A Glossary of Tax Terms

When tax season rolls it around, it helps to be familiar with a few common tax terms.

| March/April 1985

Tax accounting has a language all its own. You may never learn to speak it like a native, but knowing a few tax terms will help you feel less like a foreigner in your own country.

Accelerated cost recovery system (ACRS): A method of depreciation for 3-, 5-, 10, and 18-year property wherein the full percentage is allowed in the first year (no matter when during the year the property was purchased), varying percentages are allowed (as specified in the instructions for Form 4562) in subsequent years, and no percentage is allowed in the last year. Each year's percentage is set by the IRS.

Accrual accounting: An accounting system wherein income and expenses are listed at the time of service, not of payment. Under accrual, you count income you've earned but not yet received and expenses you've incurred but not yet paid bills for. You can't switch methods of accounting without permission from the IRS.

Adjusted gross income: The amount of your total income that remains after adjustments—such as moving expenses, employee business expenses, IRA or Keogh payments, penalties for early savings withdrawals, alimony paid, deductions for married couples with both working, and disability income exclusion—are subtracted. This amount must be reported on line 33 of Form 1040 and precedes either itemized deductions or the standard exclusion.

Allocation: A process wherein an expense is divided between two situations. One part may be deductible while the other isn't. For example, a portion of the total cost of driving your personal automobile may be deductible as a business expense: The total cost of driving the car is allocated.

Amortization: A process similar to depreciation wherein income (such as bonds bought at discount) or expense (such as business startup costs) is spread over several tax years.

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