Definitions of tax terms:B-C

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Definitions of tax terms: B-C

One of the hardest things about taxes is learning the language. You've got all the forms and instructions, but it seems they're harder to decipher than your VCR user manual! Here are some of the more common tax terms to help you become tax fluent in no time.
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Backup Withholding	Tax withheld from investment income, such as interest and dividends, to ensure that tax is collected on the income. Banks and other organizations are required to report to the IRS all interest and dividend payments you received, along with your Social Security number or other taxpayer identification number. If you don't give them correct reporting information for you, they are required to withhold 31 percent of your investment income. The IRS may also require the bank or other organization to withhold tax if it determines you have underreported your investment income. If backup withholding is taken out of your earnings, it will show up as "Federal income tax withheld" on the Form 1099-INT or Form 1099-DIV that the bank sends you each January.
Bad Debts	Money you can't collect. Businesses are allowed to deduct bad debts under certain circumstances. If a bad debt is personal, it may be deducted in some cases as a short-term capital loss. Loans between family members generally are classified as nonbusiness.
Boot	Cash or other property used in an exchange to make the values of property traded equal. For instance, if you trade in a delivery truck on a new model, the cash you pay in addition to your old truck is boot.
Burden of Proof	The legal requirement to provide enough evidence to win a lawsuit. In civil cases, such as tax court, the burden is decided by the preponderance -- the most -- evidence. Except in cases of tax fraud, the burden of proof in a tax case generally is on the taxpayer.
Business Interest Expense	Interest incurred in the operation of your business. It is deductible as a business expense.
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Capital Asset	An item that you own for investment or personal purposes, such as stocks, bonds or stamp collections. When you sell a capital asset, depending on the price you earn a capital gain or a capital loss. Gains are taxed at a special rate, and losses can be used in many cases to reduce the amount that is taxed. See also Capital Gain or Capital Loss.
Capital Gain	Profit on the sale of a capital asset. Capital gains receive more favorable tax treatment than regular income. Depending on your tax bracket and on how long you held an asset before selling it, you may pay about one-third to one-half less tax than you would have paid on the same amount if you had earned it as salary. See also Capital Asset.
Capital Gain Distribution	You receive capital gain distributions when the fund sells some of its assets and then passes along a portion to you. This distribution that you get is regarded by the IRS as a capital gain, not as ordinary dividends such as the interest you get from your bank account. It is important to separate capital gain distributions from ordinary dividends because capital gains are taxed more favorably. See also Ordinary Dividends.
Capital Loss	When you sell an asset for less than you paid for it, or less than its adjusted basis, you have a capital loss. While it's never fun to lose money, when it comes to taxes a capital loss isn't necessarily all bad. You can reduce the amount of income that will be taxed by the amount of your loss, up to $3,000 per year. If your loss is more than that, you can carry the excess, known as capital loss carryover, forward indefinitely until the total loss is used.
Carry Back	If you have deductions or credits that cannot be taken in the current year, in some instances the IRS allows you to reduce your tax liability for a prior year or years by using it. This is known as a carry back. Individual taxpayers may carry back net operating losses, general business credits and foreign tax credits, but not capital losses. Amounts not carried back may be carried forward to later years.
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Carry Forward	This is like carry backs, only going into future tax years instead of past ones. If you have excess deductions or credits for the current year, the IRS allows you in some cases, such as a large charitable contribution, to "save" the excess and carry it forward to reduce your tax liability in later years.
Cash Method	The form of accounting in which you report income in the actual year you receive it and deduct expenses in the year you pay. Most individuals use this method. Under this system, if you built a deck and billed the client in December 1999 but didn't receive the check until January 2000, it would be counted as 2000 income, not 1999.
Casualty and Theft Loss	A loss caused by a hurricane, earthquake, fire, flood, theft or similar event that is sudden, unexpected or unusual. You can deduct a portion of personal casualty or theft losses as an itemized deduction.
Charitable Contribution Deduction	An itemized deduction for contributions of cash or property to a qualified tax-exempt organization.
Child and Dependent Care Credit	You may be able to claim this credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who's unable to care for himself or herself. The credit can be up to 30 percent of your expenses. To qualify, you must pay these expenses so you can work or look for work.
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Circuit Breaker	A credit to reduce property taxes for elderly and/or permanently disabled; state-financed property tax credit that decreases as an individual's income increases; usually elderly and/or permanently disabled qualify.
Citizenship Test	One of the tests a person must meet to qualify as your dependent. To meet this test, the person must be a U.S. citizen, a resident of Canada or Mexico, or an alien child whom you have adopted and who lived with you for the entire year.
Cost Basis	The price you originally paid for an investment. This is also known as the basis or tax basis. The cost basis includes any commissions or fees you paid when you purchased the investment.
Cost of Goods Sold	An expense that appears on a business's income statement and represents the cost of the inventory sold during the period.
Credits	Tax credits are much like credits you get from a store. You use the credit to reduce the amount of the tax you owe. Tax credits are more valuable than deductions because they directly reduce the amount of tax you owe, rather than reducing the amount of income that is taxed. See also Deductions.
Current Year Tax	Tax payable in the same year, such as intangible tax and personal property tax.
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--Posted Oct. 29, 1999