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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

2. 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.

3. Active income -- Income from endeavors materially (actively) participated in, for instance salary, wages, bonuses and business income. Generally, you cannot offset active income with passive losses.

4. Ad valorem tax -- A tax based according to item value only, usually real estate or personal property tax based on the just or fair market value of the property.

5. Adjusted gross income (AGI) -- All the income you received over the course of the year, such as wages, interest, dividends and capital gains, minus things such as business expenses, contributions to a qualified IRA, moving expenses, alimony and capital losses. The adjusted gross income is used to calculate federal income tax.

6. 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 to lower the amount withheld for taxes.

7. AMT -- Alternative minimum tax. This tax was originally designed to target 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 liability based on separate alternative minimum tax rates, tables and rules. Because the amount of income subject to AMT is not automatically adjusted for inflation, in recent years Congress has passed last-minute legislation to increase the threshold so that middle-income taxpayers remain unaffected by this tax.

8. Backup withholding -- Tax withheld from investment income, such as interest and dividends, to ensure that tax is collected on the income. Banks and other organizations are required to report to the IRS all interest and dividend payments you received, along with your Social Security number or other taxpayer identification number. If you don't give them correct reporting information they are required to withhold a certain percentage of your investment income. The IRS may also require the bank or other organization to withhold tax if it determines you have underreported your investment income. If backup withholding is taken out of your earnings, it will show up as "Federal income tax withheld" on the Form 1099-INT or Form 1099-DIV that the bank sends you each January.

9. Basis -- Also referred to as cost basis, this is the amount assigned to an asset from which a taxpayer determines capital gain or loss. For assets purchased, the basis is the price paid. Special rules apply to assets acquired through gift or inheritance, as well as to the value of stock funds held for a period during which earnings are reinvested. The cost basis for real estate property is the original price paid plus any improvements made on it since purchase.

-- Posted: Dec. 17, 2007
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