subtracted from your total income to arrive at adjusted gross income (AGI) on your tax return. Above-the-line deductions
are allowed whether or not a taxpayer itemizes his personal deductions or takes the standard deduction. See also below
the line and adjusted gross income.
accelerated depreciation: Depreciation is the system used to distribute the expense of an asset (property, plant, or
equipment) over its estimated useful life. Accelerated depreciation is a method that deducts the cost of an asset faster
than straight-line depreciation, which takes an equal deduction every year over the asset's life.
accounting method: The system used to determine income and expenses for financial statements and tax returns. The
most common methods are the cash method and the accrual method.
accountable plan: Under tax rules, if an employee receives travel money from his or her employer under an accountable
plan, the amount is excluded from the employee's gross income and is not subject to payroll taxes. An accountable plan
requires the employee to turn in receipts to his employer documenting how money advanced to him was spent. Any
excess advance must be returned to the employer, or it is included in an employee's taxable income.
accounting period: The period of time represented in a profit and loss statement; for example, monthly, quarterly, or
annual income statements. For income tax purposes, businesses must choose a "tax year," the annual accounting period
they use for reporting income and expenses on their tax return.
account payable: An unpaid invoice for the purchase of merchandise, supplies, and services, usually shown on a
balance sheet as due within one year.
account receivable: A specified dollar amount due to you by another (typically customers), usually shown on a balance
sheet as due within one year.
accrual method: An accounting method that records a sale when it is made rather than when the cash is actually
received and that records an expense when it occurs rather than when it is actually paid. See also cash method.
accrued expense: An expense and corresponding liability recorded on the books as it occurs, although the obligation
will be paid at a later date. For example, recording December's wages and bonuses on the December books when the
payroll is actually paid in January.
accrued income: Recording as an asset income earned this accounting period that will be received (hopefully in cash) at
some later date. For example, an inventory item is sold on open account in the current accounting period, with the
expectation that the money will be received at a later date.
accumulated depreciation: Depreciation is the system used to distribute the expense of an asset (property, plant, or
equipment) over its estimated useful life. Accumulated depreciation is an account in the asset section of the balance
sheet that shows the total amount of depreciation that has been taken on a company's combined assets as of the balance
sheet date. For example, assume your company has only one building worth $60,000 on which you are taking a $2,000
per year depreciation expense. At the end of five years, the accumulated depreciation account will show $10,000. This
balance is shown on the balance sheet immediately after the building account to show that the net book value, or adjusted
basis, of the building is $50,000.
acid test: This is a ratio of your ready-cash items (cash, accounts receivable, and marketable securities) to your current
liabilities. A higher ratio of ready cash items over current debts usually indicates a healthier company, one more likely to
meet its current obligations.
active participant: A taxpayer who is covered by an employer-maintained qualified retirement plan or a qualified
self-employed retirement plan. If you are an active participant for even a single day in the tax year, your traditional IRA
contribution may not be tax-deductible or your deduction may be limited. See also qualified retirement plans.
actuary: A person who calculates statistical risks, premiums, and life expectancies usually for insurance purposes.
actuarial: Having to do with the mathematics, statistics, and risk in the pension or insurance business.
adjustable rate mortgage (ARM): A mortgage with an interest rate that changes with some predetermined index (such
as the consumer price index), and at predetermined intervals.
adjusted basis: Adjusted basis is used to compute the gain or loss on the sale of an asset for income tax purposes. It
generally represents the cost of the asset plus the cost of any capital improvements, minus any deductions taken, such as
depreciation. See also accumulated depreciation and cost basis.
adjustment to income: An expense that may be deducted on a tax return even if a taxpayer does not itemize personal
deductions. See also adjusted gross income and above the line.
adjusted gross income (AGI): An income tax term meaning your gross income from all sources minus certain specified
items. AGI is often used to determine other allowable tax credits and adjustments. See also above the line.
adjusting journal entries: A bookkeeping entry to correct an error or to record such items as accrued income, accrued
expenses, depreciation, bad debts, etc.
alimony: Payments made by one spouse to a former spouse under a legal separation or divorce agreement. Alimony
payments are taxable income to the recipient and tax deductible for the taxpayer making the payment.
alternative minimum tax (AMT): The tax laws that are designed to make sure that certain high-income taxpayers paid at
least a reasonable amount of income tax. Because the AMT computation is not indexed for inflation, many more
middle-income taxpayers are getting caught by this tax every year. Think of the alternative minimum tax as a separate tax
system that runs parallel to the regular tax system. The AMT requires you to adjust your taxable income to disallow certain
deductions and credits allowed by the regular tax. If your AMT turns out to be higher than your regular tax computation,
you pay the AMT.
amended return: An amended income tax return allows taxpayers to correct the income, deductions, and credits
reported in error or omitted on their original return. Generally, taxpayers have three years from the tax return due date,
including extensions, to file an amended return. However, any period taxes that have not been paid are also eligible to be
amended".
amortization: A book entry to record the gradual reduction of an account value. It is most often used to describe the
reduction in a debt. To amortize a debt is to make payments over a period of time. For tax purposes, certain expenses
(such as loan fees) are required to be capitalized or deducted over a fixed period of time. Amortization refers to the
expense deduction. Similar to depreciation but involving intangible assets rather than tangible ones.
amount realized: The amount received by a taxpayer on the sale or exchange of property. It is the sum of cash, fair
market value of property or services received, and the amount of debt assumed by the purchaser.
annuitant: A person who receives a pension or annuity.
annuity: A series of payments. The right to receive a series of payments over a specified time such as monthly payments
for a set number of years, or a lifetime annuity which runs until the death of the recipient. A joint and survivor annuity ends
on the death of the last joint owner.
APR (annual percentage rate): The Truth in Lending laws require lenders to show you the APR. This figure takes into
account the interest rate shown on the contract as well as points, fees, interest on interest, and any other adjustments. It is
designed to show the true cost of the loan. A 9% annual interest rate compunded monthly yields a 9.38% APR.
ARM: See adjustable rate mortgage.
articles of incorporation: Documents filed with the Secretary of State in the state where a corporation is being formed.
The Articles give the name of the corporation, the incorporators, addresses, and the amount of capital stock authorized to
be issued. (Your attorney would be glad to expand on this definition if you need more information.)
assessed value: The value of your property for property tax purposes, usually determined by a county assessor who
assigns a separate value for land and improvements.
asset: Items you own, both tangible (real estate, vehicles, equipment, and other personal property) and intangible
(patents, trademarks, etc.).
at-risk rules: The at-risk rules limit your income tax loss from an activity to the amount you could actually lose. For
example, if your total investment risk in a partnership is $20,000, you are limited to a total of $20,000 of tax losses from
that partnership. The rules apply to individuals, partners in a partnership, and shareholders in S corporations.
audit: In accounting, the examination of books and original documents to determine the completeness and fairness of
information presented in financial reports with the intent of issuing audited financial statements. The fairness of
accounting information is measured by generally accepted accounting principles (GAAP) published by the American
Institute of Certified Public Accountants.
audit: In tax, an audit is an IRS or other tax jurisdiction examination of your tax return or other financial records,
performed in an effort to verify whether a taxpayer is correctly reporting transactions that have tax consequences.
away-from-home expenses: An income tax term used in determining the deductibility of certain travel expenses. Away
from home in this sense does not normally mean away from your personal residence, but rather your principal place of
employment. You must be away from home for a period longer than an ordinary working day for expenses to be
deductible.
