The Accelerated Cost Recovery System (ACRS) is a depreciation method introduced by the Economic Recovery Tax Act of 1981 that allows taxpayers to recover the cost of an asset over a specified life that is shorter than the actual useful life of the asset, thereby reducing taxable income in the earlier years of an asset's life.
An accounting method refers to the rules a company follows in reporting revenues and expenses, which are crucial for computing income and determining taxable income.
Accrual Basis or Accrual Method is an accounting method whereby income and expense items are included in taxable income or expense as they are earned or incurred, even though they may not yet have been received or actually paid in cash.
An intermediate step in calculating taxable income, AGI is the amount used for computing deductions based on, or limited by, a percentage of income, such as medical expenses, charitable contributions, and miscellaneous itemized deductions. This amount is determined by subtracting from gross income any business expenses and other deductions, such as KEOGH payments, alimony payments, and IRA contributions.
In the USA, the difference between the gross income of a taxpayer and the adjustments to income, which is an essential figure for multiple tax computations.
Annual earnings represent the amount of profit a business or individual realizes in one fiscal year. The concept is crucial for financial performance assessment, taxation, and strategic planning.
Annualization is a process outlined in the Internal Revenue Code in the United States, where taxable income for part of a year is extended or 'annualized' to a full year by multiplying it by 12 and dividing by the number of months involved. This computation gives a standardized monthly income amount for tax-related purposes.
In the UK, the basic rate of income tax is the lower band of income tax rates, currently set at 20%. This rate applies to the first £32,000 of taxable income for the 2016-2017 tax year.
A below-the-line deduction, also referred to as an itemized deduction, is a tax deduction that taxpayers can claim on their federal income tax returns. These deductions are subtracted from a taxpayer's adjusted gross income (AGI) to determine their taxable income, ultimately reducing the amount of tax owed.
Cash surrender value refers to the amount a policyowner is entitled to receive from an insurance company upon surrendering a life insurance policy with cash value. This sum is the cash value stated in the policy minus any surrender charges and outstanding loans with interest.
Casualty loss refers to the loss of property due to events such as fire, storm, shipwreck, or theft. Such losses are allowable as deductions from taxable income, net of any insurance reimbursements. To qualify, the loss must result from a sudden, unexpected, or unusual event. Personal casualty losses can be deducted only if they exceed a $100 floor and 10% of adjusted gross income.
A corporation that dissolves before realizing a substantial portion of the taxable income to be derived from its properties. The Internal Revenue Service (IRS) treats the gain on the sale or liquidation of a collapsible corporation as ordinary income to the stockholder.
In calculating a corporation's Current Earnings and Profits (E&P), nontaxable or tax-exempt income is added to the taxable income for the tax year. Current E&P, if not paid out, transitions into Accumulated E&P. Distributions are first taken from current E&P, and then from accumulated E&P. These distributions are taxable to shareholders to the extent of current and accumulated E&P.
Debt Discharge Income refers to the forgiven portion of outstanding debt that becomes taxable income to the borrower, subject to specific exemptions.
Deductions from Gross Income refer to the allowable reductions from an individual's gross income to arrive at their taxable income, applicable within the framework of personal income tax.
A Dependency Exemption allows taxpayers to deduct a specified amount for each dependent claimed on their tax return, reducing their overall taxable income. It is designed to assist families by acknowledging the financial responsibility involved in supporting dependents.
Earnings and Profits refers to the economic capacity of a corporation to make a distribution to shareholders that is not considered a return of capital. If distributed, it constitutes a taxable dividend to the shareholder to the extent of current and accumulated earnings and profits.
Education expenses can potentially be tax-deductible as miscellaneous itemized deductions, provided certain conditions are met.
An overview of the various forms used for individual U.S. income tax returns, including Form 1040, 1040A, and 1040EZ, their specific requirements, and use cases.
Gross Income refers to the total earnings from all sources before any deductions or taxes. It encompasses income from employment, self-employment, rental property, alimony, child support, public assistance payments, and retirement benefits.
Ground rent is the revenue generated by leasing out a piece of land. It is considered ordinary income for tax purposes but can be reclassified in some circumstances.
A higher rate of income tax is applied to individuals with taxable income exceeding certain thresholds, different from the basic rate of income tax. In 2016-17, it was levied at 40% on income over £32,000, with an additional rate of 45% for income beyond £150,000.
Illegal income refers to earnings derived from activities that are against the law, such as theft or embezzlement. These earnings are considered taxable income and must be reported to tax authorities.
Income represents an economic benefit, encompassing money or value received over a period. It is a crucial concept in various domains like accounting, taxation, and economics.
A direct tax on an individual’s income, generally levied at progressive rates, with income classified under various headings as per UK tax legislation.
Income tax schedules refer to detailed tables that list the tax rates or tax brackets applicable to various ranges of income levels. These schedules are used to determine the amount of tax payable by individuals and corporations.
Itemized deductions are specific, individualized tax deductions allowed under provisions of the Internal Revenue Code and state and municipal tax codes for particular expenses incurred by the taxpayer during the taxable year. These deductions are permitted in computing taxable income, but there is an overall limitation on certain itemized deductions. An alternative to itemizing deductions is to claim the standard deduction.
Net income, also known as net earnings or net profit, is the sum remaining after all expenses have been fulfilled. It serves as a crucial metric that indicates a company's profitability.
Nontaxable interest refers to interest income derived from certain sources that is excluded from federal taxable income, such as interest on state and municipal debt obligations.
An overview of the personal allowance entitlement for individual residents in the UK for calculating their taxable income for income tax purposes.
In determining taxable income, an individual taxpayer is entitled to a deduction for each allowable personal exemption. This exemption reduces the amount of income subject to tax and can be claimed for the taxpayer, their spouse, and each dependent.
Phantom income refers to income that is taxable even though the taxpayer has not received equivalent cash or financial benefit. This situation often arises in leveraged real estate transactions where excess depreciation over mortgage amortization leads to a taxable gain without cash flow.
Prepaid income refers to rents, interest, or other forms of compensation received in advance for services or deliveries to be provided at a later date. It is generally included in taxable income in the year it is received.
In the context of tax-free exchanges, a recognized gain is the portion of a gain that becomes taxable. While a realized gain represents the total profit from the sale or exchange of an asset, the recognized gain is the part that the IRS considers taxable income.
The process of returning cash or a check, typically by the IRS or state tax agency, when the taxpayer's withholding and estimated tax payments exceed their tax liability for the year.
A security deposit is a nontaxable cash payment received by a landlord to be held during the term of a lease to offset damages incurred due to actions of a tenant.
A system that enables taxpayers to assess their own income tax and capital gains tax liabilities for the year. Since 1996-97, self-assessment has become a significant component of the UK tax return system, encapsulating details on taxable income, chargeable gains, and claims for personal allowances.
Severance pay is an income bridge provided by some employers for employees transitioning from employment to unemployment. The amount is negotiable and taxable in the year received.
Sick pay refers to payments made to an employee to replace wages during periods of absence due to illness or personal injury. It includes payments from various sources such as employer, welfare funds, and state sickness or disability funds.
The Specific Identification inventory method considers the sale and cost of each item specifically. It is particularly useful for investors managing securities acquired at different costs, providing flexibility in reporting taxable income.
Statutory total income refers to the aggregate amount of income that is subject to taxation according to the relevant laws and regulations. It encompasses total income from various sources such as salaries, business income, capital gains, and other categories defined by tax legislation.
The specified domain on which a tax is levied, such as an individual's income for income tax, the estate of a deceased person for inheritance tax, and the profits of a company for corporation tax.
A tax-deductible expense can be used to reduce taxable income, resulting in a lower tax liability. Common examples include interest on housing, ad valorem taxes, depreciation, repairs, maintenance, utilities, and other ordinary and necessary business expenses.
A tax deduction reduces the amount of income subject to tax, thereby decreasing the total tax bill for individuals or businesses. Tax deductions can encompass a wide range of expenses, from mortgage interest to medical expenses.
Tax Rate Schedules provide predefined percentages applicable to various income ranges, crucial for the taxation process of individuals and entities. These schedules must be utilized by taxpayers with taxable income of $100,000 or more, while others typically use detailed tax tables.
Denoting an amount that can be deducted from income or profits, in accordance with the tax legislation, before establishing the amount of income or profits that is subject to tax.
A detailed explanation of taxable income, along with examples, related terms, frequently asked questions, online resources, and further reading materials.
