| Definitions
of tax terms: A |
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| 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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A
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D | E
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J | K
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L | M
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| Ability
to Pay |
A principle of
taxation. Individuals who earn more income pay more tax, not
because they use more government goods and services but because
taxpayers who earn more have the ability to pay more. The progressive
tax, or higher tax rates for people with higher incomes,
is based on this principle. |
| Above-the-line
deduction |
A deduction that is not itemized on Schedule
A. Instead, it is subtracted from total income on the
Form
1040 to arrive at a taxpayer's adjusted
gross income. Since the adjusted gross income amount is
entered on the last line of page 1 of the 1040, any tax breaks
used in arriving at this amount -- such as allowable IRA contributions,
student loan interest and moving
expenses -- are known as above-the-line deductions. Above-the-line
deductions can be used by taxpayers who don't itemize
as long as they opt to file the long Form 1040. They also
immediately produce a lower adjusted gross income, which in
turn directly cuts a taxpayer's overall bill because
it is the first step in arriving at the taxable income amount.
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| Accounting
Method |
The method used
by a business or individual to keep records. Most individuals
and small businesses use the cash
method, although businesses that maintain inventory are
required to use the accrual method. See also Accrual
Method or Cash
Method. |
| Accrual
Method |
Business accounting
in which you report income in the year you earned it and expenses
in the year you incur them, rather than reporting income and
expenses when you receive payment or when you pay the expenses.
Under this method, if you built a deck and billed the client
in December 1999, the amount you charged would be reported in
1999 as income even if you didn't get the payment until January
2000. If you own a business that maintains an inventory, you
are required to use the accrual method for purchases and sales.
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| Active
Income |
Active income,
such as wages, tips and profits from your business that you
materially
participate in, and portfolio income, such as interest
and dividends.
Generally, you cannot offset active income with passive
losses. See also Nonpassive
Income. |
| Active
Participation |
Just what it sounds
like: taking an active role in the management of an enterprise.
This is a determining factor for the IRS in rental real estate
issues. The rules for active participation are much easier to
meet than the material
participation rules. An active participant may generally
deduct up to $25,000 of rental real estate losses against other
income. An active participant must not be a limited partner
or own 10 percent or less of the property. See also Material
Participation. |
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| Adjusted
Basis |
The amount you
use to determine your profit or loss from a sale or exchange
of property. To determine your adjusted basis for an asset,
start with the amount you originally paid, add your cost of
improvements and assessments, then subtract deductions you have
taken, such as depreciation
and depletion. |
| Adjusted
Gross Income (AGI) |
A person's entire
income (for example, wages, interest
income, money from
a rental property) after it is reduced by adjustments
(such as contributions to an Individual
Retirement Account or medical
savings account, moving
expenses and alimony paid to an ex-spouse). It is often
referred to in tax publications as AGI, and is used for various
tax payment or credit calculations. |
| Adjustments
to Income |
Adjustments to
income include IRA
contributions; deduction for one-half of self-employment
tax; contributions to a retirement plan for self-employed
individuals (Keogh
plan or self-employed SEP
or SIMPLE
plan); contributions to a medical
savings account; penalty on early withdrawal of savings;
and alimony payments. |
| Adoption
Taxpayer Identification Number (ATIN) |
Parents in the process of a domestic U.S. adoption who do
not have and/or are unable to obtain the child's Social Security
number (SSN) should request an adoption taxpayer identification
number (ATIN) from the IRS to claim the child as a dependent
and (if eligible) to claim the child
care credit. Form W-7A, application for taxpayer identification
number for pending adoptions, is used by qualifying taxpayers
to obtain an ATIN.
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| Ad
Valorem Tax |
A tax based according
to item value only, usually property
tax based on the just or fair
market value of the property. |
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| Allowance
|
This is the number
you put on your Form W-4 so your employer can calculate the
amount of income
tax to withhold
from your paycheck. The more allowances you claim, the less
income tax will be withheld. Usually, you claim one allowance
each for yourself, your spouse and each of your dependents.
However, you can adjust the number of allowances for your situation
-- if you have a lot of deductions
that will reduce your final tax bill, you may want to claim
more allowances so your withholding will be less -- to avoid
having too much or not enough tax withheld. |
| Alternative
Minimum Tax (AMT) |
This tax primarily
affects high-income taxpayers who shelter some of their income
from tax through certain tax
preference items or deductions.
It is often referred to in tax publications as AMT and, if your
income meets the limit, you have to recalculate your tax due
based on the separate alternative minimum tax rates and tables.
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| Amended
Return |
A return filed
to correct a previous year's individual tax return. You must
correct your original filing if, for example, your bank is late
in sending you an earnings statement and you filed your return
without reporting the added income. You also can file an amended
return if you discover you made a mistake or circumstances change
that would allow you to get a refund for a previously filed
return. An amended return is filed on Form 1040X. |
| Annuity |
A regular periodic
payment made by an insurance company to a policyholder for a
specified period of time. Also see Tax-Sheltered
Annuity. |
| Appraisal |
An estimate of
market value placed on all real
property and mobile homes. There are two kinds of appraisal:
mass appraisal, in which a community is valued for tax purposes;
and fee appraisal, in which only one piece of property is appraised,
often in conjunction with other mortgages. Each is accomplished
under a different set of rules and guidelines. |
| Assessed
Valuation/ Assessment |
In reference to
property
taxes, a percentage of a property's market value. |
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