Chapter 12 - Terms (Nontaxable Income) Flashcards
Adjustment to Income
An expense which may be deducted even in the taxpayer does not itemize deductions. Adjustments to income are subtracted from gross income to arrive at adjusted gross income. Examples include educator expenses, alimony paid, and student loan interest payments.
Alimony payments
Payments made by one spouse to the other spouse, or a former spouse under a written separation or divorce instrument. Qualified alimony and separate maintenance payments are included in the gross income of the recipient and are deductible by the payer. Child support payments and property settlements are not treated as alimony.
Disability Pension
A taxable pension from an employer-funded disability plan or a disability provision of a retirement plan. Until the recipient reaches normal retirement age, a disability pension generally is reported on line 7 of Forms 1040 and 1040A and treated as wages for purposes of the child care, child tax, and EITC.
Educator Expenses Deduction
An adjustment to income for up to $250 for classroom supplies, books, and equipment, for eligible educators of grades kindergarten through 12th grade.
Eligible Educator
Any educator who works at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide in a public or private elementary or secondary school.
Individual Retirement Arrangement (IRA)
A personal retirement savings plan that allows a taxpayer to accumulate money tax-deferred until withdrawal, usually upon retirement. The primary two types of IRAs are traditional IRAs and Roth IRAs.
Modified AGI (MAGI)
Modified adjusted gross income. For the purposes of computing a specific deduction or credit, MAGI begins with the taxpayer’s regular adjusted gross income, which is then modified to account for certain types of losses, exclusions, and deductions. For example, for many tax purposes, MAGI is regular AGI, plus any excluded foreign, US possession, and Puerto Rican income.
Necessary (Expenses)
An expense that is appropriate and helpful in furthering the taxpayer’s business or income-producing activity.
Ordinary (expenses)
Common and accepted in the general industry or type of activity in which the taxpayer is engaged. It is one of the tests for the deductibility of expenses incurred or paid in connection with a trade or business; for the production of income; for the management, conservation, or maintenance of property held for the production of income; or in connection with the determination, collection, or refund of any tax.
Prizes and Awards
The fair market value of a prize or award generally is includable in gross income. An exception applies when a qualified recipient of an award for charitable and the like achievements designates that the prize is to be transferred by the payer to a governmental unit or to certain charitable, educational, or religious organizations. Another exception is made for certain employee achievement awards, such as a traditional gold watch presented upon retirement.
Scholarships and Fellowships
Financial aid grants awarded to students for the purpose of attending college or performing research.
Student loan interest deduction
An adjustment to income (limited to $2500 per return) for interest paid during the year on qualified higher-education loans.
Tax-Exempt Income
Income that, by law, is not subject to income tax.
Traditional IRA
An individual retirement arrangement, contributions to which may or may not be deductible depending on the taxpayer’s AGI and whether or not they are covered under an employer-sponsored retirement plan. Earnings within a traditional IRA grow tax-deferred. Distributions from a traditional IRA are taxable, except to the extent they represent nondeductible contributions and earnings.
