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California Tax Law · Plain-English Definitions

California Tax Law
Glossary

20 essential terms — from stepped-up basis to probate, Prop 19 to Offer in Compromise — explained in plain English for California families and property owners.

A – B
Tax Fundamentals
Adjusted Basis
Your cost basis in a property after accounting for improvements, depreciation, and other adjustments — used to calculate capital gains on sale.
Gift Tax
Annual Gift Tax Exclusion
The amount you can give each year to any individual without gift tax or using lifetime exemption — $18,000 per recipient in 2024.
Trusts
Bypass Trust (Credit Shelter Trust)
An irrevocable trust funded at the first spouse's death to shelter assets from the surviving spouse's taxable estate, preserving both spouses' federal exemptions.
C
Capital Gains
Capital Gains Tax
Tax on the profit from selling a capital asset (like real estate or stock) for more than your cost basis. California taxes all gains as ordinary income.
Tax Fundamentals
Carryover Basis
When you receive property as a gift during someone's lifetime, you inherit their original cost basis — no step-up. Can lead to large capital gains taxes on later sale.
California Law
Community Property
California's marital property system where most assets acquired during marriage are owned equally by both spouses — with important estate tax and stepped-up basis benefits.
IRS Resolution
Currently Not Collectible (CNC)
An IRS status that temporarily suspends collection activity when a taxpayer cannot afford to pay. Interest and penalties continue accruing. Not a permanent resolution.
E – F
Estate Tax
Estate Tax Exemption
The amount of an estate that is exempt from federal estate tax — $13.61 million per individual in 2024, scheduled to decrease significantly at end of 2025.
Probate
Executor / Personal Representative
The person named in a will and appointed by the probate court to administer an estate — collecting assets, paying debts, and distributing property to heirs.
G – I
Trusts
Grantor Trust
A trust treated as transparent for income tax — all income flows to the grantor's personal return. A revocable living trust is always a grantor trust during the grantor's lifetime.
IRS Resolution
IRS Installment Agreement
A formal payment plan allowing a taxpayer to pay federal tax debt over time. Interest and penalties continue accruing. Several types exist depending on amount owed and circumstances.
Trusts
Irrevocable Trust
A trust that generally cannot be changed or revoked after creation. Can remove assets from the taxable estate but also removes the grantor's control and the stepped-up basis benefit.
L – O
Real Estate
Like-Kind Exchange (1031 Exchange)
A tax-deferral strategy under IRC §1031 allowing investors to sell investment property and defer capital gains by reinvesting in another qualifying property within strict timelines.
IRS Resolution
Offer in Compromise (OIC)
An IRS program allowing eligible taxpayers to settle federal tax debt for less than the full amount owed, based on their Reasonable Collection Potential (RCP).
P
Estate Tax
Portability (Estate Tax)
A federal rule allowing a surviving spouse to use the deceased spouse's unused estate tax exemption — requires timely filing of an estate tax return even if no tax is due.
Probate
Probate
The court-supervised process of administering a deceased person's estate — paying debts and distributing assets. In California, it is public, time-consuming, and costly.
California Law
Proposition 19
California's 2020 ballot measure that significantly restricted the parent-child property tax exclusion, effective February 2021 — eliminating reassessment protection for most inherited property.
R – S
IRS Resolution
Reasonable Collection Potential (RCP)
The IRS formula for calculating the minimum acceptable Offer in Compromise — net asset equity plus future available income over 12 or 24 months, minus allowable expenses.
Trusts
Revocable Living Trust
A trust created during the grantor's lifetime that can be changed or revoked at any time. Avoids probate, maintains privacy, and provides incapacity planning — if properly funded.
Tax Fundamentals
Stepped-Up Basis
When you inherit property, your tax basis is reset to the fair market value at the date of death — eliminating capital gains on pre-death appreciation. Governed by IRC §1014.
T
IRS / Taxpayer Rights
Taxpayer Bill of Rights (TBOR)
The IRS codification of 10 fundamental rights every taxpayer has — including the right to representation, the right to appeal, and the right to a fair hearing.

Disclaimer: All definitions are for general educational purposes only and do not constitute legal or tax advice. Tax laws change frequently. Consult a licensed California attorney or CPA for guidance on your specific situation. Reading this glossary does not create an attorney-client relationship with Bay Legal PC.

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