2006•University of North Texas Digital Library (University of North Texas)Open access
Federal Individual Income Tax Terms: An Explanation
Pamela J. Jackson
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Abstract
The most commonly used terms in discussing the federal individual income tax are described in this report.Most of these tax terms are explained in the order that they occur in the process of determining one's income tax on the Form 1040.Even before sitting down to calculate taxes, however, most individuals have a general idea of their total economic income, which is the broadest measure of all income, whether tax-relevant or not, and is an economic concept rather than one contained in the tax code.Gross income is the sum total of all income required to be reported for tax purposes before adjustments to income are made for special types of expenses which Congress has determined should be considered in calculating gross income.These adjustments function like deductions, except that unlike deductions, adjustments are calculated in arriving at adjusted gross income, and thus can be claimed by all taxpayers, not just those who itemize deductions.An exclusion from income refers to an item specifically excluded from determination of gross income.Adjusted gross income (AGI) equals gross income less qualifying adjustments to income.It serves as the base for computing limits on certain itemized deductions and is the income measurement before deductions and personal exemptions are taken into account.Deductions from adjusted gross income are allowed for certain types of expenditures for which income taxation is deemed inappropriate or inadvisable.Deductions function like adjustments and exclusions in their effect on tax liability.In addition to the standard deduction, an additional standard deduction amount is available to elderly and blind taxpayers.Personal exemptions are allowed for the taxpayer, his spouse and each of his dependents.Exemptions affect tax liability like deductions, adjustments to income, and exclusions.A flow chart illustrating the relationship among the income tax terms discussed in this report appears on the final page.This report will be updated as warranted by legislative events.
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