Plain-English definitions for common tax terms. No legalese, no jargon walls—just clear explanations you can actually use.
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A deduction you can claim without itemizing. These are subtracted from your gross income to arrive at your AGI. Examples include student loan interest, educator expenses, and IRA contributions.
Related: Deductions
Your total gross income minus specific deductions like student loan interest, IRA contributions, and alimony payments. AGI is a key number on your tax return because it determines your eligibility for many credits and deductions.
Related: Deductions
A parallel tax system designed to ensure high-income taxpayers pay at least a minimum amount of tax. The AMT recalculates your income tax after adding back certain deductions and applies its own set of rates.
A corrected version of a tax return you already filed. You use Form 1040-X to fix mistakes like wrong filing status, missing income, or unclaimed deductions. You generally have three years from the original filing date to amend.
Related: Filing Guides
A review of your tax return by the IRS to verify that your income, deductions, and credits are accurate. Most audits are handled by mail and only require you to send supporting documents.
A retirement plan similar to a 401(k) but offered by public schools, nonprofits, and certain other tax-exempt organizations. Contributions are typically pre-tax and reduce your current taxable income.
Related: Retirement
A flat 24% tax the IRS requires payers to withhold from certain payments (like interest and dividends) when you haven't provided a correct taxpayer identification number. It acts as a safety net to ensure taxes get collected.
The original cost of an asset for tax purposes, used to calculate your gain or loss when you sell it. Basis can be adjusted for improvements, depreciation, and other factors.
Related: Investments
A tax strategy where you concentrate deductible expenses into a single year so they exceed the standard deduction, then take the standard deduction in alternate years. Common with charitable contributions and medical expenses.
Related: Deductions
The profit you make when you sell an asset (like stock or real estate) for more than you paid. Short-term capital gains (assets held one year or less) are taxed at your ordinary income rate, while long-term gains get lower rates.
Related: Investments
The loss you take when you sell an asset for less than you paid for it. You can use capital losses to offset capital gains, and deduct up to $3,000 of net losses against ordinary income each year.
The ability to apply unused deductions, losses, or credits to future tax years. For example, if your capital losses exceed $3,000 in a year, the excess carries forward to offset income in later years.
A donation to a qualified nonprofit organization that may be deductible if you itemize. You'll need written acknowledgment for donations of $250 or more. Non-cash donations like clothing and vehicles also count.
Related: Deductions
A tax credit for each qualifying child under age 17. The credit directly reduces your tax bill dollar for dollar. Income limits apply, and the credit phases out at higher income levels.
Related: Tax Credits
The maximum amount you can put into a tax-advantaged account like an IRA or 401(k) in a given year. Going over the limit can trigger penalties. Limits are adjusted annually for inflation.
Related: Retirement
The original price you paid for an investment or asset, plus any additional costs like commissions. When you sell, you subtract your cost basis from the sale price to determine your taxable gain or deductible loss.
Related: Investments
An amount you subtract from your gross income before calculating the tax you owe. Deductions lower your taxable income, which means you pay tax on a smaller number. You can take the standard deduction or itemize.
Related: Deductions
A person you support financially who qualifies you for certain tax benefits. Dependents are typically your children or other relatives who live with you and meet IRS income and residency tests.
Related: Tax Credits
A tax deduction that lets you spread the cost of a business asset (like equipment or a building) over its useful life instead of deducting the full cost in the year you bought it.
Related: Self-Employment
Money you receive from working, including wages, salaries, tips, and self-employment income. Earned income does not include investment income, pensions, or Social Security benefits.
A refundable tax credit for low-to-moderate income workers. The amount depends on your income, filing status, and number of qualifying children. If the credit exceeds your tax, you get the difference as a refund.
Related: Tax Credits
The actual percentage of your total income that goes to taxes. It's calculated by dividing your total tax by your total income. Your effective rate is always lower than your marginal rate because of the progressive bracket system.
Related: Tax Brackets
A nine-digit number the IRS assigns to businesses for tax reporting purposes. Think of it as a Social Security number for your business. You need one if you have employees, operate as a corporation or partnership, or file certain tax returns.
Related: Self-Employment
A tax on the transfer of property after someone dies. The federal estate tax only applies to estates above a high threshold (around $13 million in 2025). Most people never owe estate tax.
Quarterly tax payments made by people who don't have enough tax withheld from their paychecks, such as freelancers, small business owners, and investors. Due in April, June, September, and January.
Related: Self-Employment
An amount that reduces your taxable income. Personal exemptions were eliminated by the Tax Cuts and Jobs Act for 2018-2025 but may return. Some states still allow exemptions on state returns.
A request to push back your tax filing deadline, typically by six months. An extension gives you more time to file, but not more time to pay. You still owe interest on any unpaid balance after the original due date.
Related: Filing Guides
The payroll taxes that fund Social Security and Medicare. Employees pay 7.65% of their wages (6.2% for Social Security, 1.45% for Medicare), and employers match that amount. Self-employed people pay both halves.
A category that determines your tax rates, standard deduction amount, and eligibility for certain credits. The five statuses are Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse.
Related: Filing Guides
The main federal income tax return that almost every individual taxpayer files. All the other schedules and forms attach to the 1040. It reports your income, deductions, credits, and the tax you owe or the refund you're getting.
Related: Filing Guides
A family of information returns used to report income other than wages. Common types include 1099-NEC (freelance/contractor income), 1099-INT (interest), 1099-DIV (dividends), and 1099-B (brokerage sales).
The form your employer sends you each January showing your total wages and the taxes withheld during the year. You need it to file your tax return. Employers must send W-2s by January 31.
The form you fill out when you start a new job (or anytime you want to adjust) to tell your employer how much federal tax to withhold from your paychecks. Getting it right helps you avoid a big tax bill or an unnecessarily large refund.
A tax on money or property you give to another person. Most gifts aren't taxable because of the annual exclusion ($18,000 per recipient in 2025). If you go over, you report it but usually don't owe tax until you exceed the lifetime exemption.
All the income you receive in a year before any deductions or adjustments. This includes wages, interest, dividends, rental income, business income, and most other sources of money.
A filing status for unmarried taxpayers who pay more than half the cost of keeping up a home for a qualifying person (usually a child or dependent relative). It gives you a larger standard deduction and lower tax rates than filing as Single.
Related: Filing Guides
A tax-advantaged savings account for people with high-deductible health plans. Contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free — a triple tax benefit.
Related: Deductions
Specific expenses you can deduct instead of taking the standard deduction. Common itemized deductions include mortgage interest, state and local taxes (SALT), charitable contributions, and medical expenses above a threshold.
Related: Deductions
An employer-sponsored retirement savings plan that lets you contribute pre-tax dollars from your paycheck. Many employers match a percentage of your contributions. You pay income tax when you withdraw the money in retirement.
Related: Retirement
A rule that taxes a child's unearned income (like investment income) above a certain threshold at the parent's tax rate. It's designed to prevent parents from shifting investment income to their children to get a lower rate.
Profits from selling assets held for more than one year. These gains are taxed at preferential rates of 0%, 15%, or 20% depending on your taxable income, which are lower than ordinary income tax rates for most people.
Related: Investments
The tax rate applied to your last dollar of income. The U.S. uses a progressive tax system, so only the income within each bracket is taxed at that bracket's rate — not all of your income.
Related: Tax Brackets
A filing status for married couples who combine their income and deductions on one return. It usually results in a lower tax bill than filing separately because of wider tax brackets and higher deduction limits.
Related: Filing Guides
A filing status where each spouse files their own return. It's usually less favorable than filing jointly, but it can make sense in certain situations like when one spouse has large medical expenses or student loan concerns.
A payroll tax of 1.45% on all wages (no income cap). High earners pay an additional 0.9% Medicare surtax on wages above $200,000 (single) or $250,000 (married filing jointly).
Your AGI with certain deductions added back in. Different tax provisions define MAGI differently, but it's commonly used to determine eligibility for Roth IRA contributions, education credits, and premium tax credits.
The amount left after subtracting all expenses, deductions, and taxes from your gross income. For businesses, it's revenue minus all costs. For individuals, it's essentially your take-home amount.
An additional 3.8% tax on investment income (interest, dividends, capital gains, rental income) for individuals with MAGI above $200,000 (single) or $250,000 (married filing jointly).
Related: Investments
A tax credit that can reduce your tax to zero but won't generate a refund beyond that. If the credit is worth more than your tax bill, you lose the excess. Examples include the Child and Dependent Care Credit.
Business income that flows through to the owner's personal tax return instead of being taxed at the business level. S-corporations, partnerships, and sole proprietorships all generate pass-through income.
Related: Self-Employment
Taxes withheld from your paycheck to fund Social Security and Medicare (FICA). Employers withhold the employee's share and also pay a matching amount. Self-employed individuals pay both shares through self-employment tax.
An additional charge the IRS imposes for things like filing late, paying late, or underpaying your estimated taxes. The late-filing penalty is usually much steeper than the late-payment penalty, so always file on time even if you can't pay.
A deduction of up to 20% of qualified income from a pass-through business (Section 199A). It's available to sole proprietors, S-corp owners, and partners. Income thresholds and business type determine how much you can deduct.
Related: Self-Employment
A dividend that meets IRS holding-period requirements and is taxed at the lower long-term capital gains rates instead of your ordinary income rate. Most dividends from U.S. companies are qualified.
Related: Investments
Money the IRS sends back to you when the taxes you paid during the year (through withholding or estimated payments) exceed the tax you actually owe. You can receive your refund by direct deposit or paper check.
A tax credit that can not only reduce your tax to zero but also result in a payment to you. If the credit exceeds your tax, the IRS sends you the difference. The Earned Income Tax Credit is a common example.
The minimum amount you must withdraw from traditional IRAs and most retirement accounts each year starting at age 73. Failing to take your RMD results in a steep penalty on the amount you should have withdrawn.
Related: Retirement
A retirement account funded with after-tax dollars. You don't get a deduction when you contribute, but qualified withdrawals in retirement are completely tax-free — including all the investment growth.
Related: Retirement
A type of corporation that passes income, losses, and deductions through to shareholders' personal returns, avoiding the double taxation that regular (C) corporations face. Owners who work in the business must pay themselves a reasonable salary.
Related: Self-Employment
The itemized deduction for state and local taxes, including income taxes (or sales taxes) and property taxes. Since 2018, the deduction has been capped at $10,000 per return ($5,000 if married filing separately).
Related: Deductions
The IRS form used to report itemized deductions. You attach it to your 1040 if your itemized deductions exceed the standard deduction. It covers medical expenses, taxes, interest, gifts to charity, and other deductions.
Related: Deductions
The IRS form sole proprietors and single-member LLCs use to report business income and expenses. Your net profit from Schedule C flows to your Form 1040 and is also subject to self-employment tax.
Related: Self-Employment
A tax-advantaged savings plan for education expenses. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education costs including tuition, books, and room and board.
The Social Security and Medicare taxes self-employed people pay on their net earnings. The rate is 15.3% (12.4% Social Security + 2.9% Medicare), but you deduct half of it when calculating your adjusted gross income.
Related: Self-Employment
Profits from selling assets held for one year or less. These gains are taxed at your regular income tax rate, which is usually higher than the long-term capital gains rate.
A payroll tax of 6.2% on wages up to the annual wage base ($168,600 in 2025). Both employees and employers pay this rate. Income above the wage base is not subject to Social Security tax.
The simplest business structure, where one person owns and operates the business. There's no legal separation between you and the business. You report business income and expenses on Schedule C of your personal tax return.
Related: Self-Employment
A fixed dollar amount that reduces your taxable income if you don't itemize. For 2025, it's $15,000 for single filers and $30,000 for married couples filing jointly. Most taxpayers take the standard deduction because it's simpler and often larger.
Related: Deductions
A range of income taxed at a specific rate. The U.S. has seven federal brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%). Only the income within each bracket is taxed at that rate, not your entire income.
Related: Tax Brackets
An amount that directly reduces the tax you owe, dollar for dollar. A $1,000 tax credit saves you $1,000 in taxes, making credits more valuable than deductions of the same amount.
Related: Tax Credits
An expense that reduces your taxable income. Unlike a credit, a deduction's value depends on your tax bracket. A $1,000 deduction in the 22% bracket saves you $220 in taxes.
Related: Deductions
An account or investment where you don't pay taxes on the earnings until you withdraw the money, typically in retirement. Traditional IRAs and 401(k)s are tax-deferred accounts.
Related: Retirement
Selling investments at a loss to offset capital gains and reduce your tax bill. You can deduct up to $3,000 in net losses against ordinary income and carry forward any remaining losses to future years.
Related: Investments
The portion of your income that is actually subject to tax, after subtracting deductions and exemptions from your adjusted gross income. This is the number used to calculate how much tax you owe.
A retirement account where contributions may be tax-deductible, and the money grows tax-deferred. You pay income tax when you withdraw funds in retirement. There are income limits for deducting contributions if you also have a workplace plan.
Related: Retirement
A penalty the IRS charges if you didn't pay enough tax during the year through withholding or estimated payments. You can usually avoid it by paying at least 90% of this year's tax or 100% of last year's tax.
Income from sources other than work, such as interest, dividends, capital gains, rental income, and retirement distributions. Unearned income is generally not subject to payroll taxes but is still subject to income tax.
An IRS rule that prevents you from claiming a tax loss on a security if you buy the same or a substantially identical security within 30 days before or after the sale. The disallowed loss gets added to the cost basis of the replacement shares.
Related: Investments
The portion of your paycheck your employer sends directly to the IRS as a prepayment of your income taxes. The amount is based on your W-4 form. At the end of the year, any overpayment is returned to you as a refund.
This glossary is for educational purposes only and does not constitute tax, legal, or financial advice. Tax rules change frequently — consult a qualified tax professional for guidance specific to your situation.