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Financial Literacy - Taxes
Tax planning tool kit
Calculators, work sheets and resources to help make paying taxes almost painless.
Taxes made easy

Tax glossary

10. Before-tax income -- Also known as pretax income, these are earnings before income taxes are paid. Pretax income is often used to fund 401(k) or other retirement plans. The amount contributed is not deductible; however, it is subtracted from wages subject to income tax.

11. 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, you generally earn a capital gain or suffer 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 and capital loss.

12. Capital expenditure -- The cost of making an improvement to a property.

13. Capital gain -- An increase in the price of a share of stock (or any kind of asset) over and above what you paid for it.

14. Capital gain distribution -- You receive capital gain distributions when the mutual fund you own sells some of its assets and then passes along a portion to you. The 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 generally taxed more favorably.

15. Capital gains tax -- A tax on profits from the sale of real estate or other investments.

16. Capital loss -- When you sell an asset for less than what 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 use capital losses to offset capital gains. The rules are a bit complicated; for instance short-term and long-term losses are treated differently. Losses can also reduce the amount of income that will be taxed, up to $3,000 per year. If your loss is higher than that, you can carry forward the excess, known as capital loss carryover, indefinitely until the total loss is used up.

17. Capitalization rate -- The estimated percentage rate of return that a property will produce on the owner's investment. It's calculated by dividing the expected cash flow by the cost of the investment.

18. 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 a carry back. Individual taxpayers may carry back net operating losses, some business credits and foreign tax credits, but not capital losses. Amounts not carried back may be carried forward to future years.

19. Carry forward -- This is like a carry back, only losses apply to 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 to carry them forward to reduce your tax liability in future years.

20. 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.

21. Child tax credit -- A tax break allowed individuals who claim eligible dependent children on their tax returns.

22. Deductible contribution -- Contributions to a traditional IRA are tax deductible if you are not covered by your employer's retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending upon your income and filing status. Contributions to a Roth IRA are not deductible.

-- Posted: Dec. 17, 2007
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