone defined under Section 267(b) including brothers and sisters (of whole or half blood or adopted).

194
Q

Reserve Method

A

A method of deducting bad debts used by some businesses in which bad debt deductions are taken based on a percentage of accounts receivable representing the historical percentage of accounts that go bad.

195
Q

Residential Energy Efficient Property Credit

A

A nonrefundable energy tax credit that helps an individual taxpayer pay for qualified residential alternative energy equipment.

196
Q

Residential Energy Property Credit

A

A credit that increases the energy tax credit for energy efficient improvements made to a taxpayers existing home.

197
Q

Retirement Savings Contribution Credit

A

A nonrefundable credit intended to encourage lower-income taxpayers to save for retirement.

198
Q

Revenue Procedures

A

Statements issued by the IRS which detail internal practices and procedures within the IRS and make important announcements to taxpayers.

199
Q

Revenue Rulings

A

Rulings issued by the IRS based on a set of facts common to many taxpayers and binding on the IRS.

200
Q

S Corporation

A

A corporation formed under state law that elects to be taxed under Subchapter S of the Internal Revenue Code.

201
Q

Sale or Exchange Requirement

A

One of the requirements for a gain to be subject to income tax.

202
Q

Section 1231 Asset

A

Depreciable property or real property used for productive use in a trade or business or for the production of income.

203
Q

Section 179 Election

A

Provides to business owners

204
Q

Short-Term Holding Period

A

Occurs when an asset is owned by a taxpayer for one year or less.

205
Q

Single Filing Status

A

A filing status used by an unmarried taxpayer who does not qualify as a surviving spouse or head of household.

206
Q

16th Amendment

A

Amendment to the U.S. Constitution adopted on February 25

207
Q

Small Business Health Coverage Tax Credit

A

A tax credit for organizations that employ 25 or fewer employees who have annual compensation of $55

208
Q

Small Business Stock (1202 Stock)

A

Stock that is eligible for a 100% capital gains exclusion.

209
Q

Small Business Stock (1244 Stock)

A

Stock in a company initially capitalized with $1 million or less that permits special ordinary loss recognition.

210
Q

Small Corporation

A

A corporation with average gross receipts of $7.5 million or less for the past three years.

211
Q

Small Employer Pension Plan Startup Costs Credit

A

A component of the general business credit intended to encourage small employers to set up retirement plans for employees.

212
Q

Sole Proprietorship

A

A business venture owned and operated by a single individual.

213
Q

Specific Charge-Off Method

A

Allows businesses to deduct bad debts as an ordinary loss in the year in which the debt becomes partially or wholly worthless.

214
Q

Specified Service Trade or Business (SSTB)

A

A trade or business involving performance of services in the fields of health

215
Q

Standard Deduction

A

A standard amount that is specified by Congress and includes inflation adjustments. Taxpayers may deduct the greater of the standard deduction or allowable itemized deductions.

216
Q

Statute of Limitations

A

Specified time within which the IRS may examine an income tax return.

217
Q

Step-to Fair Market Value

A

The basis of inherited property

218
Q

Straight-Line Depreciation

A

A depreciation method under which the purchase price of the asset

219
Q

Substantial Omission

A

An omission from a tax return of more than 25 percent of the gross income reported.

220
Q

Surviving Spouse Filing Status

A

A filing status for a surviving spouse with a qualifying child that affords the same basic standard deduction and tax rates as the married filing jointly status.

221
Q

Tax Court

A

A special purpose court that sits in Washington

222
Q

Tax Credit

A

An amount that reduces the calculated tax liability of the taxpayer.

223
Q

Tax Relief

A

Unemployment Insurance Authorization

224
Q

Tax Year

A

Normally a period of 12 months.

225
Q

Taxable Income

A

Determined by subtracting allowable deductions from gross income.

226
Q

Taxpayer Use Test

A

Requires that the replacement property be used by the taxpayer within activities which is treated the same for tax purposes.

227
Q

Temporary Regulations

A

Regulations that have the same authority as final regulations and are issued when guidance must be provided quickly to taxpayers.

228
Q

Transfer for Value Rule

A

An exception to the general rule that life insurance death benefits are received tax-free.

229
Q

Treasury Regulations

A

An administrative source of tax law that are official interpretations of the Internal Revenue Code and give taxpayers insight as to how the Code will be enforced by the IRS.

230
Q

U.S. Court of Federal Claims

A

Court that may preside over tax controversies and only hears cases in Washington

231
Q

U.S. District Court

A

Trial court of the federal judicial system which has general jurisdiction and is the only option for tax controversies in which the taxpayer would like a jury trial.

232
Q

Unrecaptured Section 1250 Depreciation

A

The portion of gain that is attributable to non-recaptured depreciation (up to the amount of straight-line depreciation deductions taken) for depreciable real estate that is taxed at 25 percent upon the sale or exchange of the property (plus the Affordable Care Act surtax of 3.8% if applicable).

233
Q

Wash Sale

A

Occurs when a taxpayer sells a stock or security at a loss

234
Q

Work Opportunity Credit

A

Part of the general business credit intended to promote the hiring of targeted groups of people who have special needs or high unemployment rates.

235
Q

Working Condition Fringe Benefit

A

Any property or service provided to an employee to help the employee perform his job better.

236
Q

Zero Coupon Bond

A

A bond that is sold at a deep discount

CFP - Steps in the Financial Planning Process (9 decks)

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