Definitions of tax terms: K-O

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Definitions of tax terms: K-O

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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Keogh Plan	A pension or profit-sharing plan available to self-employed individuals and their employees.
Kiddie Tax	A popular name for the Tax for Children Under Age 14 Who Have Investment Income of More Than $1,400. If you have children with substantial investment income, such as interest, dividends, rents and royalties, your children will pay tax on their investment income at a rate based on your marginal tax rate.
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Like-Kind Exchange	A tax-deferred exchange of similar items you use in your business or hold for investment, not including securities and other indebtedness or interests such as stocks and bonds. The items must be the same type, but they do not need to be of the same grade or quality.
Local Taxes	In addition to federal and state taxes, those taxes imposed by local municipalities (such as a city or a county) for its government services.
Long-term Capital Gain or Loss	Your profit or loss from the sale of a capital asset that you held for more than 12 months. See also Short-term Capital Gain or Loss.
Lump-sum Distribution	A type of distribution from a pension plan, where you receive the entire balance within one tax year. This usually happens when you retire, and a lump-sum distribution can be rolled over into another plan.
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MACRS	Tax shorthand (pronounced MAKERS) for Modified Accelerated Cost Recovery System, a depreciation method used to figure the deductions you get over the life of tangible property you began using on Jan. 1, 1987, or later.
Marginal Tax Rate	The tax rate that would have to be paid if any additional dollars of taxable income were earned.
Marital Deduction	For estate tax and gift tax purposes, a deduction that allows you to transfer assets to your spouse tax-free.
Married Filing Jointly	If you and your spouse are living together, you may choose this as your filing status. Your marital status on the last day of the tax year determines your status for the entire year, so if you got married Dec. 31, the Internal Revenue Service considers you as married that year. However, the reverse is not necessarily true. If your spouse died in during a tax year and you did not remarry, you are considered married for the whole year for filing purposes.
Married Filing Separately	Just because you are married doesn't mean you have to file jointly. Some couples find that separately figuring taxes on each spouse's portion of their income and deductions is advantageous. Or they may just feel more comfortable keeping their tax situations separate. Separate filing by married couples, however, can be problematic. Some states view a married couple's income as split 50/50, regardless of which partner earned the money and require that even split to be used even when the spouses file separate returns. Also, many tax breaks and credits are not available when the married filing separately status is used.
Material Participation	A term defined by the IRS to determine if you worked and were involved in a business activity on a regular basis or if you were only an investor. If you materially participated in a business activity, you are allowed to deduct any losses from that activity against your ordinary income. See also Active Participation.
Medical Savings Account (MSA)	Similar to an IRA, a medical savings account (MSA) is intended to help self-employed people and employees of certain small businesses to save for and pay their medical expenses that are not covered by health insurance.
Medicare	The Medicare program funds the federal health program for people over 65. Payroll taxes from employers and employees go to pay for the program.
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Mortgage Interest Expense	Interest paid on a loan secured by your home that is fully deductible, up to certain limits, when you itemize.
Meals and Entertainment	Expenses that are deductible in your business may include meals and entertainment, such as the cost of taking a client to a restaurant and a sporting event. These expenses, however, are only partially deductible (55 percent this year) unless they meet certain exceptions.
Mill	In reference to property taxes, a unit of taxation that equals 1/10th of one cent, or $1 on every $1,000 of taxable property value.
Miscellaneous Itemized Deductions	Certain deductions that are itemized but do not fall into other specific categories on Form 1040 Schedule A. Most miscellaneous deductions are job-related expenses or investment expenses and can be deducted only if they are more than 2 percent of your adjusted gross income.
Moving Expenses	Expenses incurred when you moved in connection with your job and are deductible if they are the reasonable costs of moving yourself, your family and your possessions. You can no longer deduct the cost of meals while moving.
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Net income	The amount left after taxes have been paid.
Nonpassive Income	Active income, such as wages, tips and profits from your business which you materially participate in, and portfolio income, such as interest and dividends. Generally, you cannot offset nonpassive income with passive losses. See also Active Income.
Nonpayroll Withholding	Federal income tax on nonpayroll items such as backup withholding and withholding on pensions, annuities, gambling winnings and payments of Indian gaming profits to tribal members.
Nonresident Alien	A person who is not a permanent resident or a citizen of the United States, and who is generally taxed on income from U.S. sources.
Nontaxable Distribution	A dividend you receive from a company, not from its earnings but as a return of your investment in the stock. If you receive a nontaxable distribution, you must reduce your basis in the stock by the amount of the distribution. When you sell the stock, your gain or loss will be calculated using the adjusted basis.
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Ordinary Dividends	Dividends that are distributions of a company's profits. They are fully taxable.
Ordinary Income	Income that does not qualify as a capital gain. Wages, interest, dividends and net income from a business are examples of ordinary income.
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--Posted Oct. 29, 1999