Taxation. Exercise 4.

A. Above-the-line deductions: Deductions available to all taxpayers before calculation of adjusted gross income. They include non-employee business expenses, reimbursed employee business expenses, and alimony. The term comes from the way tax forms are designed.

B. Accounting period: A 12-month period of a taxpayer’s financial records, usually the calendar year. Taxpayers may keep records for a fiscal year ending in a month other than December. Changes in accounting period generally require IRS approval.

C. Adjusted gross income: Gross income less specified expenses such as nonemployee business expenses, certain employment-connected expenses and travel expenses. “AGI” applies only to individual returns and is the basis for computing deductible medical expenses, charitable contributions, and nonbusiness casualty and theft losses.

D. Capital gain: Gain realized from the sale or exchange of a capital asset. Depending on the holding period, a capital gain is either long-term or short-term, although this distinction was eliminated by the Tax Reform Act of 1986.

E. Deductions: Expenses which a taxpayer may subtract from gross income to determine taxable income. Deductions include exemptions, “above-the-line” deductions, itemized deductions, and miscellaneous itemized deductions (MID’s).

F. Exclusions: Items or transactions which are wholly or partially omitted from the calculation of income. They are listed in Sections 101-135 ofthe Code. Some items are excluded up to specified maximums; the balance is included.

G. Exemptions: A reduction in a taxpayer’s adjusted gross income based on relationship, dependency, status, or condition. Each taxpayer is allowedat least one exemption. On joint returns, husband and wife receive one exemption each. An exemption is allowed for each dependent,as well as for conditions such as age or blindness.

H. Gross income: All income from whatever source received by a taxpayer which may be subject to tax. Certain very specific items are excluded. The exclusions include gifts and inheritances, interest on state and municipal obligations, etc.

I. Gross receipts: The sum of all money and other consideration received in the sale or exchange of an asset or property. “Other consideration” is valued at fair market.

J. Inclusions: Inclusions are items or transactions which are included in gross income. Various sections of the Code list inclusions, but the fact that an item is not specifically listed does not mean it is not included.

K. Itemized Deductions: A taxpayer can make use of itemized deductions only if the sum of his itemized deductions exceeds the standard deduction. Standard deduction is an amount equal to $5,000 for married couples and $3,000 for single persons, adjusted annually for inflation, plus an additional amount for blind and over-65 taxpayers. The most important itemized deduction is the home interest deduction, since relatively few poor and middle-class taxpayers have other itemized deductions in excess ofthe standard deduction. 

L. Joint return: A tax return filed by a husband and wife containing the income and expenses of each and computing tax on the basis of a special table which reflects a splitting of income.

M. Miscellaneous Itemized Deductions: One class of itemized deductions that the Code disfavors is “miscellaneous itemized deductions” (MIDs). I.R.C. section 67 states that all itemized deductions other than those listed in the Section are MIDs. Not only must MIDs be itemized, which means that non-itemizers cannot use them, but itemizers can use them only to the extent their aggregate MIDs exceed two percent of their AGI.

N. Taxable income: For individual taxpayers, adjusted gross income minus all personal exemptions and minus all allowable deductions. This is the sum to which the tax table is applied.