Bankrate's financial glossary
Did you run across an unfamiliar term when applying for a mortgage, credit card
or auto loan? Find the meaning here, along with definitions of other financial words
and phrases, in Bankrate.com's financial glossary.
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.
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
Accelerated cost recovery system
Commonly referred to as ACRS (prounounced "acres"), a method of depreciating property rapidly for tax purposes. ACRS property is divided into classes and each class has a predetermined time period over which it may be depreciated. ACRS generally is used for property placed in service after 1980 and by Dec. 31, 1986. Subsequent property must be depreciated under the Modified Accelerated Cost Recovery System (MACRS).
A bookeeping method that allows an owner to deduct a greater portion of the cost of depreciated property in the years right after it is bought.
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."
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 tax purposes.
A loan you get to build your house, a loan to buy your house or any loan you take out to substantially improve your home. Interest paid on such a loan is generally tax-deductible.
Tax shorthand (pronounced "acres") for Accelerated Cost Recovery System, a depreciation method used to figure the deductions allowed over the life of tangible property. ACRS property is divided into classes and each class has a predetermined time period over which it may be depreciated. ACRS generally is used for property placed in service after 1980 and by Dec. 31, 1986. Subsequent property must be depreciated under the Modified Accelerated Cost Recovery System (MACRS).
In an income tax sense, active income means 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 nnpassive icome.
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.