HS 321 Income Taxation key terms

All income received in any form, whether money, property, or services, unless the tax law specifically excludes it. It is the starting point for computing taxable income.

Gross income minus specific above-the-line deductions, such as certain retirement contributions and self-employment tax. Many tax benefits phase out or are limited based on this figure.

The amount on which tax is actually computed: adjusted gross income minus the standard or itemized deduction and any qualified business income deduction. Tax brackets apply to this figure.

A deduction subtracted in arriving at adjusted gross income, available whether or not the taxpayer itemizes. Examples include deductible IRA contributions and student loan interest within limits.

A fixed deduction amount set by filing status and indexed for inflation, claimed instead of itemizing. It is increased for taxpayers who are blind or age 65 and older.

Allowable personal expenses listed individually on a schedule, such as mortgage interest, state taxes, and charitable gifts. They are claimed only when their total exceeds the standard deduction.

An item of income that Congress removes from gross income by statute, so it is never taxed. Common examples are employer-provided health insurance and qualified fringe benefits.

Postponing recognition of income or a deduction to a later tax year rather than eliminating it. Installment sales and like-kind exchanges produce this treatment.

The event that triggers tax recognition, generally a sale, exchange, or other disposition of property. Mere appreciation in value is not taxed until it is realized.

The taxpayer's investment in property for tax purposes, used to measure gain or loss on sale. It generally starts as cost and is adjusted for improvements and depreciation.

Original basis increased by capital improvements and decreased by depreciation, depletion, or casualty losses. It is the figure subtracted from sale proceeds to compute gain or loss.

The portion of realized gain that must be included in income for the year. It equals amount realized minus adjusted basis, reduced by any nonrecognition provision.

Property held for investment or personal use, excluding inventory, business receivables, and depreciable property used in a trade or business. Sales produce capital gain or loss.

Gain from selling a capital asset, taxed at preferential rates when long-term. Short-term gains are taxed at ordinary income rates.

The length of time a taxpayer owns an asset before sale, which determines whether gain or loss is short-term or long-term. Long-term treatment generally requires more than one year.

Net long-term capital gain reduced by net short-term capital loss, taxed at preferential maximum rates. It excludes gain taxed at ordinary rates under special rules.

Income taxed at regular graduated rates rather than preferential capital gain rates. Wages, interest, rents, and business profits are typical examples.

An annual deduction recovering the cost of tangible business property over its recovery period. It reduces adjusted basis and must follow the prescribed cost recovery system.

An election allowing a business to expense the cost of qualifying tangible personal property in the year placed in service, subject to annual dollar and income limits.

An additional first-year depreciation allowance on qualifying property, applied after the regular depreciation computation. Its percentage depends on the year the property is placed in service.

A transaction in which business or investment real property is exchanged for similar property, deferring gain. The replacement property's basis carries over from the relinquished property.

A disposition in which at least one payment is received after the tax year of sale, spreading gain recognition over the payment periods. Each payment carries a gross profit ratio.

Compensation other than cash wages provided by an employer, such as health coverage or a company car. Many are excluded from income, but some must be included at fair market value.

A doctrine treating income as received when it is made available without substantial restriction, even if the taxpayer does not take it. It prevents taxpayers from choosing the tax year.

An accounting method recognizing income when actually or constructively received and deductions when paid. Certain businesses with inventory must use accrual accounting instead.

An accounting method recognizing income when the right to receive it becomes fixed and deductions when the liability is established. It is generally required for larger businesses with inventory.

The category determining tax brackets, standard deduction, and credit eligibility, such as single, married filing jointly, married filing separately, and head of household.

Tax an employer or payer deducts from wages or other payments and remits to the government on the taxpayer's behalf. It is credited against the taxpayer's total tax liability.

Periodic prepayments of tax made by taxpayers whose withholding does not cover their liability, generally required quarterly. Underpayment can trigger a penalty.

A dollar-for-dollar reduction of tax owed, more valuable than an equal deduction. Credits may be refundable, nonrefundable, or partially refundable.

A credit that can reduce tax below zero and produce a payment to the taxpayer. The earned income credit and the child tax credit's refundable portion are examples.

An itemized deduction for gifts to qualified organizations, limited to a percentage of adjusted gross income. Substantiation rules require written records for most gifts.

A deduction of up to 20 percent of qualified business income from a pass-through entity, subject to wage and income limitations. It is taken below the line.

Social Security and Medicare tax on net earnings from self-employment, computed on a schedule and partly deductible above the line. It applies when earnings exceed a threshold.

A parallel tax system with its own exemption and rate structure that limits the benefit of certain preferences. Taxpayers pay the higher of regular tax or this amount.

A rule that protects a taxpayer from penalty if specified conditions are met, such as paying a set percentage of prior-year tax through withholding and estimates.

A business structure such as a partnership or S corporation that generally pays no entity-level income tax. Income and deductions flow through to owners' returns.