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Definitions of tax terms: A

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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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.

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.
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.

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.
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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