Specializing in federal income taxes, 1040, 1040ez, and 1040A.

2007 Federal Income Tax "The Advantage of Tax Knowledge"

What do these tax terms mean?

Adjusted gross income. Your income after certain allowable adjustments from your gross income, such as IRA contributions, alimony paid, moving expenses, and Keogh account contributions. You use your AGI amount as a basis for various calculations, including determining the limitations on your itemized deduction. These deductions are done before standardized and itemized deductions and personal exemptions are made. See AGI Calculator.

Gross income includes wages, interest income, dividend income, income from certain retirement accounts,capital gains, alimony received, rental income, royalty income, farm income, unemployment compensation, and certain other kinds of income.

Adjustments to income. Deductions that are subtracted from gross income in figuring adjusted gross income. They include deductions for moving expenses, alimony paid, a penalty on early withdrawal of savings, and contributions to an individual retirement arrangement (IRA). Adjustments to income can be taken even if itemized deductions are not claimed.

Alternative minimum tax. A tax designed to collect at least a minimum amount of tax from taxpayers who benefit from the tax laws that give special treatment to certain kinds of income and allow deductions and credits for certain kinds of expenses.

Capital gain distribution. An allocated amount paid to, or treated as paid to, a shareholder by a mutual fund, regulated investment company, or real estate investment trust from its net realized long-term capital gains. This amount is in addition to any ordinary dividend paid to the shareholder. You will receive a statement from the payer if this applies to you.

Dependent. A person, other than the taxpayer or the taxpayer's spouse, for whom an exemption can be claimed. To be your dependent, a person must be your qualifying child or qualifying relative. For more information, see See Qualifying Child and/or Qualifying Relative.

Earned income. Salaries, wages, tips, professional fees, and other amounts received as pay for work actually done.

Exemption. An amount ($3,300 for 2006) that can be subtracted from income in figuring how much income will be taxed. Exemptions generally are allowed for the taxpayer, the taxpayer's spouse, and dependents.

Gross income. All income from all sources (other than tax-exempt income) that must be included on your tax return.

Investment income. The IRS calls it unearned income. The earnings from your savings accounts, stocks and bonds, certificates of deposit and mutual funds.

Itemized deductions. Deductions allowed on Schedule A (Form 1040) for medical and dental expenses, taxes, interest, charitable contributions, casualty and theft losses, and miscellaneous deductions. They are subtracted from adjusted gross income in figuring taxable income.

Net capital gain. Gains and losses are fully part of adjusted gross income (AGI), with the exception that if your net capital loss exceeds $3,000, you can only take $3,000 of the loss in a tax year and must carry the remainder forward. Carried-over losses are used to reduce capital gains in a future year, and can be carried over until all used up. If you die with carried-over losses, they are lost. Net investment income. The total of all investment income (other than tax-exempt income) reduced by the sum of the following: adjustments to income related to the investment income, plus the larger of: $850 plus itemized deductions directly connected with producing the investment income, or $1,700.

Qualified dividends. Investors "must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date". The tax rate on qualified dividends is 5% or 15% (depending on the individual's income tax rate). If the individual has a regular income tax rate of 25% or higher, then the qualified dividend tax rate is 15%.

Qualifying child. To be your dependent (defined earlier), a person must be either your qualifying child or your qualifying relative (defined next). Generally, a person is your qualifying child if that person: Is your child, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them, Lived with you for more than half of the year, Did not provide more than half of his or her own support for the year, and Was under age 19 at the end of the year (or was under age 24 at the end of the year and a student, or was any age and permanently and totally disabled).

Qualifying relative. To be your dependent (defined earlier), a person must be either your qualifying child (defined earlier) or your qualifying relative. Generally, a person is your qualifying relative if that person: Lives with or is related to you, Does not have $3,300 or more of gross (total) income, Is supported (generally more than 50%) by you, and Is neither your qualifying child nor the qualifying child of anyone else.

Standard deduction. An amount (based on filing status, age, and blindness) that can be subtracted from adjusted gross income in figuring taxable income. The standard deduction is not used if itemized deductions are claimed.

Tax year. The time period covered by a tax return. Usually this is January 1 to December 31, a calendar year, but taxpayers can elect a fiscal tax year with different beginning and ending dates.

Taxable income. Gross income minus any adjustments to income, any allowable exemptions, and either itemized deductions or the standard deduction.

Unearned income. Income other than earned income. This is investment-type income and includes interest, dividends, and capital gains. Distributions of interest, dividends, capital gains, and other unearned income from a trust are also unearned income to a beneficiary of the trust. However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income.

28% rate gain. Gain from the sale of collectibles and, generally, the taxable part of your gain from the sale of qualified small business stock held more than 5 years.