Chapter 8: Other Income/Adjustments

Scholarships and Fellowships

Financial aid grants awarded to students for the purpose of attending a college or performing research.

individual retirement arrangement (IRA)

A personal savings plan that allows a taxpayer to accumulate money tax deferred until withdrawal, usually upon retirement. There are two types of IRAs: traditional IRAs and Roth IRAs, both of which are defined elsewhere in this glossary.

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 or 1040A (or line 1 of Form 1040EZ) and treated as wages for purposes of the child care, child tax, and earned income tax credits.

educator expense deduction

An above-the-line deduction of up to $250 for classroom supplies, books, and equipment, and available to eligible educators of students in kindergarten through 12th grade.

Student Loan Interest Deduction

An adjustment to income (limited to $2,500 per return) for interest paid during the year on qualified higher-education loans. Certain restrictions apply.

Necessary (expenses)

An expense that is appropriate and helpful in furthering the taxpayer's business or income-producing activity. See also Ordinary Expenses.

adjustments to income

An expense which may be deducted even if 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.

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 he is 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.

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.

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.

modified AGI (MAGI)

Modified adjusted gross income. For 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, U.S. possession, and Puerto Rican income.

Alimony Payments

Payments made by one spouse to the other spouse or 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.

Prizes and Awards

The fair market value of a prize or award generally is includable in gross income. An exemption 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 the traditional gold watch presented upon retirement.