Tax Glossary
93 essential US tax terms explained in plain language. Whether you are filing your first return or optimizing a complex situation, this glossary has you covered.
Income & Employment
1099
A family of IRS tax forms used to report income other than wages, such as freelance earnings (1099-NEC), interest (1099-INT), dividends (1099-DIV), and more.
Read more →Additional Medicare Tax
An extra 0.9% Medicare surtax on earned income above $200,000 (single) or $250,000 (married filing jointly). Unlike regular Medicare tax, it is not matched by employers.
Read more →Adjusted Gross Income (AGI)
Your gross income minus specific adjustments such as student loan interest, IRA contributions, and self-employment tax. AGI is the starting point for calculating your taxable income.
Read more →Effective Tax Rate
Your total federal income tax divided by your total income, expressed as a percentage. It represents the average rate at which your income is actually taxed.
Read more →FICA
Federal Insurance Contributions Act taxes that fund Social Security (6.2%) and Medicare (1.45%). Both employees and employers pay FICA, totaling 15.3% on wages.
Read more →Filing Status
Your tax classification based on marital and family situation — Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Surviving Spouse.
Read more →Gross Income
The total of all income you receive during the year before any deductions or adjustments. Includes wages, interest, dividends, rental income, and business income.
Read more →Marginal Tax Rate
The tax rate applied to your last (highest) dollar of taxable income. It indicates how much tax you would pay on an additional dollar of earnings.
Read more →Medicare Tax
A 1.45% payroll tax on all wages with no income cap, matched by employers. High earners pay an Additional Medicare Tax of 0.9% on wages over $200,000 (single).
Read more →Pay-As-You-Go (PAYG)
The US tax system requires taxes to be paid throughout the year as income is earned, either through employer withholding or quarterly estimated tax payments.
Read more →Rental Income
Money received for the use of property you own, including rent payments, advance rent, and security deposits applied to rent. Rental income is generally taxable and reported on Schedule E.
Read more →SE Tax Base (92.35%)
Self-employment tax is calculated on 92.35% of net self-employment income, not the full amount. This adjustment mirrors the fact that employees do not pay FICA on the employer's share.
Read more →Self-Employment Tax
The combined Social Security (12.4%) and Medicare (2.9%) tax paid by self-employed individuals — effectively both the employee and employer shares of FICA, totaling 15.3%.
Read more →Social Security Tax
A 6.2% payroll tax on wages up to the annual wage base ($176,100 in 2025), matched by your employer. Funds Social Security retirement, disability, and survivor benefits.
Read more →Tax Bracket
A range of income taxed at a specific rate. The US uses a progressive system with seven brackets ranging from 10% to 37% for 2025.
Read more →Taxable Income
The portion of your income that is actually subject to federal income tax, calculated by subtracting the standard or itemized deduction from your AGI.
Read more →W-2
A tax form employers send to employees each year reporting wages earned and taxes withheld, including federal income tax, Social Security, and Medicare.
Read more →W-4 (Form W-4)
Employee's Withholding Certificate that tells your employer how much federal income tax to withhold from your paycheck.
Read more →Wage Base
The maximum amount of earnings subject to Social Security tax in a given year. For 2025, the wage base is $176,100. Earnings above this amount are exempt from Social Security tax.
Read more →Withholding
The amount of federal and state income tax your employer deducts from each paycheck and sends to the IRS on your behalf throughout the year.
Read more →Deductions
Above-the-Line Deduction
Deductions subtracted from gross income to arrive at AGI, available regardless of whether you itemize. Examples include IRA contributions, student loan interest, and HSA contributions.
Read more →Charitable Deduction
An itemized deduction for donations to qualified charitable organizations. Cash donations are generally deductible up to 60% of AGI; appreciated property donations up to 30%.
Read more →Itemized Deduction
Specific expenses you can deduct instead of taking the standard deduction, including mortgage interest, state/local taxes (SALT cap: $40,000 for 2025+ under OBBBA, phased out for high earners), charitable donations, and medical expenses.
Read more →Medical Expense Deduction
An itemized deduction for unreimbursed medical and dental expenses that exceed 7.5% of your AGI. Qualifying expenses include doctor visits, prescriptions, insurance premiums, and more.
Read more →Mileage Deduction
A tax deduction for business, medical, moving (military), or charitable miles driven. The 2025 IRS standard mileage rate is 70 cents per business mile and 21 cents per medical/moving mile.
Read more →Mortgage Interest Deduction
An itemized deduction for interest paid on mortgage debt up to $750,000 ($375,000 if married filing separately) used to buy, build, or improve your primary or second home.
Read more →Mortgage Interest Deduction
An itemized deduction for interest paid on home mortgage debt up to $750,000, covering your primary residence and one second home. It is one of the largest potential itemized deductions for homeowners.
Read more →Qualified Business Income (QBI) Deduction
A deduction of up to 20% of qualified business income from pass-through entities like sole proprietorships, partnerships, and S corporations, available under Section 199A.
Read more →SALT Deduction
An itemized deduction for state and local taxes paid, including income tax (or sales tax) and property tax. Under OBBBA (2025+), capped at $40,000 per return ($20,000 MFS) with phaseout above $500,000 MAGI to a $10,000 floor. Pre-OBBBA (2018–2024) the cap was $10,000 flat.
Read more →Standard Deduction
A fixed dollar amount that reduces your taxable income, available to all filers who do not itemize. For 2025, it is $15,750 for single filers and $31,500 for married filing jointly (OBBBA-adjusted).
Read more →Credits
Additional Child Tax Credit (ACTC)
The refundable portion of the Child Tax Credit, worth up to $1,700 per child for 2025 and 2026. Families who owe less tax than their CTC amount can receive the ACTC as a cash refund.
Read more →AOTC (American Opportunity Tax Credit)
A tax credit of up to $2,500 per eligible student for qualified education expenses during the first four years of post-secondary education.
Read more →Child Tax Credit
A tax credit worth up to $2,200 per qualifying child under age 17 for 2025 and 2026 (raised from $2,000 by OBBBA). Up to $1,700 is refundable as the Additional Child Tax Credit, meaning you can receive it even if you owe no tax.
Read more →Child Tax Credit
A federal tax credit of up to $2,200 per qualifying child under age 17 for 2025 and 2026 (raised from $2,000 by OBBBA). Up to $1,700 is refundable as the Additional Child Tax Credit, benefiting families with little or no tax liability.
Read more →Earned Income Credit (EITC)
A refundable tax credit for low- to moderate-income workers. The amount depends on income, filing status, and number of qualifying children — worth up to $7,830 in 2025 with three or more children.
Read more →Education Credits
Tax credits for higher education expenses. The American Opportunity Credit is worth up to $2,500 per student for the first four years; the Lifetime Learning Credit is up to $2,000 per return.
Read more →EITC (Earned Income Tax Credit)
A refundable federal tax credit for low-to-moderate income working individuals and families.
Read more →LLC (Lifetime Learning Credit)
A non-refundable tax credit of up to $2,000 per tax return for qualified tuition and education expenses.
Read more →Retirement
401(k)
An employer-sponsored retirement savings plan that lets you contribute pre-tax income (or after-tax with Roth 401(k)). The 2025 employee contribution limit is $23,500.
Read more →Catch-Up Contribution
Additional retirement plan contributions allowed for workers age 50 and older — $7,500 extra for 401(k) plans and $1,000 extra for IRAs in 2025.
Read more →Employer Match
A contribution your employer makes to your 401(k) or similar retirement plan based on how much you contribute, often matching 50% to 100% of the first 3% to 6% of your salary.
Read more →FSA (Flexible Spending Account)
An employer-sponsored account that lets you set aside pre-tax dollars for medical expenses or dependent care. Unlike HSAs, FSAs generally have a use-it-or-lose-it rule.
Read more →HSA (Health Savings Account)
A triple-tax-advantaged savings account for medical expenses, available with high-deductible health plans. Contributions are tax-deductible, growth is tax-free, and qualified withdrawals are tax-free.
Read more →Required Minimum Distribution (RMD)
The minimum amount you must withdraw annually from tax-deferred retirement accounts like Traditional IRAs and 401(k)s starting at age 73. Roth IRAs are exempt from RMDs during the owner's lifetime.
Read more →Required Minimum Distribution (RMD)
The minimum amount the IRS requires you to withdraw each year from tax-deferred retirement accounts starting at age 73. Failure to take your RMD triggers a 25% excise tax on the shortfall.
Read more →Roth IRA
A retirement account funded with after-tax dollars. Qualified withdrawals in retirement — including all growth — are completely tax-free. The 2025 contribution limit is $7,000 ($8,000 if 50+).
Read more →Traditional IRA
An individual retirement account where contributions may be tax-deductible and investments grow tax-deferred. The 2025 contribution limit is $7,000 ($8,000 if age 50+).
Read more →Vesting
The process by which you gain ownership of employer contributions to your retirement plan over time. Your own contributions are always 100% vested immediately.
Read more →Investment
Capital Gains
The profit from selling a capital asset (stocks, real estate, etc.) for more than its purchase price. Capital gains are classified as short-term or long-term based on holding period.
Read more →Cost Basis
The original purchase price of an asset (plus adjustments like commissions and reinvested dividends), used to calculate capital gain or loss when you sell.
Read more →Long-Term Capital Gains
Profits from selling assets held for more than one year, taxed at preferential rates of 0%, 15%, or 20% depending on your taxable income.
Read more →Net Investment Income Tax (NIIT)
A 3.8% surtax on investment income (interest, dividends, capital gains, rental income) for individuals with modified AGI above $200,000 (single) or $250,000 (married filing jointly).
Read more →Net Investment Income Tax (NIIT)
A 3.8% surtax on the lesser of net investment income or modified AGI exceeding $200,000 (single) or $250,000 (married filing jointly). Applies to interest, dividends, capital gains, and rental income.
Read more →Ordinary Dividends
Dividends that do not meet the requirements for qualified treatment. They are taxed at your regular income tax rate, which can be significantly higher than qualified dividend rates.
Read more →Passive Activity Loss
A loss from a business or rental activity in which you do not materially participate. Passive losses can generally only be deducted against passive income, not wages or portfolio income.
Read more →Qualified Dividends
Dividends that meet IRS holding-period and company requirements, taxed at the lower long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income rates.
Read more →Short-Term Capital Gains
Profits from selling assets held for one year or less, taxed at ordinary income tax rates (10% to 37%). There is no preferential rate for short-term gains.
Read more →Wash Sale Rule
An IRS rule that disallows a capital loss deduction if you buy a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the new shares.
Read more →Business
Bonus Depreciation
A tax incentive allowing businesses to immediately deduct a large percentage of the cost of qualifying assets in the first year. Was phasing down under TCJA (100%→80%→60%→40%) but the One Big Beautiful Bill Act (OBBBA, 2025) permanently restored the 100% rate for property placed in service after January 19, 2025.
Read more →Business Expenses
Costs incurred in running a business that are deductible on your tax return if they are ordinary (common in your industry) and necessary (helpful and appropriate for your trade).
Read more →Depreciation
A tax deduction that spreads the cost of a business asset over its useful life. Section 179 and bonus depreciation may allow full first-year expensing for qualifying assets.
Read more →Home Office Deduction
A deduction for the business use of your home, available to self-employed individuals. You can use the simplified method ($5 per square foot, up to 300 sq ft) or the regular method based on actual expenses.
Read more →MACRS Depreciation
Modified Accelerated Cost Recovery System — the standard IRS method for depreciating business assets, using predetermined recovery periods and front-loaded deduction schedules.
Read more →Quarterly Estimated Tax
Tax payments made four times a year by self-employed individuals and others with income not subject to withholding. Due dates are April 15, June 15, September 15, and January 15.
Read more →Safe Harbor
IRS rules that protect you from underpayment penalties if you pay at least 100% of the prior year's tax (110% if AGI over $150,000) or 90% of the current year's tax.
Read more →Schedule C
The IRS form (Schedule C of Form 1040) used by sole proprietors and single-member LLCs to report business income and expenses. The net profit flows to your personal tax return.
Read more →Section 179 Deduction
An IRS provision allowing businesses to immediately deduct the full cost of qualifying equipment and property in the year it is placed in service, rather than depreciating it over time. The 2025 limit is $1,250,000.
Read more →Sole Proprietor
An individual who owns and operates an unincorporated business by themselves. Business income and expenses are reported on Schedule C of the personal tax return.
Read more →General
Alternative Minimum Tax (AMT)
A parallel tax system that ensures high-income taxpayers pay at least a minimum amount of tax. For 2025, the AMT exemption is $88,100 (single) and $137,000 (married filing jointly).
Read more →Amended Return
A corrected tax return (Form 1040-X) filed to fix errors or omissions on an original return, such as unreported income, missed deductions, or incorrect filing status.
Read more →Annual Gift Tax Exclusion
The amount you can give to any individual each year without gift tax consequences or filing requirements. For 2025, the annual exclusion is $19,000 per recipient.
Read more →Audit
An IRS review of your tax return to verify that income and deductions are reported accurately. Audits can be conducted by mail, at an IRS office, or at your home or business.
Read more →Estate Tax
A federal tax on the transfer of property at death. The taxable estate is the fair market value of all assets at death minus allowable deductions. The 2026 exemption is $15,000,000 (OBBBA permanent) — up from $13,990,000 in 2025.
Read more →Extension
A request to push your tax return filing deadline from April 15 to October 15. An extension gives more time to file but not more time to pay any taxes owed.
Read more →Fiscal Year
A 12-month accounting period that ends on the last day of any month other than December. Used mainly by businesses and some trusts, not by individual taxpayers.
Read more →Gift Tax
A federal tax on transfers of money or property to another person when you receive nothing (or less than full value) in return. The donor — not the recipient — is responsible for paying the gift tax.
Read more →IRS (Internal Revenue Service)
The federal agency responsible for collecting taxes and enforcing tax laws in the United States. The IRS processes tax returns, issues refunds, and conducts audits.
Read more →Lottery Tax
Federal and state income taxes on lottery winnings. The IRS treats winnings as ordinary income; federal withholding is 24% on prizes over $5,000, with the top marginal rate reaching 37%.
Read more →Penalty
A charge imposed by the IRS for filing late, paying late, or underpaying estimated taxes. Common penalties include failure-to-file (5% per month) and failure-to-pay (0.5% per month).
Read more →Tax Liability
The total amount of tax you owe for the year before accounting for payments, withholding, and refundable credits. It is the bottom-line tax calculated on your return.
Read more →Tax Refund
Money returned to you by the IRS when your total tax payments (withholding + estimated payments + refundable credits) exceed your tax liability for the year.
Read more →Tax Return
The form(s) you file with the IRS to report income, claim deductions and credits, and calculate your tax liability or refund. For individuals, this is Form 1040.
Read more →Tax Year
The 12-month accounting period for calculating and filing taxes. For most individuals, the tax year is the calendar year (January 1 through December 31).
Read more →Unified Credit
A lifetime tax credit that offsets gift and estate taxes. It shelters $15,000,000 in cumulative taxable gifts and estate value from federal transfer taxes in 2026 (OBBBA permanent), up from $13,990,000 in 2025.
Read more →State Taxes
Assessment Ratio
The percentage of a property's fair market value that is used as its taxable assessed value for property tax purposes. Ratios vary by jurisdiction and property type.
Read more →Flat Tax
A tax system with a single rate applied to all income levels. Several US states use flat income tax rates, including Illinois (4.95%), Colorado (4.4%), and Pennsylvania (3.07%).
Read more →Homestead Exemption
A reduction in the assessed value (or taxable value) of a primary residence for property tax purposes. Most states offer homestead exemptions to owner-occupants, reducing their annual property tax bill.
Read more →Progressive Tax
A tax system where rates increase as income rises, with higher earners paying a larger percentage. The US federal income tax and most state income taxes use progressive brackets.
Read more →Property Tax
An annual tax levied by local governments on the assessed value of real property (land and buildings). Rates and assessment methods vary widely by jurisdiction.
Read more →Reciprocity Agreement
An agreement between two states where residents working across state lines only pay income tax to their home state, not the state where they work.
Read more →Sales Tax
A consumption tax levied by state and local governments on the sale of goods and some services. Rates vary by state and locality, ranging from 0% in states with no sales tax to over 10% in some jurisdictions.
Read more →SALT Cap
The annual limit on the federal deduction for state and local taxes. Pre-OBBBA (2018–2024): $10,000. OBBBA (2025+): $40,000 ($20,000 MFS) with phaseout above $500,000 MAGI to a $10,000 floor.
Read more →State Income Tax
Income tax levied by individual states, in addition to federal income tax. Rates and structures vary widely — some states have no income tax, while others have rates up to 13.3%.
Read more →