In this season of holiday shopping and rising prices, what could be more welcome than an increase in income? Plenty, depending on who's counting it.

Consider the case of Mary Silverberg, 72, an Alzheimer's disease victim at the Philadelphia Geriatric Center. Silverberg's family was using Medicaid benefits to cover part of her $2,600 monthly nursing home bill when the Pennsylvania Welfare Department suddenly declared her ineligible for the program.

The reason: Silverberg's monthly war reparations from the West German government, which compensate her as a survivor of the Nazi Holocaust, constitute "income," in the department's reading of federal Medicaid rules. Adding $175 to $225 in monthly reparations to Silverberg's income rendered her too wealthy for the need-based assistance program, the state said.

Last week, following a front-page report about Silverberg's case in The Philadelphia Inquirer, a department hearing officer reversed the state's ruling, declaring that war reparations are not part of a Medicaid beneficiary's income.

The case nonetheless illustrates one of the government's time-honored techniques of saving or spending large sums of money -- and thereby affecting the lives of millions of Americans. All it takes is a few fine-print changes in the way an individual's income is defined in an array of federal programs.

In programs based on need, such as food stamps, Aid to Families with Dependent Children, Supplemental Security Income and Medicaid, a small change in the way income is defined can increase or cut benefits for millions of families.

For example, to qualify for food stamps, families must have net income below the federal poverty level ($11,200 a year for a family of four) or gross income below 130 percent of the poverty level.

New York food stamp officials recently jolted thousands of families when they expanded the definition of income to include the value of shelter at New York City's welfare hotels for the homeless. This shelter was estimated to be worth $270 a month -- or $3,240 a year, more than a quarter of the threshold for families of four.

More than 10,000 families in the city saw their benefits reduced or halted, according to the Food Research and Action Council, before Congress reversed the practice in legislation this year.

Some federal definitions defy logic. In the Medicaid program, the government has tried to count court-ordered child support payments as income both to the spouse who receives them and the one who pays. This understandably puzzled the 9th U.S. Circuit Court of Appeals, which ruled in September that the government cannot force the policy on California Medicaid officials.

"Clearly the income is available to only one person, either the payer or the payee," the court lectured. The ruling applies only in the Ninth Circuit.

Definitions of income are quick to change when a new administration comes to town, seeking to swing the pendulum of policy in a new direction. In 1981, when Congress and the administration moved to cut welfare programs, the definition of income under the food stamp program was broadened to include, among other things, the assets of more family members.

Last year, Congress took a small definitional step to loosen the purse strings. In legislation passed in 1986, Congress narrowed the meaning of income for food stamps recipients to exclude federal educational assistance used for books, supplies and transportation. This wordsmanship adds up to $10 million in extra food stamps for students this fiscal year, according to the Congressional Budget Office.

As in the case of Holocaust survivor Mary Silverberg, the circumstances of individual recipients often move program officials to make far-reaching extrapolations. Virginia officials, for example, had to deal with an impoverished welfare recipient who suddenly received a large cash sum in a personal injury case.

Should this sum be considered income only for the month in which it was received, over a period of months, or did it belong in a category separate from income? The U.S. Supreme Court ruled earlier this year that nothing in federal law stops Virginia from counting the injury award as income. As a result, the state now counts such cash awards for as many months as they exceed the threshold income level for welfare.

Definitional devices were a favored tool of the Grace Commission, a business group that proposed thousands of ways to cut the federal deficit in President Reagan's first term. Led by industrialist J. Peter Grace, the group proposed, among other things, to save the federal government $500 million a year by counting a low-income child's school lunch payment as income, thereby reducing food stamps payments to many families.

Congress decided to pass up this idea.

Ironically, Grace came under fire soon afterward for profiting from other little-noticed definitions. His $6 billion-a-year conglomerate, W.R. Grace & Co., had avoided paying federal income taxes for a number of years thanks to provisions in the Internal Revenue Code allowing businesses to exclude certain kinds of income from taxation.

Indeed, no federal program affects more Americans than the Internal Revenue Code -- about 100 million individuals pay income taxes -- and nowhere is the definition of income more subject to change than in federal tax law.

Since the dawn of taxation, payments of wages and salaries have been considered income for tax purposes. But until 1984, payments from Social Security were not. That year, Congress changed the definition so that, for families with gross incomes exceeding $32,000 before Social Security, half of the benefit became taxable.

Countless income definitions were up for grabs in the Tax Reform Act of 1986 as lawmakers struggled to find ways to recoup billions of dollars in tax cuts with backdoor tax increases. For example, Congress voted that interest on certain municipal bonds was not income. Neither was employe-paid health insurance even though self-employed Americans buy their insurance out of their after-tax earnings.

But in one of its more controversial tradeoffs, Congress decided that fellowships and scholarships won by students are income -- at least to the extent that they exceed course-related expenses. In 1988, this meant that students, long exempt from taxation of fellowships and scholarships, will pay an extra $64 million in taxes, according to estimates.

As the federal deficit looms ever more ominous, such word games are certain to proliferate. "It's a continuing irritation to us," said Roger Schwartz of the National Health Law Program, a Medicaid advocacy group.