Income Tax Preparation Software Key Terms

Understand some terms related to income tax preparation software

There is an ideal income tax preparation software product on the market for just about anyone. From the single taxpayer to larger enterprises such as small businesses, home-based businesses all the way to business partnerships, S-corporations and C-corporations, there is a suitable package that can guide the user through this complex process. Getting started on evaluating some of the income tax preparation software programs on the market should begin with an understanding of some basic terms.

 

Accounting method

Accounting method is the method a taxpayer uses to account for income and expenses. The two primary methods used to compute taxable income for U.S. citizens are the cash or accrual basis. Income tax preparation software can help you determine which accounting method you should use. Tax preparation software has the user identify what type of accounting method they are using.
Try: BusinessDictionary.com explains this term as well as the two forms, cash and accrual.

Earned Income

Earned income is any income a person receives for work that they do. It includes wages, salary, tips, bonuses and commissions. Tax preparation software can help the user identify their earned income.
Try: InvestorWords.com has a simple definition. For a complete understanding of earned income, visit the Internal Revenue Service website.

Business expense, business deductions

Business expense, quite simply put, is any ordinary or necessary expense that occurs in the operation of the enterprise. Tax preparation software gives the user options on what to count as business expenses.
Try: Looking for a list of common business expenses? CompleteTax has one. Find out more about small business expenses and business deductions at Business.Gov.

Above the line deductions

An above the line deduction describes those deductions which IRS allows a taxpayer to subtract from their gross income. It can include rental deductions, alimony or stock losses to mention a few. Tax preparation software can assist a user in identifying these deductions.
Try: The Motley Fool discusses these deductions in more detail.

Capital gains or capital losses

A capital gain is a profit that comes from gains in stocks, real estate or bonds and which exceeds the purchase price of the asset. A capital loss arises when the sale of the asset results in less than its purchase price. Tax preparation software includes methods for calculating these.
Try: For a capital gains calculator go to Moneychimp. You can find capital losses explained at Bankrate.

Alternative minimum tax

Alternative minimum tax (AMT) is a mechanism for ensuring that high income persons or companies pay at least a minimum tax. Tax preparation software can guide the user through calculating this figure.
Try: H&R Block has a comprehensive discussion on this topic.

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