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Cynthia K Heidebrecht, CPA

Glossary of Terms

Abatement:   A reduction in or reprieve from a tax, debt or any other payment obligation. An abatement is sometimes included in a contract, for example abatement of rent in the event that a building is destroyed by fire, flood or other accident.

Above the line deductions:   Above the line deductions are certain types of deductions that are subtracted from your income before the adjusted gross income is calculated for tax purposes. Above the line deductions include such items as losses on a property sale, alimony payments and educational expenses. Since above the line deductions are generally deducted from taxable income, they are advantageous to taxpayers in the sense that they reduce the overall tax burden.

Adjusted Gross Income:   AGI. The amount used in the calculation of an individual's income tax liability; one's income after certain adjustments are made, but before standardized and itemized deductions and personal exemptions are made.

Alternative Minimum Tax:   AMT. An IRS system created to ensure that high-income individuals, corporations, trusts, and estates pay at least some minimum amount of tax, regardless of deductions, credits or exemptions. It functions by adding certain tax-preference items back into adjusted gross income. While it was once only important for a limited number of high-income individuals who made extensive use of tax shelters and deductions, more and more people are being affected by it. The AMT was introduced in 1969, and was originally intended only to affect 155 U.S. households, but by 2010 it is projected that up to 20% of households may be affected by AMT. The AMT is often triggered when there are large numbers of personal exemptions on state and local taxes paid, large numbers of miscellaneous itemized deductions or medical expenses, or by Incentive Stock Option (ISO) plans. The AMT has become one of the most controversial tax mechanisms in existence.

Below the line deductions:   Deductions which the Internal Revenue Service allows a taxpayer to subtract from his or her gross income in arriving at "adjusted gross income" for the taxable year. These deductions are set forth in Internal Revenue Code Section 62. A taxpayer's gross income minus his or her above-the-line deductions is equal to the adjusted gross income. Because these deductions are taken before adjusted gross income is calculated, they are termed "above-the-line." Thus, those deductions allowed in computing "taxable income" under section 63 of the IRC are termed "below the line deductions" (thus, adjusted gross income represents "the line"). Above-the-line deductions are considered more valuable to taxpayers than below-the-line deductions.

Certified Management Accountant:   CMA. An accountant who specializes in the study of how managers use accounting and/or financial information in current or future business decisions. Management accountants use both qualitative and quantitative information in their work. Unlike other accountants, they primarily report to the internal management of a company, rather than to an external body like shareholders or tax collection agencies. In order to become a certified management accountant, one must pass a series of tests sponsored by the Institute of Management Accountants. These tests examine one's knowledge in four subjects: business analysis, management accounting and reporting, strategic management, and business applications.

Certified Internal Auditor:   CIA. A certification offered to accountants who conduct internal audits. Certified Internal Auditors (CIA) must meet several requirements to obtain this designation, such as passing a four-part exam that covers all issues, risks and remedies that pertain to internal audits. The Certified Internal Auditor designation is conferred by the Institute of Internal Auditors (IIA) and is the only such credential that is accepted worldwide.

Certified Public Accountant:   CPA. An individual who has passed the uniform CPA examination administered by the American Institute Of Certified Public Accountants, and who has received state certification to practice accounting. To achieve this designation, an individual usually has to complete 5 years of education, and a certain degree of work experience. Additionally, once an individual becomes a CPA, they typically must complete a certain number of hours.

Capital Gains:   The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain. For most investments sold at a profit, including mutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed money called capital gains tax. opposite of capital loss.

Cost basis:   1. Purchase price, including commissions and other expenses, used to determine capital gains and capital losses for tax purposes.

2. The cost of an asset used to determine tax liabilities. This number is the purchase price, including capital gains and losses, accrued interest, and other fees. also called tax basis.

3. The difference between the cash price and the futures price of a given commodity.

Earned Income:   Compensation from participation in a business, including wages, salary, tips, commissions and bonuses. opposite of unearned income.

Fixed Asset:   A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture. also called plant.

Individual Retirement Accountant:   IRA. A tax-deferred retirement account for an individual that permits individuals to set aside money each year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or later (or earlier, with a 10% penalty). IRAs can be established at a bank, mutual fund, or brokerage. Only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make deductible contributions to an IRA. All others can make contributions to an IRA on a non-deductible basis. Such contributions qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn. A participant is able to roll over a distribution to another IRA or withdraw funds using a special schedule of early payments made over the participant's life expectancy.

Interest:   1. The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate. Here, interest per year divided by principal amount, expressed as a percentage. also called interest rate.

2. The return earned on an investment.

3. Partial or total ownership in an asset.

Net Investment Income:   The income or loss of a portfolio or business minus all expenses, including portfolio and asset management fees, but before gains and losses on investments are considered.

Passive Loss:   Loss from a passive activity; losses from rents, royalties, interest, and dividends.

Marginal Tax Rate:   The ordinary rate of income tax charged on the last dollar of income; generally used to estimate calculations for investment decisions.

Medicare Surtax:   A surtax or add-on tax on your “Net Investment Income” to any taxpayer above an specific income threshold.

Rent:   Payment, usually monthly, for use of space or property

Required Minimum Distribution:   RMD. The minimum annual required distribution amount for an IRA holder who reaches age 70 1/2. also called minimum distribution.

Tax Credit:   The direct dollar-for-dollar reduction of an individual's tax liability; compare with tax deduction, which reduces an individual's tax liability only in proportion to his/her tax bracket.

Tax Deferral:   Paying taxes in the future for income earned in the current year, such as through an IRA, 401(k), SEP IRA or Keogh Plan.

Tax Exempt Income:   Not subject to taxation.

Unearned Income:   An individual's income derived from sources other than employment, such as interest and dividends from investments, or income from rental property. also called unearned revenue. opposite of earned income.

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