Your Financial Professional & Insurance Agent
Adjusted Gross Income
(AGI)An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income.
The return from an investment after the effects of taxes have been taken into account.
The examination of the accounting and financial documents of a firm by an objective professional. The audit is done to determine the records’ accuracy, consistency, and conformity to legal and accounting principles.
ValueThe net value of a company’s assets, less its liabilities and the liquidation price of its preferred issues. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock’s market value.
Capital Gain or Loss
The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.
Certified Public Accountant (CPA)
A professional license granted by a state board of accountancy to an individual who has passed the Uniform CPA Examination (administered by the American Institute of Certified Public Accountants) and has fulfilled that state’s educational and professional experience requirements for certification.
State laws vary, but generally all property acquired during a marriage — excluding property one spouse receives from a will, inheritance, or gift — is considered community property, and each partner is entitled to one half. This includes debt accumulated. Nine states currently have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. (Alaska adopted a community property system in 1998, but it is optional.)
Interest that is computed on the principal and on the accrued interest. Compound interest may be computed continuously, daily, monthly, quarterly, semiannually, or annually.
An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.
Defined Benefit Plan
A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed to inflation.
Defined Contribution Plan
A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee’s compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee’s account.
A pro rata portion of earnings usually distributed in cash by a corporation to its stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends may vary with the fortunes of the company.
Employer-Sponsored Retirement Plan
A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.
Enrolled Agent (EA)
An enrolled agent is a person who has passed the appropriate examination in order to represent taxpayers before the Internal Revenue Service. Enrolled agents, like attorneys and certified public accountants, are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before.
Upon the death of a decedent, federal and state governments impose taxes on the value of the estate left to others (with limitations).
Federal Income Tax Bracket
The range of taxable income that is taxable at a certain rate. The brackets for tax years 2019 and 2020 are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
A defined contribution plan that may be established by a company for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59½.
A defined contribution plan that may be established by a nonprofit organization or school for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59½.
A federal tax levied on the transfer of property as a gift. This tax is paid by the donor. For 2019 and 2020, the first $15,000 a year from a donor to each recipient is excluded from tax. Most states also impose a gift tax. The gift tax exclusion is indexed for inflation.
Individual Retirement Account (IRA)
Contributions to a traditional IRA are deductible from earned income in the calculation of federal and state income taxes if the taxpayer meets certain requirements. The earnings accumulate tax deferred until withdrawn, and then the entire withdrawal is taxed as ordinary income. Individuals not eligible to make deductible contributions may make nondeductible contributions, the earnings on which would be tax deferred.
Jointly Held Property
Property owned by two or more persons under joint tenancy, tenancy in common, or, in some states, community property.
The disbursement of the entire value of an employer-sponsored retirement plan, pension plan, annuity, or similar account to the account owner or beneficiary. Lump-sum distributions may be rolled over into another tax-deferred account.
Marginal Tax Rate
The amount of tax paid on an additional dollar of income. As income rises, so does the tax rate.
A provision of the tax codes that allows all assets of a deceased spouse to pass to the surviving spouse free of estate taxes. This provision is also referred to as the “unlimited marital deduction.” The marital deduction may not apply in the case of noncitizens.
Net Asset Value
The per-share value of a mutual fund’s current holdings. The net asset value is calculated by dividing the net market value of the fund’s assets by the number of outstanding shares.
In a security, the principal is the amount of money that is invested, excluding earnings. In a debt instrument such as a bond, it is the face amount.
An agreement under which employees share in the profits of their employer. The company makes annual contributions to the employees’ accounts. These funds usually accumulate tax deferred until the employee retires or leaves the company.
Qualified Retirement Plan
A pension, profit-sharing, or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules. Contributions accumulate tax deferred until withdrawn and are deductible to the employer as a current business expense.
A method by which an individual can transfer the assets from one retirement program to another without the recognition of income for tax purposes. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.
A nondeductible IRA that allows tax-free withdrawals when certain conditions are met. Income and contribution limits apply.
Self-Employed Retirement Plans
In the past, the terms “Keogh plan” and “H.R. 10 plan” were used to distinguish a retirement plan established by a self-employed individual from a plan established by a corporation or other entity. However, self-employed retirement plans are now generally referred to by the name of the particular type of plan used, such as SEP IRA, SIMPLE 401(k), or self-employed 401(k). The contribution amount is indexed annually for inflation.
Simplified Employee Pension Plan (SEP)
A type of plan under which the employer contributes to an employee’s IRA. Contributions may be made up to a certain limit and are immediately vested.
An IRA designed for a couple when one spouse has no earned income. The maximum combined contribution that can be made each year to an IRA and a spousal IRA is $12,000 or 100 percent of earned income (whichever is less) for the 2019 and 2020 tax years. The total may be split between the two IRAs as the couple wishes, provided that the contribution to either IRA does not exceed the maximum annual contribution limit ($6,000 for 2019 and 2020).
Tax credits, the most appealing type of tax deductions, are subtracted directly, dollar for dollar, from your income tax bill.
Interest, dividends, or capital gains that grow untaxed in certain accounts or plans until they are withdrawn.
Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes. If you sell a tax-exempt bond at a profit, you could incur capital gains taxes. Some tax-exempt bond interest could be subject to the federal alternative minimum tax. The principal value of bonds fluctuates with market conditions. Bonds sold prior to maturity may be worth more or less than their original cost.
The amount of income used to compute tax liability. It is determined by subtracting adjustments, itemized deductions or the standard deduction, and personal exemptions from gross income.