6 Mortgage Terms to Know

mortgage-new-jerseyBuying a house is an exciting and busy time. Once you’re pre-approved for a mortgage, you can start looking at homes in your price range. Whether you’re a first-time homebuyer or have been there before, it’s easy to feel overwhelmed. Not only will you have to find a home inspector and a real estate lawyer, you’ll also need to choose a mortgage lender. A mortgage represents a serious amount of money, so it’s important to fully understand it.

Before diving into these key mortgage terms we think it is important to briefly describe the difference between a Mortgage Broker and a Mortgage Lender.  A Mortgage Broker is an intermediary who brings mortgage borrowers and mortgage lenders together, but does not use its own funds to originate mortgages. A mortgage broker gathers paperwork from a borrower, and passes that paperwork along to a mortgage lender for underwriting and approval.

Here are 6 mortgage terms to know as a homebuyer:

1. Amortization Period
Do you aspire to be mortgage-free? Well, you’ll want to know your amortization period. Your amortization period is the period of time over which your mortgage will be fully paid off. Generally, a standard amortization period on high-ratio mortgages (a down payment between 5% and 19.99%) is 25 years. On conventional mortgages (a down payment 20% or greater), 30 year amortization periods are still available. By shortening your amortization period you’ll pay less interest over the life of your mortgage, but your mortgage payments will be higher. A few years ago homeowners could choose an amortization period as long as 40 years, but that has recently been reduced by the federal government in an effort to avoid a housing bubble.

2. Appraisal
Even though you may of have purchased your home for $550,000, it doesn’t necessarily mean your lender agrees with its value. Most mortgage lenders will require an appraisal to determine your property’s value. You shouldn’t confuse market value and appraised value, as they aren’t always the same. It’s important to not get caught up in a bidding war and pay a lot more than the appraisal value, as you’ll have to come up with the extra money if the appraisal comes in a lot less. Homebuyers cover the cost of appraisals, although some lenders may be willing to foot the bill.

RELATED: Market Value vs. Appraised Value

3. Home Insurance
Protects your home in most cases from fire and other named perils. Insurance is paid by monthly premiums. Most lenders require you’re fully insured before they’ll approve your mortgage.

RELATED: 12 Ways to Save Money On Home Insurance

4. Interest
Lenders don’t simply offer you a mortgage out of the goodness of their heart. The interest on a loan like a mortgage covers the cost of borrowing. When you start paying your mortgage, you’ll notice your interest payments are quite high, but as you get closer to paying it off your interest payments will get smaller. That’s because as you pay down your principal, your interest payments become less and less.

RELATED: Four Areas of Financial Wellness That Mortgage Lenders Love

5. Principal
Nobody wants to pay only the interest on their mortgage. A portion of each mortgage payments goes towards principal and interest. Most closed mortgages come with prepayments privileges. When you make lump sum payments, it’s applied against principal. This can help you shave years off your mortgage and save thousands in interest.

RELATED: Will I Qualify For A Mortgage?

6. Term
Not to be confused with the amortization period, a mortgage term is the length of your current mortgage agreement. Although a mortgage term can be as short as six months or as long as 10 years, most homebuyers choose the stability of a five-year fixed rate mortgage term. Once your mortgage term expires, you can repay your balance in full or renew your mortgage with the same or another mortgage lender.

From the Patrick Parker Realty Tax Season Blog Series
Tax Terms Glossary

Confused by tax terms and lingo? Get plain-English definitions that make tax return terminology less, well, taxing.


401(k) plan
An employer-sponsored retirement savings plan through which employees divert part of their salary to a tax-deferred investment account. Salary put in the plan is not taxed until it is later withdrawn, presumably in retirement. Employers often match part or all of the employee’s deposits. Penalties usually apply to withdrawals before age 55, although most plans allow employees to borrow limited amounts tax- and penalty-free from their accounts. See also Roth 401(k).


Accelerated depreciation
For most business property, except real estate, the law allows you to depreciate the cost at a rate faster than would be allowed under straight-line depreciation (see definition below.) For example, automobiles and computers are assumed to have a five-year life for tax purposes. With straight-line depreciation you would be permitted to write off 20 percent of the cost each year; the accelerated method generally lets you deduct 20 percent of the business cost the first year, 32 percent the second, 19.2 percent the third, 11.52 percent in years four and five, and the remaining 5.8 percent in the sixth year. It takes six years to fully depreciate the property, thanks to the “midyear” convention, which basically assumes that business assets are put into service in the middle of the year.

Acquisition indebtedness
This is the technical term that Congress uses for what most of us call home mortgage debt, on which the interest is deductible. To qualify, the debt must be used to buy, build or improve your principal residence or second home and must be secured by the property. The interest paid on up to $1 million of acquisition indebtedness is deductible if you itemize deductions.

Active participation
The level of involvement that real estate owners must meet to qualify to deduct up to $25,000 of passive losses from rental real estate. Failure to pass this test could make such losses nondeductible under passive-loss rules. (see passive loss rules below.)

Additional child tax credit
You may qualify for this credit if the regular child credit more than wipes out your tax liability. This additional credit can trigger a refund check from the IRS even if you don’t owe any tax.

Adjusted basis
Your basis in property is the starting point for determining whether you have a gain or loss when you sell it. (This is sometimes referred to as cost basis, tax basis or simply, basis.) The basis generally starts out as what you pay for the property, although special rules apply to assets you inherit or receive as a gift. The basis can be adjusted while you own property. When you buy rental property, for example, the basis begins at what you pay for the place, including certain buying expenses, and it is adjusted upward by the cost of permanent improvements. The basis is reduced by the amount of any depreciation you are allowed to deduct while you own the property. You use your adjusted basis to figure the gain or loss on the sale.

Adjusted Gross Income (AGI)
This is your income from all taxable sources, minus certain adjustments, and is the key to determining your eligibility for certain tax benefits and the phase-out of your eligibility for others. Adjusted Gross Income is also the amount from which deductions (the standard deduction or itemized deductions) and personal and dependent exemptions are deducted to arrive at the amount of taxable income that will actually be taxed. The adjustments—sometimes called above-the-line deductions because you can claim them whether or not you itemize deductions—include (among other things) deductible contributions to Individual Retirement Accounts (IRAs), SIMPLE and Keogh plans, contributions to Health Savings Accounts (HSAs), job-related moving expenses, any penalty paid on early withdrawal of savings, the deduction for 50 percent of the self-employment tax paid by self-employed taxpayers, alimony payments, up to $2,500 of interest on higher education loans and certain qualifying college costs.

Adoption credit
This credit effectively refunds to you part of what you pay to adopt a qualifying child. An eligible child is generally one under age 18 or one who is physically or mentally incapable of caring for him or herself. If you adopt a special-needs child, you may be eligible for a credit that exceeds your actual costs. The right to the credit phases out as AGI rises.

See Taxpayer advocate.

Qualifying payments to an ex-spouse that can be deducted as adjustments to income whether or not you itemize. The recipient must include the payments in his or her taxable income.

Alternative Minimum Tax (AMT)
A special tax designed primarily to prevent the wealthy from using so many legal tax breaks that their regular tax bill is reduced to little or nothing. In recent years, it has hit more and more taxpayers who live in high-tax states, have many children or exercise incentive stock options and will increasingly hit taxpayers who do not consider themselves rich. The AMT ignores certain tax benefits allowed by the regular rules and applies special rates—26 percent and 28 percent—to a larger amount of income than is hit by the regular tax.

Amended return
A revised tax return, filed on Form 1040X, to correct an error on a return filed during the previous three years. An amended return can result in owing extra tax or getting a refund, depending on the mistake you correct.

As if you didn’t know, this is a review of your tax return by the IRS, during which you are asked to prove that you have correctly reported your income and deductions. Most audits are done by mail and involve specific issues, not the entire return.

Automobile, business use
The cost of driving your car on business can be deducted as a business or employee expense. You can deduct actual costs or use the standardized mileage rate published by the IRS, plus what you spend for parking and tolls while driving on business.

Automobile, donating to charity
Strict rules control your charitable deduction of a donated vehicle. In most cases, your deduction is limited to the amount the charity gets for the car when it sells it. The charity should give you this information within 30 days of the sale. Without it, the maximum deduction you’ll be able to claim for the vehicle donation is $500.

Automobile, driving for charity
The cost of using your car while doing charitable work is deductible. You can deduct 14 cents per mile you drove while performing services for a charity. You can also deduct what you pay for parking and tolls.


Bargain sale to charity
Selling property to a charity for less than the property’s actually worth. Depending on the circumstances, this could result in a tax deduction or extra taxable income.

See Adjusted basis.

Below-market-rate loans
If you make an interest-free or bargain-rate loan to a friend or relative, you may be required to include in your taxable income some of the interest the IRS believes you should have charged.

A person is considered legally blind for purposes of qualifying for a larger standard deduction if:

• He or she is totally blind.
• He or she can’t see above 20/200 in the better eye with glasses or contact lenses.
• His or her field of vision is 20 degrees or less.

Bond premium
The amount over face value that you pay to buy a bond paying higher than current market rates. With taxable bonds, a portion of the premium can be deducted each year that you own the securities.

Burden of proof
The responsibility of the taxpayer to prove that his or her tax return is accurate, rather than the IRS having to provide convincing evidence that it is inaccurate. Although Congress has shifted the burden of proof to the IRS in certain tax disputes, don’t throw away your records. The change will have no effect on the vast majority of taxpayers. The burden shifts only if a case gets to court—which happens very rarely—and then only if the taxpayer has complied with all record-keeping requirements and has cooperated with IRS requests for information. In almost all cases, the burden of proof remains on your shoulders.


Cancelled debt
Generally, when a debt is cancelled or forgiven, the borrower who benefits is considered to have received taxable income equal to the amount of the cancelled debt. There are exceptions. For example, some student loans contain agreements that debt will be forgiven if the borrower works for a certain period of time in a certain profession. And, up to $2 million of debt forgiven on a mortgage on a principal residence – in a foreclosure, for example, or short sale — can also be tax-free but only until Dec 31, 2014. Also, forgiven debt is not taxable to the extent the borrower is insolvent (that is, whose liabilities exceed his or her assets) or when the debt is waived by a bankruptcy court. Other provisions grant tax-free treatment for cancelled debts in specific circumstances.

Capital expenditure
The cost of a permanent improvement to property. Such expenses, such as adding central air conditioning or an addition to your home, increase the property’s adjusted tax basis.

Capital gain
The profit from the sale of such property as stocks, mutual-fund shares and real estate. Gains from the sale of assets owned for 12 months or less are “short-term capital gains” and are taxed in your top tax bracket, just like salary. For most assets owned more than 12 months, profits are considered “long-term capital gains” and are taxed at 0, 15, or 20 percent. Taxpayers who otherwise fall in the 10 percent or 15 percent bracket get an even better deal. Their rate on long-term gains is 0% percent for 2008 through 2014. The special rates for long-term gains do not, however, apply to all gains from investment real estate. To the extent that gain results from depreciation (depreciation deductions reduce your basis in the property and therefore increase gain dollar for dollar upon sale), a 25 percent maximum rate applies (unless you are in the 10 percent or 15 percent bracket, in which case that rate applies) to this “recaptured” depreciation. Also, long term-gains from the sale of collectibles are taxed at a maximum rate of 28 percent.

Capital loss
The loss from the sale of assets such as stocks, bonds, mutual funds and real estate. Such losses are first used to offset capital gains and then up to $3,000 of excess losses can be deducted against other income, such as your salary. Long- and short-term losses (distinguished by whether the property was held for more than one year or a shorter period of time) are first used to offset gains of a similar nature. Any excess first offsets the other kind of gain, then other types of income.

Capital-loss carryover
Capital losses can be used to offset capital gains, and up to $3,000 of any net capital loss can be deducted against other income, such as your salary or bank account interest. Net capital losses not currently deductible because of the $3,000 limit can be carried over to future years.

Casualty loss
Damage that results from a sudden or unusual event.

Charitable contribution
A gift of cash or property to a qualified charity for which a tax deduction is allowed. You must have either a receipt or a bank record (such as a cancelled check) to back up any donation of cash, regardless of the amount. Donations of $250 or more must have an acknowledgement from the charity.

Charitable carryovers
Generally, your deduction for donations to charity in one year cannot exceed 50% of your adjusted gross income for that year (30% in the case of donations of appreciated assets and contributions to private foundations). You can carry over any excess for the following five tax years. The carryover expires, however, should you pass away before it is used up. Your heirs cannot claim it.

Charitable mileage
See Standard mileage rate.

Child credit
This credit is $1,000 for each child under age 17 you claim as a dependent on your return. The right to this credit is phased out as adjusted gross income rises.

Child- and dependent-care credit
Not to be confused with the child credit, this one offsets part of the cost of paying for care for a child under the age of 13 or disabled dependent while you work. The credit—which ranges from 20 percent to 35 percent depending on your income—can be applied to as much as $3,000 of qualifying expenses if you pay for the care of one qualifying child, or up to $6,000 if you pay for the care of two or more.

Child support
Payments made under a divorce or separation agreement for the support of a child. The payments are neither deductible by the person who pays them, nor considered taxable income to the person who receives the money.

College credits
The American Opportunity credit can be worth up to $2,500 for each qualifying student and is available for the first four years of vocational school or college. The Lifetime Learning credit can be worth up to $2,000 per year for additional schooling. You can claim an American Opportunity credit for qualifying expenses of each qualifying student (including yourself, your spouse or your dependent child). For example, having three children in college at the same time could earn you $7,500 worth of credits. However, only one Lifetime Learning credit can be claimed each year, for a maximum credit of $2,000 per tax return. The right to claim the American Opportunity credit disappears as adjusted gross income rises from $80,000 to $90,000 for a single taxpayer ($160,000 to $180,000 on a joint return). The right to claim the Lifetime Learning credit disappears as adjusted gross income rises from $50,000 to $60,000 for a single taxpayer ($100,000 to $120,000 on a joint return).

College expense deduction
For 2014 and earlier years, qualifying taxpayers can deduct up to $4,000 of college expenses if their adjusted gross income is under $65,000 on a single return or $130,000 on a joint return. This break is available whether or not you itemize deductions, but is not available on the return of a student who is claimed as a dependent on his or her parent’s return. . A write-off of up to $2,000 will be allowed for qualifying taxpayers whose AGI falls between $65,000 and $80,000 on a single return, and between $130,000 and $160,000 on a joint return. You cannot claim the deduction in the same year you claim an American Opportunity or Lifetime Learning credit for the same student. But because the income phase-out range for this deduction is higher than for the Lifetime Learning credit, some taxpayers whose income is too high to benefit from the Lifetime Learning credit will benefit from this write-off.

Combat pay
Pay received by members of the U.S. Armed Forces and support personnel in combat zones, including peace-keeping efforts. Military pay received by enlisted personnel serving in combat or designated peace-keeping efforts is tax-free. Officer pay is tax-free up to the maximum pay for enlisted personnel (plus imminent danger/ hostile fire pay), an amount that increases each year. Although tax-free, combat pay may now be counted as compensation when determining whether the taxpayer can contribute to an IRA or Roth IRA.

Conservation easements
If you donated an easement to a conservation group or a state or local government to restrict development of your property, you can deduct the resulting decline-in- value of your property.

Constructive receipt
A concept of tax law that taxes income at the time you could have received it, even if you don’t actually have it. A paycheck you could pick up in December is considered constructively received and taxed in that year, even if don’t get and cash the check until the following January. Also, interest paid on a savings account is considered constructively received and taxable in the year it is credited to your account, whether or not you withdraw the money.

Consumer interest
See Personal interest.

Coverdell education savings account
A Coverdell ESA allows you to put up to $2,000 a year in a special account that will be used to pay a student’s school bills. There’s no deduction for contributions but if the money is used to pay qualifying expenses, withdrawals, including accumulated income, are tax-free. The $2,000 cap is the limit on how much can be set aside for any student in one year, regardless of how many people contribute. In addition to being used for college expenses, ESA funds can also be spent for primary and high school bills. Even the cost of a computer is a qualifying expense.

Coverdell ESA
See Coverdell education savings account.

Credit for qualified retirement savings contributions
See Retirement credit.


If you receive a settlement in a damage suit that includes money for future medical expenses, the amount is not taxable. But you can’t deduct those future medical expenses covered by the amount of the award allocated to medical care as an itemized deduction. Enter medical expenses that exceed the award in Deductions and Credits under Medical.

Write-offs you are permitted to subtract from your gross income to calculate your taxable income. All taxpayers may claim a standard deduction, which is determined by the IRS. If your qualifying expenses exceed your standard deduction, you may claim the higher amount by itemizing your deductions. Although no records are needed to back up your right to the standard deduction, you must maintain records of qualifying expenditures if you itemize. For higher income taxpayers, the amount of their otherwise allowable itemized deductions will be reduced when adjusted gross income (AGI) exceeds a threshold amount. The reduction and threshold amounts can vary each year.

Someone you support and for whom you can claim a dependency exemption on your tax return. For each dependent you claim, the exemption knocks a standard amount off your taxable income. Other tax breaks (such as the child tax credit) may also be available for dependents.

A deduction to reflect the gradual loss of value of business property as it wears out. The law assigns a tax life to various types of property, and your basis in such property is deducted over that period of time. See also Accelerated Depreciation.

Direct transfer
A method to move funds from one Individual Retirement Account (IRA) or Keogh plan to another. You can also use this method to move money from a company retirement plan such as a 401(k) to an IRA. With a direct transfer, you order one sponsor to transfer the money directly to your new IRA; you do not take possession of the funds. There is no limit on the number of times you can move your money via direct transfer. However, if you take possession of the funds and personally deposit them in the new IRA, the switch is considered a rollover. You can use the rollover method only once each year for each IRA account you own. The direct transfer method must be used to move funds from a company retirement plan to an IRA, or else 20 percent of the money withdrawn from the company plan will be withheld for the IRS, even if no taxes are due.


Earned income
Compensation, such as salary, commissions and tips, you receive for your personal services. This is distinguished from “unearned” income such as interest, dividends and capital gains.

Earned income credit
If your adjusted gross income is below a certain amount, you may be able to claim the earned income credit, which might wipe out your income tax bill and even result in a refund of any leftover credit. The exact credit amount depends on your income level, as well as how many qualifying children you have.

Education interest
Interest on college loans can be deducted as an adjustment to income, so you get a benefit even if you claim the standard deduction rather than itemizing deductions on your return. To qualify for the write off, the debt had to be incurred to pay higher education expenses for you, your spouse or your dependent. Up to $2,500 of such interest can be deducted, but this tax-saver — like so many others — is phased out at higher income levels.

Education savings account
See Coverdell education savings account.

Educator expenses
This deduction is allowed for kindergarten through 12th grade teachers for what they spend for classroom supplies. This is an “adjustment to income,” which means you get this benefit even if you claim the standard deduction rather than itemizing.

Elderly or disabled credit
This credit is for low-income taxpayers age 65 or older at the end of the year, or those who are retired on permanent and total disability. Relatively few taxpayers qualify for this credit.

Electronic filing
The fastest way to get your tax return (or a request for an extension of time to file) to the IRS (and state revenue office).

Energy credits
Residential Energy Efficient Property Credit: This tax credit helps taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit, which runs through 2016, is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property. Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; fuel cell property qualifies only when installed on or in connection with your main home located in the United States.

Enrolled agent
A tax preparer who, by virtue of passing a tough IRS test or prior IRS work experience, can represent clients at IRS audits and appeals.

Estate tax
For 2014 the exemption amount for estates is $5,340,000, with a maximum estate tax of 40%.

Estimated tax
If you have income that’s not subject to withholding, such as investment or self-employment income, you may have to make quarterly payments of the estimated amount needed to cover your expected tax liability for the year.

Excess Social Security tax withheld
If you hold more than one job during the year—either at the same time or successively—too much Social Security could be withheld from your pay. This is because each employer is required to withhold the tax, but no taxpayer has to pay the full tax on more than the annual limits. If wages from two jobs pushes you over the limit, too much tax will be withheld. You get a credit for the excess when you file your tax return for the year.

You can claim a personal exemption for yourself. On joint returns a personal exemption is claimed for each spouse. You also get an exemption for each dependent you claim on your return. Each exemption reduces taxable income by a standard amount, which is partially phased out at higher income levels.

Also known as the Section 179 deduction, expensing lets you treat a certain amount of the expenditures that normally would be depreciated over a number of years as current business expenses to be deducted immediately.


See Scholarships and fellowships.

The Federal Insurance Contribution Act tax that pays for Social Security and Medicare is usually split 50/50 between employers and employees.

Filing status
Your status determines the size of your standard deduction and the tax-rates that apply to your income. For tax purposes, you are considered single, married filing jointly, married filing separately, head of household or qualifying widow or widower.

First-time homebuyer credit
See Homebuyer credit.

Flexible spending account
See Reimbursement account.

Forgiven debt
See Cancelled debt.


Gift tax
To prevent people from avoiding the estate tax by giving their property away, the law imposes a gift tax. You can give up to $14,000 yearly to each of as many people you want without worrying about this tax. Any part of the credit used to offset taxable gifts will not be available to reduce the estate tax. When the gift tax is owed, it is owed by the giver, not the recipient.

Gross income
All of your income from taxable sources, before subtracting any adjustments, deductions or exemptions.


Head of household
A filing status with lower tax rates for unmarried or some married persons considered unmarried (for purposes of this filing status) who pay more than half the cost of maintaining a home, generally, for themselves and a qualifying person, for more than half the tax year.

Health Savings Account (HSA)
HSAs allow Americans under age 65 to make tax-deductible contributions to a special account tied to a high-deductible health insurance policy. Earnings inside the HSA are tax-deferred (just like in an IRA). To be eligible to contribute to an HSA, you must have a qualified high-deductible insurance policy. Money from the HSA can be used tax- and penalty-free to pay the insurance policy deductible, co-payments and any other qualifying expenses. Money left in the account at the end of a year can be rolled over to the next year. Nonqualifying withdrawals of earnings before age 65 are taxed and a 10 percent penalty is imposed. After you reach age 65, contributions to the HSA must cease and non-qualifying withdrawals are taxed but not penalized.

Highly-paid individuals
Special anti-discrimination rules can limit retirement plan contributions for highly-paid individuals, defined as anyone making more than $115,000 in 2014 or anyone who is a 5% owner of a company which offers the retirement plan in question. If lower-paid employees do not contribute to a 401(k) plan in sufficient numbers, for example, higher-paid employees can have part of their contributions returned at year-end, meaning it will be treated as taxable compensation.

Hobby-loss rule
One requirement for deducting business losses is that you show you are trying to make a profit. The law presumes you’re in business for profit if you report a taxable profit for three years out of any five-year period (or two out of seven years if you’re into breeding, showing or racing horses). Otherwise, your activity is assumed to be a hobby, unless you can prove otherwise. The distinction is important because if the expenses of a hobby exceed the income, the difference is considered a personal expense, not a tax-deductible loss.

Holding period
The period of time you own an asset for purposes of determining whether profit or loss on its sale is a short- or long-term capital gain or loss. Sales of assets owned one year or less produce short-term results. The sale of assets owned more than 12 months produces long-term results. The holding period begins on the day after you purchase an asset and ends on the day you sell it. If you buy on January 4, for example, your holding period begins January 5. If you sell the following January 4, you have owned the asset for exactly one year, and are stuck with short-term treatment. To be eligible for the gentler long-term tax treatment, you’d need to hold on until January 5, so that you have owned the asset for more than one year. See Capital gain.

Homebuyer credit
This credit is available if you close on the purchase of a U.S. principal residence between April 9, 2008 and April 30, 2010. (If a home is under contract on April 30, the deadline to close is extended to June 30, 2010.) The maximum credit for 2008 purchases is the lesser of $7,500 or 10% of the home purchase price; the maximum credit for purchases in 2009 and 2010 is the lesser of $8,000 or 10% of the purchase price (the credit amount is halved for a buyer who uses married filing separate status). Maximum credits are allowed to individuals who did not own a U.S. principal residence within the three-year period ending on the purchase date. For purchases after November 6, 2009, a reduced credit equal to the lesser of $6,500 or 10% of the purchase price is allowed to an individual who owned the same U.S. principal residence for a period of five consecutive years during the eight-year period ending on the purchase date (the credit amount is halved for a buyer who uses married filing separate status). The credit is phased out at higher income levels (stricter phase-out ranges apply to purchases on or before November 6, 2009). For purchases after that date, the credit is only allowed if the price of the new principal residence doesn’t exceed $800,000. Credits for 2008 purchases generally must be paid back over 15 years, starting in 2010. Credits for 2009 and 2010 purchases generally won’t have to be paid back. Credits for 2009 purchases can be claimed on 2008 returns, and credits for 2010 purchases can be claimed on 2009 returns. The credit is fully refundable, which means it can be used to offset the buyer’s regular tax and alternative minimum tax liabilities with any leftover credit amount refunded to the buyer in cash. Certain liberalized rules apply to military service members.

Home equity loans
Debt secured by your principal residence or second home—such as a second mortgage or home equity line of credit—that is not used to buy, build or substantially improve the property. Although interest on most personal loans is not deductible, interest on up to $100,000 of home equity debt is an exception.

Home office expenses
If you use part of your home regularly and exclusively as the principal place of your business or the place you meet with clients, patients or customers, you can qualify to deduct certain expenses that are otherwise nondeductible personal expenses. Examples include a portion of your utilities, homeowner’s insurance premiums and depreciation (if you own your home) or part of your rent (if you are a renter).

Home sale profit
Profit of up to $250,000 ($500,000 for married taxpayers filing jointly) is tax-free, if you owned and lived in the home for two of the five years leading up to the sale. This break can be used repeated times, but not more than once in any two year period. A surviving spouse is considered married (and eligible for a $500,000 exclusion) if a home is sold within two years of the death of his or her spouse.

Hope credit (now the American Opportunity credit)
See College credits.

Household employees
If someone works in your home—as a child care provider, for example, or housekeeper or gardener—as your employee (rather than as an independent contractor or an employee of a service company), you may be responsible for paying Social Security and Medicare taxes for the employee. This requirement is triggered in 2014 if you pay the employee $1,900 or more during the year. This is also sometimes called the “nanny tax.” (If you pay an employee $1,000 or more in any calendar quarter, you must pay federal unemployment tax.)


Imported drugs
The cost of prescription drugs imported from Canada or any other foreign country is not deductible.

Imputed interest
Interest you are considered to have earned—and therefore owe tax on—if you make a below-market-rate loan. The term is also used to refer to the interest income you must report on taxable zero-coupon bonds. Although the bonds pay no interest until maturity, you must report and pay tax on the interest as it accrues.

Incentive stock option
An option that allows an employee to purchase stock of the employer below current market price. For regular income tax purposes, the “spread” or “bargain element”—the difference between the price paid and market value of the stock—is not taxed when the option is exercised. Rather, it is taxed when the stock is sold. For alternative minimum tax purposes, however, the spread is taxed in the year the option is exercised.

To prevent inflation from eroding certain tax benefits—including standard deductions and exemption amounts and the beginning and end of each tax bracket—they are automatically adjusted annually for increases in the consumer price index.

Individual 401(k) plan
The 401(k) rules allow a self-employed person with no employees (other than his or her spouse) to use a 401(k) plan to sock away—and deduct—far more for his or her retirement than in the past. For 2014, self-employed individuals can contribute up to $52,000 to a solo 401(k). Those 50 and older can shelter up to an additional $5,500 by making extra “catch-up” contribution.

Individual retirement account (IRA)
A reference to an IRA without the moniker “Roth” in front of it is a reference to a traditional IRA, a tax-favored account designed to encourage saving for retirement. If your income is below a certain level or you are not covered by a retirement plan at work, deposits into a traditional IRA can be deducted. The maximum annual contribution for 2014—deductible or not—is $5,500 or 100 percent of the compensation earned during the year, whichever is less. Those who are age 50 or older at the end of the year can add an extra $1,000 “catch-up” contribution, bringing their annual limit to $6,500 for 2010. Also, spouses can contribute part of his other compensation to an IRA for a non-working spouse. The tax on all earnings inside the IRA is postponed until you withdraw the funds. In most cases there is a penalty for withdrawing funds before you reach age 59 1/2. The right to deduct contributions phases out at higher income levels for those covered by a retirement plan at work. See also Roth IRA.

Individual retirement arrangement
See Individual retirement account (IRA).

IRA payouts for first-time homebuyers
As a general rule, withdrawals from traditional IRA before age 59½ are hit with a 10% tax penalty. But the penalty is waived on up to $10,000 withdrawn to buy a first home for yourself, a child or grandchild, or your parents or grandparents.

IRA withdrawals for education
The typical 10% penalty for early (pre-age 59½) withdrawal from traditional IRAs is waived if the distributions is used to pay higher education expenses for yourself, your spouse, or a dependent. However, the payout is taxed.

Innocent-spouse rules
Tax rules designed to protect married taxpayers who file joint returns from being held responsible for taxes due to erroneous actions by their spouses—such as failing to report income or claiming unsubstantiated deductions. Basically, if you can show that you didn’t know and didn’t have reason to know about error that resulted in the underpayment of tax on the joint return, you can be relieved of responsibility for that underpayment. You have two years from the time the IRS begins trying to collect the underpayment to petition for innocent spouse relief.

Installment sale
With an installment sale you agree to have the purchaser pay you over a number of years, and you report the profit on the sale as you receive the money instead of all at once in the year of the sale.

Investment interest
Interest paid on loans used for investment purposes, such as to buy stock on margin. You can deduct this interest on Schedule A if you itemize, up to the amount of investment income (not including capital gains or dividends that qualify for the 0, 15, or 20 percent rates) you report.

Itemized deductions
See Deductions.


Job-hunting costs
The costs of looking for a new job in your same line of work are deductible. Qualifying expenses include the cost of want-ads, employment agency fees, printing and mailing resumes, and travel expenses such as transportation, lodging and 50% of food if your job hunting takes you away from home overnight.

Job-related education
The cost of education that maintains or improves skills you use on the job, or that is required to maintain your job is deductible Education that qualifies you for a new trade or business, such as law school, is not eligible for this deduction, but may be eligible for the American Opportunity or Lifetime Learning tax credit.

Job-related move
See Moving expenses.

Jury duty pay repaid to employer
Jury fees you are required to turn over to your employer—in exchange for your salary continuing while you do your civic duty—are deductible. This will offset the jury fee income you are required to report if the money only passes through your hands.


Keogh plan
Also known as an H.R. 10 plan, this is a retirement plan for the self-employed. As much as 20 percent of your net earnings from self-employment income (up to $52,000 for 2014) can be deposited in a defined contribution Keogh. Contributions are tax deductible. There is no tax on the earnings until the money is withdrawn, and there are restrictions on tapping the account before age 59½.

Kiddie cards
A reference to the Social Security cards needed by any child you claim as a dependent on your tax return. The nine-digit identifying number shown on the card must be reported on the tax return of the parent who claims the child as a dependent. What if a child is born late in the year and you haven’t received a Social Security number by the time you’re ready to file? The IRS says you must delay filing, even if it means getting an extension to file past the April 15 deadline. If you claim a dependent and fail to include the number, the exemption will be rejected and your tax bill hiked accordingly.

Kiddie tax
The tax—at the parents’ higher tax rate—imposed on unearned income of children who are under age 19 at the end of the year and dependent students who are under age 24. For 2014, the kiddie tax can only apply to the child’s unearned income in excess of $2,000.


Lifetime learning credit
See College credits.

Like-kind exchange
The tax-free exchange of similar assets, such as real estate for real estate. The tax on profit accrued in the first property is deferred until the subsequent property is sold.

Limited partnerships
A partnership investment—in real estate and oil and gas, for example—that passes on both profits and losses to investors. By definition, limited partnerships are passive investments, subject to the passive-loss rules.

Listed property
“Listed property” is the term used for depreciable assets that Congress has put on a special list for special scrutiny by the IRS. Basically, this includes things Congress worries you might use for personal as well as business purposes—a car, computer, cellular telephone, boat, airplane and photographic and video equipment. (If a computer or photographic or video equipment is used exclusively at your regular place of business, however, it is not considered listed property.) There are special restrictions on the depreciation of listed property if business use does not exceed 50 percent.

Long-term care insurance premium
Premiums paid for long-term care insurance can be deducted as a medical expense. The maximum annual deduction is based on your age.

Long-term gain or loss
See Capital gain or Capital loss.

Lump-sum distribution
The payment within one year of the full amount of your interest in a pension or profit-sharing plan. To qualify as a lump-sum distribution—and for favorable tax treatment—other requirements must be met.

Luxury car rules
The restrictions that limit annual depreciation deductions for business automobiles that cost more than a certain amount.


Margin interest
See Investment interest

Marginal tax rate
The share of each extra dollar of income that will go to the IRS. It’s not necessarily the same as the rate in your top tax bracket because in many cases rising income squeezes the value of tax breaks, so that the extra income is effectively taxed more harshly than advertised. Knowing your marginal rate tells you how much of each additional dollar you make will go to the IRS and how much you’ll save for every dollar of deductions you claim.

Marital deduction
The tax law provision that generally allows any amount of property to go from one spouse to the other—via lifetime gifts or bequests—free of federal gift or estate taxes.

Market discount
The difference between what you pay for a bond and its higher face value. The tax treatment varies depending on whether the bond is taxable or tax-free and whether you redeem it at maturity or sell it before that time.

Master limited partnerships (MLP)
Similar to regular limited partnerships, but MLP shares are traded on the major exchanges, making for a much more liquid investment. Although limited-partnership losses are considered passive, income from an MLP is considered investment income rather than passive income. That means passive losses can’t be used to shelter MLP income.

Material participation
The test used to determine whether you are involved enough in a business to avoid the passive-loss rules. To be considered a material participant, you must be involved on a “regular, continuous and substantial basis.” One way to pass the test is to participate in the business for more than 500 hours during the year.

Medicare tax
The portion of the combined Social Security and Medicare tax—1.45 percent for employees and 2.9 percent for self-employed taxpayers—that pays for Medicare. Although the part of the tax that pays for Social Security stops at $117,000 in 2014, the Medicare portion of the tax applies to all wages and self-employment income, no matter how high.

Midmonth convention
The rule that treats certain kinds of depreciable property, including real estate, as though it were placed in service in the middle of the month it was first used.

Midquarter convention
In general, business property is depreciated under a midyear rule that allows half a year’s depreciation for the first year, whether you buy property in January or December. However, if you buy more than 40 percent of the business property you put into service for the year during the fourth quarter, the midquarter convention takes over. With it, you depreciate each piece of property as though it were placed into service in the middle of the calendar quarter in which it was purchased. You claim just six weeks’ worth of depreciation for property put in service during the final quarter, for example.

Mileage rate
See Standard mileage rate.

Mortgage interest
A term often used to refer to deductible interest paid on debt that qualifies as acquisition indebtedness or home equity debt. Interest on up to $1 million of debt used to buy or build your principal residence or second home can be deducted. In addition, interest on up to $100,000 of borrowing via a home equity loan or line of credit can be deducted, regardless of how you use the money.

Moving expenses
Some of the costs of moving in connection with taking a new job are deductible. To qualify for the deduction, the new job must be at least 50 miles farther from your old home than your old job was. Deductible expenses include the cost of moving your household goods, as well as travel and lodging expenses for you and your family. If you moved to take your first job, the 50-mile test applies to the distance between your old home and your new job. You can take this deduction even if you claim the standard deduction rather than itemizing deductions on your return.

Multiple-support agreement
An agreement under which two or more taxpayers, who together provide more than half the support for someone else, agree that one supporting person will claim the supported person as a dependent, and the other supporting persons will not.


Nanny tax
See Household employee.

Net Unrealized Appreciation (NUA)
NUA comes into play if you take a total payout from a company retirement plan that includes appreciated employer securities. Rather than make a tax-free rollover of the entire amount to an IRA, you can roll the stock into a taxable account and owe tax only on the stock’s value when you acquired the shares. The Net Unrealized Appreciation that accrued while the stock was inside the plan will not be taxed until you ultimately sell the stock. At that point, the profit can qualify for special long-term capital gain treatment. If you rolled the stock into an IRA, all appreciation would be taxed as ordinary income when withdrawn, at your top tax rate.

Nonbusiness bad debt
A bad debt not connected with your trade or business. An uncollectible loan to a friend or a deposit to a contractor who becomes insolvent are examples. You must be able to show that you tried to collect the debt. When those efforts are unsuccessful, a nonbusiness bad debt is deductible as a short-term capital loss in the year the debt becomes entirely worthless.

Noncash contributions
The full fair-market value of most assets that you donate to charity can be deducted if you have owned the asset for more than a year. The deduction for assets owned one year or less is limited to your tax basis, which is generally what you paid for the property. If you give property with a total value of more than $500, you’ll need to file Form 8283 and give details about the assets, including a description of them and their individual values. If their value is more than $5,000, you generally will need to attach an appraisal, unless you give listed securities. Note that if you donate used clothing or household items such as furniture, appliances, linens, or electronics, you can’t deduct the value of the items unless they are in excellent or good condition.

Nonqualified stock options
Options to purchase company stock that are granted to employees as compensation but do not meet restrictions necessary to qualify as incentive stock options. (See Incentive stock options.) There is no tax consequence when the options are granted but when employees exercise the options to purchase stock, the “spread” or “bargain element”—the difference between purchase price and the stock’s value—is taxed as additional compensation.


Out-of-pocket charitable contributions
Expenses you incur while working for a charity – from the cost of driving your car (generally 14 cents per mile) to the cost of stamps for a fundraiser—can be deducted as a charitable contribution.

Original Issue Discount (OID)
The amount by which the face value of a bond exceeds its issue price. Part of the discount on taxable bonds must be reported as taxable interest income each year that you own the securities.


Passive-loss rules
Passive activities are investments in which you do not materially participate. Losses from such investments can be used only to offset income from similarly passive investments. Passive losses generally can’t be deducted against other kinds of income, such as salary or income from interest, dividends or capital gains. Generally, all real estate and limited-partnership investments are considered passive activities, but there is an exception for real estate professionals and a limited exception for rental real estate in which non-professionals actively participate. Losses you can’t use because you have no passive income to offset can be carried over to future years.

Personal exemption
See Exemptions.

Personal interest
Basically, this is interest that doesn’t qualify as mortgage, business, student loan or investment interest. Included is interest you pay on credit cards, car loans, life insurance loans and any other personal borrowing not secured by your home. Personal interest cannot be deducted.

Plug-In Electric Drive Motor Vehicle Credit
Internal Revenue Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks. For vehicles acquired after 12/31/2009, the credit is equal to $2,500 plus, for a vehicle which draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours. The total amount of the credit allowed for a vehicle is limited to $7,500.
The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For additional information see Notice 2009-89.

In connection with getting a home mortgage, each point is equal to 1 percent of the mortgage amount. Points paid on a mortgage to buy or improve your principal residence are generally fully-deductible in the year you pay them. You get to deduct the points even if you convince the seller to pay them for you, as long as you paid enough cash at closing—as a down payment, for example—to cover the points. Points paid to refinance the mortgage on a principal home or to buy any other property must be deducted over the life of the loan.

Preference items
Tax breaks allowed under the regular income tax but not under the Alternative Minimum Tax, including the deduction of state and local taxes and interest on home equity loans. One that is becoming more and more important to more and more taxpayers is the “spread” between the exercise price and the value of stock purchased with incentive stock options. Although that amount is not taxed under the regular tax, it is a preference item subject to tax if you’re hit by the AMT.

Prizes and awards
The value of a prize or award is generally taxable, so if you hit the lotto, Uncle Sam is a winner, too. One exception is that certain noncash employee awards—the proverbial gold watch, for example—can be tax-free.

Premature distribution
Withdrawals from a company retirement plan which are subject to a 10 percent penalty (in most cases) if you’re under age 55 in the year you leave the job or from a traditional IRA if you’re under age 59½.

Property taxes
See Real estate taxes.


Qualified plan
An employee benefit plan—such as a pension or profit-sharing plan—that meets IRS requirements designed to protect employees’ interests.


Real estate taxes
Real estate taxes you pay are deductible. You can deduct the state and local property taxes you paid on any number of personal residences or other real property you own.

Recapture of depreciation
When you depreciate investment real estate, your tax basis declines. To the extent that profit when you sell is due to the reduced basis (rather than appreciation), the law recaptures part of the depreciation tax break by taxing that part of your profit up to 25 percent, rather than the regular top 15 percent rate for long-term capital gains.

Reimbursement account
A fringe benefit, sometimes called a flexible spending account or salary reduction plan that allows an employee to divert some of his or her salary to a special account that is used to reimburse the employee for medical or child care expenses. Funds channeled through the account escape federal income and Social Security taxes and state income taxes as well.

Retirement saver’s credit
This credit is worth as much as 50 percent of up to $2,000 contributed to an IRA, 401(k) or other retirement plan, for a maximum credit amount of $1,000 ($2,000 if filing jointly). The credit is designed to encourage lower-income workers to save for their retirement. The credit is phased out as income rises. Taxpayers under age 18 and those claimed as dependents on their parents’ returns are not eligible, regardless of their income.

The tax-free transfer of funds from one individual retirement account (IRA) to another or from a company plan to an IRA. If you take possession of the funds, the money must be deposited in the new IRA within 60 days. Beware that when the rollover method is used to move money from a company plan to an IRA, 20 percent of the amount will be withheld for the IRS, even though the rollover is tax-free if the money is in the IRA within 60 days. To avoid this automatic withholding, use the direct transfer method to move money from a company plan to an IRA. See Direct transfer.

Roth 401(k)
Employers are now allowed to add a Roth option to 401(k) plans to allow employees to invest after-tax money with the promise of tax-free withdrawals in retirement. With the regular 401(k), you invest pre-tax money but have to pay tax on all withdrawals in retirement. If your firm offers a matching contribution, it must go into the traditional 401(k), and you will be taxed on distributions from that part of the plan. The same dollar limits apply to Roth 401(k)s as to regular plans. The maximum employee contribution for 2014 is $17,500. Plus, you can make an extra $5,500 “catch-up” contribution if you are age 50 or older. You can choose to divert part of your pay to each kind of 401(k) account, but your combined contributions can’t exceed the preceding limits.

Roth IRA
The back-loaded IRA is named after a chief supporter—the late Senator William Roth of Delaware. It’s called back-loaded because the tax benefits come at the end of the line. Contributions are not deductible, but all withdrawals are tax-free, as long as they come after you reach age 59½ and at least five years after January 1st of the year in which you opened up your first Roth account. Contribution limits are the same as for traditional IRAs: $5,500 in 2014, with an extra $1,000 catch-up contribution allowed for those age 50 and older. But there’s a catch: If your income is too high, you can’t contribute to a Roth IRA.
You can also roll over funds from a traditional IRA to a Roth IRA—so that all future earnings would be tax-free rather than simply tax-deferred. This is called a Roth IRA conversion. But to do so, you have to pay tax on the money you move from the old IRA to the Roth. Starting in 2010, there is no income restriction on Roth IRA conversions (for earlier years, Roth conversions are only allowed if AGI is $100,000 or less).


S corporation
Named after the subchapter of the tax law that authorizes it, an S corporation generally pays no tax because profits and losses are passed on and taxed to the shareholders.

Sales taxes
State and local general sales taxes you pay may be deductible if you itemize. But you must choose between deduction sales taxes or deducting city and state income taxes. If you live in a state that does not impose an income tax, claim the sales tax deduction. You don’t need to keep all your receipts, either. The IRS has a handy table with estimates based on your income, family size and where you live. You can add to the table amount sales taxes paid on cars, boats, aircraft and other big ticket items. Purchase of such items could lead some taxpayers in income-tax states to pay more sales tax than income tax. You can choose whichever deduction is most valuable to you.

Saver’s credit
See Retirement saver’s credit.

Salary reduction plan
See Reimbursement account.

Scholarships and fellowships
Scholarships and fellowships received by degree candidates to cover tuition, fees, books and supplies are generally tax-free. But amounts for room and board are taxable.

Section 179 deduction
See Expensing.

The Self Employment Contributions Act tax that pays for Social Security and Medicare for self-employed individuals. For 2014, the self-employment tax rate is 15.3 percent on the first $117,000 of self-employment income and 2.9 percent on all amounts over $117,000.

Self-employed health insurance premiums
Premiums paid by a self-employed person for coverage for yourself, your spouse or dependents can be deductible, even if you don’t itemize deductions.

A Simplified Employee Pension (SEP) is a tax-favored retirement plan mainly for self-employed taxpayers. Contributions to the plan are tax deductible. The maximum contribution for 2014 is the smaller of 20% of net earnings from self-employment or $52,000. Contributions for the 2014 tax year are due by April 15, 2015, but you can extend the contribution deadline to October 15, 2015 if you extend the due date of your return.

Short sale
The sale of borrowed stock, usually with the hope that the stock price will fall. If it does, the investor profits by repaying the loan with shares purchased at the lower price. If the stock price increases, the investor loses and has to repay the loan with shares that cost more than those sold. As far as the IRS is concerned, the transaction doesn’t count for tax purposes until the investor delivers stock to the lender to close the sale.

Short-term gains and losses
See Capital gain or Capital loss.

The Savings Incentive Match Plan for Employees (SIMPLE) is a retirement plan that can be offered by companies with 100 or fewer employees. A key consideration is that the employer generally must match employee contributions up to 3 percent or contribute 2 percent of pay for each employee, whether or not they contribute on their own. The rules are simpler than for other tax-qualified retirement plans. Congress hopes that this will encourage smaller employers to establish plans. For 2014, a self-employed person with no employees could open a SIMPLE and contribute up to $12,000 of self-employment earnings (plus a $2,500 catch-up contribution if he or she is age 50 or older by the end of the year).

Social Security Tax
See FICA and SECA.

Social Security Tax, excess withheld
If you hold more than one job during the year—either at the same time or successively—too much Social Security could be withheld from your pay. If this happens, you are entitled to a refund of the excess withholding.

Spousal IRA
Generally, to contribute to a traditional or Roth IRA, you must have earned income. But a working spouse can contribute up to $5,500 of his or her earned income to an IRA for a nonworking spouse in 2014. The limit is $6,500 if the account owner is age 50 or older by the end of the year.

Standard deduction
A no-questions-asked write-off that reduces taxable income, the amount of which varies depending on your filing status. Taxpayers age 65 and older or blind get larger standard deductions. Unlike taxpayers who itemize deductions, you need no records to prove you deserve this deduction. Even if you somehow made it through the year without incurring any deductible expenses, you may still claim the full standard deduction. About two-thirds of all taxpayers use the standard deduction rather than itemize. Special rules can reduce the standard deduction for children who are claimed as dependents on their parents’ returns.

Standard deduction for a dependent
If you can claim a child as your dependent on your tax return, the child may not claim a personal exemption on his or her own tax return.

Standard mileage rate
The deductible amount you can claim for each mile you use your car for business, charitable, job-related moving or medical purposes without having to keep track of the actual cost. You can also deduct the actual cost of parking and tolls when driving for any of these purposes.

Stepped-up basis
The basis of inherited property is stepped-up to its value on the date of death of the owner, or a slightly later date if chosen by the executor of a taxable estate. In other words, tax on any appreciation during his or her lifetime is forgiven. The heir uses the higher basis to figure his or her gain when the property is ultimately sold. If the value of property declined while it was owned by the decedent, the basis is stepped-down to date of death value.

Student loan interest deduction
You can deduct a portion of the interest you pay on student loans used to pay for college or other post-high school education expenses for yourself, your spouse or your dependents. This tax break is phased out as income rises. You can claim this write-off whether or not you itemize deductions.


Taxable income
This can mean different things. It can refer to income that is taxable (such as wages, interest and dividends) rather than tax-exempt (such as the interest on municipal bonds). On tax returns, “taxable income” is your income after subtracting all adjustments, deductions and exemptions—that is, the amount on which your tax bill is computed.

Tax bracket
Each tax bracket encompasses a certain amount of income to be taxed at a set rate. The rates now run from 10 percent to 35 percent. You are said to be in the 25 percent bracket if your highest dollar of income falls in that bracket. Even if you’re in the 25 percent bracket, part of your income is taxed at the 10 percent rate and some at 15 percent. Some of your income—such as the amounts protected by your personal and any dependent exemptions and your standard or itemized deductions—is not taxed at all.

Tax-exempt interest
Interest paid on bonds issued by states or municipalities that is tax-free for federal income tax purposes. Although you must report this income on your return, it is not taxed. Note that some interest that is exempt from the regular tax is taxed by the Alternative Minimum Tax.

Tax-free income
All sorts of income can potentially be tax-free, including: Auto rebates; child-support payments; combat pay; damages in lawsuits for physical injury; disability payments, if you paid the premiums for the policy; dividends on a life insurance policy, up to the total of premiums paid; Education Savings Account withdrawals used for qualifying expenses; gifts; Health Savings Account withdrawals used for qualifying payments; inheritances; life insurance proceeds; municipal bond interest; policy officer survivor payments; profits from the sale of a home, up to $250,000 if you’re single or $500,000 if you’re married; qualified Roth IRA and Roth 401(k) withdrawals; scholarships and fellowship grants; Social Security benefits (between 15 percent and 100 percent are tax-free); veterans benefits; and workers’ compensation.

Taxpayer advocate
The official inside the IRS who is charged with helping individuals resolve their problems with the IRS, as well as identifying changes in IRS procedures that could make the agency more taxpayer-friendly. This official oversees IRS Problem Resolution Officers (PRO) around the country. You should go to a PRO, or ultimately the Advocate, if you are getting the run-around – or worse – from regular IRS channels.

Tax preference item
See Preference item.

Tax rebate
See Economic stimulus payment.

Ten-year averaging
This special tax-computation method for lump-sum distributions from pension and profit-sharing plans is available, but only to taxpayers born before January 2, 1936. If you qualify, it could save you a substantial amount.

Ten-year forward averaging
See Ten-year averaging.

Traditional IRA
See IRA.

Tuition credit
See College credits.

Tuition deduction
Qualifying taxpayers can deduct a portion of college expenses if their adjusted gross income is under certain limits. This break is available whether or not you itemize deductions, but is not available to students who are claimed as dependents on their parents’ return. It is available to their parents, though, if they pay the tuition. You cannot claim the deduction in the same year you claim an American Opportunity or Lifetime Learning credit for the same student. But because the income phase-out ranges for this deduction are higher than for the Lifetime Learning credit, some taxpayers whose income is too high to claim the Lifetime Learning credit will benefit from this write-off.


Unearned income
Income from investments, such as interest, dividends and capital gains. See Earned income.

Underpayment penalty
The penalty is the IRS’s not-so-subtle reminder that taxes are due as income is earned, not just on April 15 of the following year. Basically, it works like interest on a loan, with the penalty rate applied to the amount of estimated tax due, but unpaid by each of four payment dates during the year. The penalty rate is set by the IRS and can change each quarter. There are several exceptions to the penalty. See Estimated tax.


Vacation home
Special tax rules apply if you rent out a vacation home, and the rules differ depending on how much you use the home personally. While all rental income is to be reported, the deductibility of expenses can be limited if you engage in “too much” personal use—generally defined as using the home for more than 14 days during the year or more than 10 percent of the number of days it is rented for fair market rent.

Vested benefits
Benefits in a company retirement plan that are yours to keep if you leave the job. Your own contributions, to a 401(k), say, are immediately 100 percent vested. But employer contributions on your behalf can be vested gradually over a period of time, as a way to encourage you to stay with the employer. If you quit a job when just 50 percent of your benefits are vested, for example, you would forfeit half of the amount the employer has set aside for you.

Voluntary withholding
You can ask the Social Security Administration to withhold taxes from your Social Security benefits. This could make sense if withholding allows you to avoid making quarterly estimated tax payments. To request voluntary withholding, file form W-4V with Social Security. You can also ask a retirement plan sponsor to withhold from payouts from IRA distributions.


Wage base
The level of earnings to which the full Social Security tax applies. For 2014, the full 15.30 percent tax (the combined rate paid by employers and employees) applies to the first $117,000 of wages or self-employment income, and the 2.9 percent Medicare portion applies to all income over that level. (Employees pay part of the tax—5.65 percent up to the wage base limit and 1.45 percent after that—and their employers pay the other half. Self-employed taxpayers have to pay both halves.)

Wash sale
The sale of stocks, bonds or mutual fund shares for a loss when, within 30 days before or after that sale, you buy the same or substantially identical securities. The law forbids the deduction of the loss.

The amount held back from your wages each payday to pay your income and Social Security taxes for the year. The amount withheld is based on the size of your salary and the W-4 form you file with your employer.

Worthless security
If a stock you own becomes completely worthless during the year, you can claim a capital loss as though you sold the stock for $0 on December 31 of the year the stock became worthless.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

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Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and sign up for the monthly Patrick Parker Realty eNewsletter to have updates delivered to your inbox.

The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly.

More info about the Patrick Parker Realty Tax Season Blog Series >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

Market Value vs. Appraised Value

The interesting thing about homes is that their real value has almost nothing to do with what they are bought and sold for. Well, this is an exaggeration, but when you think of it, buying or selling a home can be as deceptive as Jack buying some magic beans.

market-value-vs-appraised-valueMarket Value
This is the price that the people looking at your home are willing to pay for it. If just about everyone coming by your home says that they are willing to pay $200,000, then the market value of your home is $200,000. There isn’t a whole lot you can do to change that. The tricky thing about market value is that it can take into account factors that are completely out of the seller’s control.

For instance, an elderly couple walks into a new home and instantly it reminds them of the home they first lived in. Nostalgia in this case could make the home worth thousands more, simply for that reason. Or, maybe the husband is a little nervous and feels that the home is haunted. This may seem like a joke, but you would be surprised to find out just how often someone claims that ‘getting bad vibes’ from a home is a reason not to buy it. In this case however, no matter what the price, that customers is not going to buy the home.

Appraised Value
The appraised value is basically what the bank thinks your home is worth. This can include everything from what neighborhood you live in, to how many fixtures you have in your kitchen. The appraised value tends to be unbiased, because the bank is not looking to bargain with you. They need an accurate assessment.

It is very rare that the appraised value of a home is the same as the market value. Why is this? Essentially the appraised value of your home is determined in order to justify the rate of the mortgage loan. This price is based on historical data and previous sales comparisons. That means sales of similar homes in the past six months. You may encounter some problems if there is a large gap between the appraised value of the home and purchase price being offered.

For instance if a buyer decides that they absolutely must have a home and they are willing to pay for it, they mat be in for shock when they discover what the down payment is. If the purchase price is much higher they bank may determine that the apprised value of the home is not enough to cover the requested mortgage they will often raise the down payment. This situation may not emotionally deter the buyer, but, coming up with an extra 2 or 3% of the purchase can translate into thousands of dollars. And as we all know coming up with cold hard cash like that can be a real problem.

Therefore, be aware of what similar appraised vales of home in your area are. This will lessen the shock of the purchase. Also, if you can afford the initial down payment you will end up paying less for the home in the long run, providing the bank gives you the mortgage rate that you wish. In this housing market that is quite possible.

Perception vs. Reality in Realty
The really big issue at hand here is perception vs. reality. As mentioned before, sometimes buyers will just ‘fall in love’ with a home. They will be willing to go to great lengths to get that home. However, banks don’t care if you ‘love’ the house or not, they are unbiased and they will appraise the home at what they think is its value.

Fundamentally lenders, not buyers, perform appraisals. There has to be the feeling that the buyer is making a solid investment. This makes sense because of the massive mature of most mortgages the home is the collateral with which you borrow money to buy the same home.

In addition, appraised value is based on historical data and comparisons with similar homes that have sold over the past six months. This is not carved in stone. If the market is fluctuating wildly, other factors may enter the picture, so keep aware at all times.

In the past six months, for instance, the average sale price of a home in the United States has gone up a solid $20,000. It is this kind of data that the lender will look at when they are making the appraisal.

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Of course if there are multiple bidders this raises flags that for whatever reason the home may be worth more. This is the only instance, in the face of overwhelming interest, where the lender may take into account peoples emotions.

When the appraisal comes in way under the market value the seller has some decisions to make, and the buyer should be aware of what their tactics are. Often they will present a counter-offer that is not based on the appraised value. This will almost automatically eliminate many buyers that cannot afford that initial down payment.

As a buyer this could go either way. It could means that you cannot afford the home, which means you should take it as a lesson and start looking elsewhere. If you can afford it, it means that there will be fewer buyers contributing to an increase in the price of the home. This will not only save you money, but if you can afford the initial down payment it means you will save money over the long term.

Make sure that before, or during the bidding process you have done your own research and you know what home appraisals in the area have gone for in the past.

Lowest Common Denominator
Sometimes, the market value of the home will be lower than the appraised value. No matter what the situation the lender will base the mortgage on whichever one is lower. It’s how they cover their bases and make sure the market stays stable. In the case that the appraised value of the home is lower, lets say that it is 5%, the lender will use the difference between the two to calculate the down payment. So make sure you have at least 10% set aside for this contingency.

One last thing… Assessed Value
It is important to know the assessed value of your home for a couple other reasons. Let’s say you have gone through the bidding process and you have managed to come up with the necessary down payment. The assessed value of your home will also be crucial when you re sell the home (if you do) there are no guarantees that the appraised value of your home will increase and this could have as much to do with the national economy, your neighbors and a host of other factors.

The assessed value of your home will also affect how much you pay annually in taxes. The municipal government uses these value statistics to determine how much tax they collect from you. So if you are astounded that the appraised value of your home was so high, know that over the course of time, the money you saved on a down payment could in fact.

Patrick Parker Realty experts can offer additional insights and information on how market value differs from appraised value and how this plays into how Mortgage Lenders and Brokers determine what your home is worth.  For more information contact us today!

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