Definitions (CH 1-6)

Question 1

Above-The-Line Deductions

Answer 1

deductions for adjusted gross income, also known as adjustment to income.

Question 2

Accrual Method

Answer 2

an accounting method under which income is reported when it is earned rather than when it is received in cash, and expenses are reported when they are incurred rather than when they are paid.

Question 3

Adjusted Gross Income

Answer 3

gross income less above-the-line deductions.

Question 4

Average Tax Rate

Answer 4

a taxpayer’s average tax rate is the average rate of tax paid, factoring in the payments at various marginal brackets. The average tax rate can be calculated by dividing the taxpayer’s total tax by the taxpayer’s gross income.

Question 5

Below-The-Line Deductions

Answer 5

deduction from adjusted gross income. Also known as itemized deductions. Personal independence exemption amounts are also deducted below the line. However, they have been suspended by the TCJA 2017 until 2026 (unless extended by Congress). In addition, the 20% qualified business income deduction for flow-through entities introduced in the TCJA 2017 and effective until 2026 (unless extended by Congress) is also a deduction that is below the line, but it is taken regardless of whether the taxpayer itemized deductions.

Question 6

Cash Receipts and Disbursement Method

Answer 6

an accounting method under which income items are reported for the tax year in which they are received in cash and expenses are deducted in the year in which they are paid with cash.

Question 7

Deductions

Answer 7

items that are subtracted from gross income, either below the line or above the line, in order to arrive at taxable income.

Question 8

Dependency Exemption

Answer 8

a deduction from adjusted gross income allowed for each person who is a qualifying child or relative of the taxpayer for tax years before 2018 and after 2025 (unless the suspension is extended by Congress). While the dependency exemption cannot be used in calculating taxable income for tax years 2018-2025, it is still used when determining dependency status to qualify for the head of household filing status.

Question 9

Doctrine of Constructive Receipt

Answer 9

a cash method taxpayer must report income when it is credited to the taxpayer’s account or when it is made available without restriction.

Question 10

Estimated Tax Payments

Answer 10

quarterly payments that are paid to the IRS and may be claimed as a credit against tax.

Question 11

Exclusions

Answer 11

income items are specifically exempted from income tax.

Question 12

Gross Income

Answer 12

all income from whatever source derived, unless it is specifically excluded by some provision of the IRC.

Question 13

Head of Household Filing Status

Answer 13

a filing status that provides a basic standard deduction and tax bracket sizes that are less favorable to the taxpayer than those for the surviving spell status, but more favorable than those for the single filing status.

Question 14

Hybrid Method

Answer 14

in accounting method, other than the accrual or cash, receipt and disbursement methods, that is permitted by the IRC and regulations as long as it is deemed to clearly reflect income.

Question 15

Income

Answer 15

Broadly defined as the total amount of money, property, services, or other accretion to wealth received, but it does not include borrowed money or a return of invested dollars.

Question 16

Kiddie Tax

Answer 16

a tax on the net unearned income of a child at the parent’s highest marginal income tax rate.

Question 17

Marginal Tax Rate

Answer 17

the highest tax bracket in which the taxpayer fall. This is the rate that will apply to the next dollar of income earned.

Question 18

Married Filing Jointly Filing Status

Answer 18

a filing status that allows married couples to combine their gross income and deductions.

Question 19

Married Filing Separately Filing Status

Answer 19

a filing status used when married couples do not choose to file a joint return.

Question 20

Net Unearned Income

Answer 20

the amount of unearned income of a child that is subject to tax at the parents’ marginal tax rate. NUI is equal to the unearned income of the child, less than $1350 (the basic standard deduction of a dependent), and the greater of $1350 worth the amount of the deductions allowed in producing the under-earned income (2025 threshold).

Question 21

Original Issue Discount Bond

Answer 21

a bond that is issued for a price that is less than its face amount or principal amount on which interest is usually paid only at maturity.

Question 22

Personal Exemption

Answer 22

in deduction from adjusted gross income for the taxpayer and the taxpayers spouse for tax years before 2018 and after 2025 (unless the suspension of the deduction is extended by Congress). During the 2018-2025 period, however, the amount of the personal exemption may be relevant in determining whether a taxpayer qualifies for head of household filing status.

Question 23

Phantom Income

Answer 23

income imputed to taxpayers without a corresponding receipt of cash.

Question 24

Qualifying Child

Answer 24

a person who meets the relationship test, abode, test, age, test, support test, joint return test, and citizenship test, and may be claimed as a dependent of the taxpayer.

Question 25

Qualifying Relative

Answer 25

a person who meets the relationship test, gross income test, support test, joint return test, and citizenship test; he is not a qualifying child of any other taxpayer; and may be claimed as a dependent by the taxpayer.

Question 26

Single Filing Status

Answer 26

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

Question 27

Standard Deduction

Answer 27

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.

Question 28

Surviving Spouse Filing Status

Answer 28

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

Question 29

Tax Credit

Answer 29

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

Question 30

Tax Year

Answer 30

normally a period of 12 months.

Question 31

Taxable Income

Answer 31

determined by subtracting allowable deductions from gross income.

Question 32

Zero Coupon Bond

Answer 32

a bond that is sold at a deep discount, pays no coupons (or periodic interest payments), and matures at its face value.

Question 33

Activities of Daily Living

Answer 33

eating, bathing, dressing, toileting, transferring, and continence.

Question 34

Adoption Assistance Program

Answer 34

an employer does assist employees with the cost of adoption and may not discriminate in favor of highly compensated or key employees.

Question 35

Archer Medical Savings Account (MSAs)

Answer 35

tax-favored savings accounts for medical expenses that were established by HIPAA in 1996, but cannot be established after 2005.

Question 36

Bona Fide Resident Test

Answer 36

requirement for the foreign earned income exclusion that requires the taxpayer to generally intend to work and reside in the foreign country for an indefinite period of time.

Question 37

Cafeteria Plan

Answer 37

a written plan under which an employee may choose to receive either cash or taxable benefits as compensation or qualified fringe benefits they are excludable from wages.

Question 38

Compensation

Answer 38

salary, wages, and fringe benefits, received in exchange for providing services to an employer.

Question 39

De Minimis Fringe Benefit

Answer 39

fringe benefits are so small were insignificant that Accounting for them would be unreasonable or administratively impractical.

Question 40

Disability Insurance

Answer 40

provides benefits in the form of periodic payments to a person who is unable to work due to sickness or accidental injury.

Question 41

Educational Assistance Program

Answer 41

a separate written plan that establishes a program through which an employer provides educational assistance to employees.

Question 42

Federal Insurance Contributions Act (FICA)

Answer 42

a law that dictates the amount to be withheld from an employee's pay for OASDI and Medicare benefits.

Question 43

Flexible Spending Account (FSA)

Answer 43

a type of cafeteria plan that is funded through employee salary reductions. The healthcare FSA limit is $3300 (2025).

Question 44

Foreign Earned Income

Answer 44

income earned by a qualified or resident of the United States in exchange for personal services rendered in a foreign country. The foreign earned income limit is $130,000 (2025).

Question 45

Fringe Benefits

Answer 45

non-cash benefits provided to an employee by an employer in addition to wages and salary.

Question 46

Health Reimbursement Arrangements (HRAs)

Answer 46

employer-funded plans that reimburse employees for medical expenses, and allow employees to carry any unused balance forward to be used in future years.

Question 47

Health Savings Accounts (HSAs)

Answer 47

accounts that allow individuals who have high-deductible health insurance plans to save on a tax-free basis to fund their medical expenses.

Question 48

Highly Compensated Employees

Answer 48

those employees were either a greater than 5% owner during the current proceeding year or have compensation from the employer in excess of $160,000 (in 2025, the look back here for the 2026 plan year; $155,000 in 2024, the look back year for the 2025 plan year).

Question 49

Incentive Stock Option (ISO)

Answer 49

a tax-favored stock option that meets certain requirements and is granted by a corporation to an employee to purchase the stock of that corporation.

Question 50

Key Employee

Answer 50

an employee who, at any time during the plan year, is (1) a greater than 5% owner, (2) a greater than 1% owner with an annual compensation from the employer in excess of $150,000 (not indexed for inflation), or (3) an officer of the employer with an annual compensation from the employer in excess of $230,000 (2025).

Question 51

Long-term Care Insurance

Answer 51

provides benefits when the insured is unable to perform some of the activities of daily living.

Question 52

No Additional-Cost Services

Answer 52

a fringe benefit provided by employers that may be excluded from the employees gross income if the service is (1) offered for sale to customers, (2) in the line of business in which the employee works, and (3) does not cause the employer to incur any substantial costs (including forgone revenue) in providing the service to the employee.

Question 53

Nonqualified Stock Option (NQSO)

Answer 53

a right to purchase shares of company stock at a given strike price (generally set at the market price of the stock on the day the option is granted).

Question 54

Physical Presence Test

Answer 54

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.

Question 55

Qualified Employee Discounts

Answer 55

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

Question 56

Qualified Moving Expense Reimbursement

Answer 56

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 US Armed Forces for 2018-2025)

Question 57

Qualified Transportation Fringe Benefits

Answer 57

benefits in the form of (1) transportation between an employee's residence and the place of employment in a commuter Highway vehicle, (2) any transit pass, or (3) qualified parking. After 2017, employers are no longer permitted to take a deduction for qualified transportation, fringe benefits, unless the benefit is provided for the safety of the employee.

Question 58

Working Condition Fringe Benefit

Answer 58

any property or service provided to an employee to help the employee perform their job better.

Question 59

Above-the-Line Deductions

Answer 59

deductions for adjusted gross income, also known as adjustments to income.

Question 60

Below-the-Line Deductions

Answer 60

deductions from adjusted gross income. Also known as itemized deductions. Personal and dependency exemption amounts are also deducted below the line; however, they have been suspended by the TCGA 2017 until 2026. In addition, the 20% qualified business income (QBI) deduction for flow-through entities (introduced in the TCJA 2017 and available through 2025) is a below-the-line deduction.

Question 61

Distance Test

Answer 61

in order to qualify for a moving expense deduction for tax years before 2018 and after 2025, the distance between the taxpayer's old home and new job location must be at least 50 miles greater than the distance between the old home and the old job location.

Question 62

Fringe Benefits

Answer 62

non-cash benefits provided to an employee by an employer in addition to wages and salary.

Question 63

Health Savings Accounts (HSAs)

Answer 63

accounts that allow individuals who have high-deductible health insurance plans to save on a tax-free basis to fund their medical expenses.

Question 64

Medical Savings Account (MSA)

Answer 64

accounts authorized by HIPAA 1996, which allowed contributions to the account to grow tax-free. If funds are distributed from the account we used to pay for medical expenses.

Question 65

Necessary Expensw

Answer 65

an expense that a prudent business person will incur in the conduct of business.

Question 66

Ordinary Expense

Answer 66

an expense as typically incurred in the normal, usual, or customary conduct of businesses in the same line of operations.

Question 67

Reasonable Expense

Answer 67

an expense 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.