A formal notice issued by the IRS after an audit indicating that a proposed deficiency will be assessed unless the taxpayer files a petition with the U.S. Tax Court within a specified time.
Understanding common abbreviations used for 'Income Tax' and 'Information Technology' in accounting and technology-related contexts.
The principle that taxes should be levied based on the taxpayer's ability to pay, suggesting that as income or wealth increases, the marginal utility decreases, allowing for higher tax rates on higher income tiers.
Accrued taxes represent the amount of taxes owed, based on income earned or property value assessment, but not yet paid. This concept plays a crucial role in accounting, taxation, and financial reporting.
Accumulating shares are additional ordinary shares issued to existing shareholders in lieu of a dividend. They serve as an alternative to annual income by fostering capital growth, thereby avoiding income tax but not capital gains tax.
The additional rate is a higher marginal rate of income tax applied to income that exceeds a specified threshold, typically aimed at higher earners.
In the USA, the difference between the gross income of a taxpayer and the adjustments to income, which is an essential figure for multiple tax computations.
The rate of return on an equity interest, taking into account financing costs and income tax implications of the investor.
Age Allowance is a tax relief designed to benefit senior citizens, allowing them to retain a greater portion of their income by providing a higher personal allowance as they reach a certain age.
In the USA, alimony payments in a divorce settlement are treated as deductions from the adjusted gross income by the payer, but the recipient treats them as income for tax purposes.
A federal tax designed to ensure that wealthy individuals, estates, trusts, and corporations pay a minimum amount of tax regardless of deductions, credits, or exemptions.
An assessment of deficiency refers to the determination of additional tax owed by a taxpayer following an appellate review within the Internal Revenue Service (IRS) and a tax court adjudication, if necessary.
The term 'badges of trade' refers to various factors considered by tax authorities to determine whether a given set of transactions constitutes a trade or business. This classification impacts how income from these activities is taxed.
In the UK, the basic rate of income tax is the lower band of income tax rates, currently set at 20%. This rate applies to the first £32,000 of taxable income for the 2016-2017 tax year.
The basis upon which personal income or business profits are assessed in the UK for each fiscal year. The specific rules for each income-tax schedule detail the profits or income to be assessed in that year.
Before-Tax Cash Flow (BTCF) represents the cash generated by an asset or a business before deducting income tax payments or adding income tax benefits. It's a critical measure for assessing an investment's or business's potential earnings and operational efficiency.
Bracket creep occurs when taxpayers move into higher tax brackets due to inflationary increases in their nominal income without a real increase in their purchasing power. This phenomenon increases government revenue without any changes in tax rates.
An extensive look into what constitutes a business for Value-Added Tax purposes and how it relates to the concept of 'economic activity' as defined in EU VAT Directive.
Capital allowances refer to allowances against UK income tax or corporation tax available to businesses, sole traders, partnerships, or limited companies that have capital expenditures on plant and machinery used in the business.
A cash dividend is a distribution of a portion of a company’s earnings to its shareholders in the form of cash rather than additional shares. These dividends are paid net of income tax, and shareholders typically receive credit for the tax deducted.
A chargeable event refers to any transaction or occurrence that results in a liability for income tax, capital gains tax, or corporation tax.
In the UK, a chargeable gain refers to that part of a capital gain arising from the disposal of an asset that is subject to taxation. Understanding chargeable gains is crucial for both individuals and businesses to manage tax liabilities effectively.
Clearance is an indication from a taxing authority that a certain provision does not apply to a particular transaction. This procedure is only available when specified by statute and can significantly impact tax liabilities and treatment of specific transactions.
A civil servant tasked with the collection of taxes that have been assessed by Inspectors of Taxes and under the pay-as-you-earn (PAYE) system.
A commuter tax is a form of income tax levied on individuals working in a jurisdiction different from where they reside.
A Controlled Group is defined as two or more corporations whose stock is substantially held by five or fewer persons. Included in this category are brother-sister groups, parent-subsidiary groups, combined groups, and certain insurance companies. These corporations are subject to special rules for computing income tax, the alternative minimum tax (AMT) exemption, the accumulated earnings credit, and the environmental tax exemption.
A statement in which the directors of a company announce that a dividend of a certain amount is recommended to be paid to the shareholders, and the liability is recognized when declared.
This is a filed statement that a taxpayer must submit to the IRS that includes an estimate of the amount of income tax owed for a particular year. It is typically used by individuals who do not have their taxes automatically withheld from their paycheck.
Deductions at Source, also known as withholding tax, involve a method of tax collection where a portion of income is deducted at the time of payment by the payer to ensure timely and efficient tax collection.
Deductions from Gross Income refer to the allowable reductions from an individual's gross income to arrive at their taxable income, applicable within the framework of personal income tax.
A loan stock or government security issued on terms that make the redemption value significantly higher than the issue price, often with more than 15% discrepancy or ½% per completed year.
A Departure Permit, also known as a Sailing Permit, is a certificate of compliance from the IRS certifying that a departing alien has satisfied U.S. income tax laws.
Taxation, the effect of which is intended to be borne by the person or organization that pays it.
A taxpayer who was divorced under a final decree of divorce or separate maintenance by the last day of the tax year; considered unmarried for the entire year for tax purposes.
A Double Taxation Agreement (DTA) is an agreement between two countries aimed at preventing the same income from being taxed twice. These agreements offer various forms of double taxation relief to companies or individuals who are subject to tax in both countries.
A fundamental principle of UK income tax and corporation tax whereby expenditures that have a dual purpose are not deductible in computing profits subject to tax unless they can be dissected to identify wholly business-related expenses.
An income tax code issued by tax authorities when the correct tax code for an employee is unavailable, ensuring basic personal allowance application but excluding further allowances until proper code assignment.
Amounts received from an office or employment including all salaries, fees, wages, perquisites, and other profits as well as certain expenses and benefits paid or provided by the employer, which are deemed to be emoluments. They are subject to income tax.
A formal claim made by a taxpayer due to an overpayment of tax, often resulting from an error or mistake in a tax return or statement. Must be filed within six years.
Estimated tax refers to income taxes paid quarterly by taxpayers on income not subject to withholding taxes. These payments are projections of ultimate tax liabilities for the taxable period.
An extension refers to an agreement between two parties to extend the time period specified in a contract. In the context of taxation, an extension provides an additional period of time to file an income tax return.
Farming, as defined by the Income Tax (Trading and Other Income) Act 2005, involves the occupation of land predominantly for the purpose of husbandry, excluding market gardening. Special tax provisions and reporting rules apply to farming activities.
The annual UK Act of Parliament that changes the law relating to taxation, implementing the rates of income tax, corporation tax, etc., proposed in the preceding Budget.
A flat tax is a simple proportional tax system with a single rate. It has no reliefs or exemptions apart from a standard personal allowance, thereby streamlining tax compliance and administration.
Foreign emoluments refer to earnings received by a person domiciled outside the UK from employment with a non-resident employer.
The Foreign Tax Credit (FTC) is a credit allowed against U.S. income taxes for foreign taxes paid on income earned overseas. It helps to mitigate the double taxation of income that is taxable both in the U.S. and by a foreign country.
The Foreign Tax Deduction allows individuals to deduct foreign income taxes paid or accrued from their U.S. income tax, or alternatively, apply the taxes as a credit against U.S. income tax liabilities.
An overview of the various forms used for individual U.S. income tax returns, including Form 1040, 1040A, and 1040EZ, their specific requirements, and use cases.
In the UK, General Commissioners are an unpaid local body of reputable individuals appointed to hear appeals against income tax, corporation tax, and capital gains tax assessments or related disputes.
Imputed income refers to the economic benefit a taxpayer obtains through the performance of their own services or through the use of their own property. Generally, imputed income is not subject to income taxes.
Income tax is a tax imposed by governments on individuals and businesses based on their earnings within a fiscal year. Understanding income tax is essential for compliance and financial planning.
A direct tax on an individual’s income, generally levied at progressive rates, with income classified under various headings as per UK tax legislation.
Independent taxation is a system of personal taxation in which married women are treated as completely separate and independent taxpayers for both income tax and capital gains tax.
A tax-advantaged savings account available in the UK that allows individuals to save or invest a certain amount per year without paying personal income tax or capital gains tax on the earnings.
The Internal Revenue Code of 1986 (IRC) is a comprehensive statute passed by Congress that outlines the laws governing the taxation of income. It details how income is to be taxed, what may be deducted from taxable income, and the provisions for enforcement and interpretation.
An incentive in the USA that allows businesses to offset a portion of the cost of a depreciable asset against their income tax liability in the year of purchase, promoting investments in certain types of assets.
A tax return filed jointly by a married couple, computing a combined tax liability with progressive tax rates based on the assumed equal income by both spouses.
The Loss Denial Rule, often referred to in tax contexts, precludes taxpayers from claiming deductions for expenses or losses associated with activities not engaged in for profit, commonly referenced as 'hobby losses.'
The marginal rate of tax represents the amount of extra tax that a taxpayer incurs if they earn one additional unit of currency over their current income. This rate typically rises as incomes increase under a progressive tax regime.
The marginal tax rate is the tax rate applied to an additional dollar of income, influenced by the progressive nature of income tax systems.
Marital status refers to the legal standing of an individual's relationship in the eyes of the law, which directly impacts the kind of tax return they file. This can be single, joint, married filing separately, or head of household. Different tax rates and benefits apply to these various statuses.
Various provisions of the tax law that require married people to pay more taxes in some situations than if they were single. The penalty is most pronounced for high-tax bracket couples earning equal amounts of income.
Job expenses and other miscellaneous expenses that are deductible by individual taxpayers but do not fall under medical expenses, taxes, interest, charitable contributions, casualty and theft losses, or moving expenses.
Moving Expense Deduction refers to the tax deduction available for certain expenses incurred by an individual when relocating to a new residence for employment purposes. The deduction is permitted if the taxpayer's new job is located at least 50 miles farther from the former residence than the previous job.
An asset of little or no value, often used for capital gains tax purposes. Such assets can be treated as sold and immediately reacquired at a negligible value, resulting in an allowable capital loss.
Net Investment Income refers to the excess of investment income over investment expenses. Individuals are allowed to deduct investment interest expenses for tax purposes to the extent of their net investment income.
Ordinary income refers to normal income earned by individuals, such as wages, interest, and rents, which is fully subject to regular income tax rates. This contrasts with capital gains, which often benefit from reduced tax rates.
An ordinary loss for income tax purposes is a type of loss that can be deductible against ordinary income. This is usually more beneficial to an individual taxpayer compared to a capital loss, which has limitations on deductibility.
A method of owning real estate, which affects income tax, estate tax, continuity, liability, survivorship, transferability, disposition at death and at bankruptcy. Ownership forms include various structures with different legal and financial implications.
An in-depth look into Passive Activity Loss (PAL), including definition, examples, frequently asked questions, related terms, online resources, and suggested books for further studies.
Passive investment income refers to the earnings derived from investments in which the individual or entity does not actively participate. This includes royalties, rents, dividends, interest, annuities, and gains from the sale of stocks and securities.
Pay-as-you-earn (PAYE) is the UK scheme for collecting income tax and National Insurance contributions. It places the responsibility on employers to collect these taxes from employees as payments are made.
The Pay-As-You-Earn (PAYE) system is a method of paying income tax and national insurance contributions to the revenue authorities based on an employee’s regular earnings.
An overview of the personal allowance entitlement for individual residents in the UK for calculating their taxable income for income tax purposes.
Exemptions from withholding for the taxpayer, spouse, and dependents, used in calculating the amount of income tax to be withheld from periodic wage payments.
Post-cessation receipts are amounts accruing from a trading activity that are received after the trade has ceased. For tax purposes, these receipts are treated as income in the year of receipt, from which any relevant trade expenses incurred can be deducted. An election can also be made to treat them as income in the year the trade ceased.
Understanding the distinctions between professional income and trade income, especially in the context of taxation, essential for accurate financial reporting.
A Progressive Tax is a tax mechanism where the tax rate increases as the tax base increases. This kind of tax structure aims to distribute the tax burden more equitably based on the taxpayer's ability to pay.
A proportional tax, also known as a flat tax, imposes the same percentage rate of taxation on everyone, regardless of income or wealth level.
Proportional taxation is a tax system where the tax rate remains constant regardless of the amount of income earned. It applies a uniform tax rate to all individuals, which means that both the wealthy and poor pay the same percentage of their income in taxes.
In tax law, proprietorship income refers to the income earned within businesses that are sole proprietorships (owned by one person and not incorporated).
Qualified Residence Interest refers to the interest paid on a home mortgage that may be deductible as an itemized deduction on federal income tax returns. It includes interest on acquisition indebtedness and home equity loans.
Employment and estimated tax returns that are due quarterly to report gross wages paid and withholdings of income tax, Social Security tax, and Medicare tax. These include Forms 941, 942, and 943. Some state unemployment tax returns are also due quarterly.
A repayment claim is a request made by taxpayers to recover overpaid taxes for a fiscal year. Such claims are necessary when basic rate taxes are deducted at source from income without considering personal allowances.
A resident is an individual or company that is considered to be based in the UK for taxation purposes, determined by specific criteria set by HM Revenue and Customs (HMRC).
Residential rental property refers to rental units utilized for dwelling purposes, excluding transient lodging like hotels or motels. To qualify as residential for income tax purposes, at least 80% of a building’s income should come from dwelling units. This type of property is eligible for a 27½-year life for tax depreciation purposes, compared to a 39-year life for nonresidential property.
The term 'schedule' can have several different meanings within the context of accounting, tax legislation, and planning. In the UK, it is used extensively in tax legislation and accounting practices.
A system that enables taxpayers to assess their own income tax and capital gains tax liabilities for the year. Since 1996-97, self-assessment has become a significant component of the UK tax return system, encapsulating details on taxable income, chargeable gains, and claims for personal allowances.
Self-employed individuals work for themselves, without a formal employer, and include sole proprietors and partners in partnerships. They shoulder all business risks and responsibilities, paying self-employment tax in addition to income tax on their net income.
Provision for Social Security (old-age, survivor's, and disability insurance) and Medicare (hospital insurance) for self-employed individuals. The rate is equal to the combined rates paid for Social Security by both employer and employee.
A 'Separate (Tax) Return' refers to the option for married couples to file their tax returns individually rather than jointly, which may offer different tax benefits and considerations.
A set of statutory provisions under which income arising from property that has been gifted is taxed as if it were income of the donor and not of the donee.
A share option is a benefit often offered to employees that provides them the opportunity to purchase company shares at a favorable fixed price or discounted market rate. This guide explores the definition, examples, FAQs, related terms, and additional resources.
An approved share option scheme established by an employer for the benefit of executives or other employees. HM Customs and Revenue has detailed rules regarding the income tax and capital gains tax chargeable to individuals benefiting from such a scheme.
A body of specialized tax lawyers appointed to hear appeals against assessments to various taxes, including income tax, corporation tax, capital gains tax, and inheritance tax.
The rate of value added tax (VAT) applied to all goods and services sold by taxable persons that are not exempt, zero-rated, or subject to a special rate. For the 2016-17 tax year, the standard rate was 20%. It is also the marginal tax rate for most taxpayers.
The starting rate of income tax was a former rate of income tax in the UK, set below the basic rate of income tax. It replaced the lower rate in 1999 and was abolished in April 2008.
Statutory total income refers to the aggregate amount of income that is subject to taxation according to the relevant laws and regulations. It encompasses total income from various sources such as salaries, business income, capital gains, and other categories defined by tax legislation.
A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures. Taxes include income tax, sales tax, property tax, estate tax, and others.
A tax allowance is a threshold within the tax code that partially or completely exempts certain amounts of income, spending, or investment from taxation. This allowance can reduce the amount of tax that must be paid.
