Tax glossary

A–D

• AGI (Adjusted Gross Income) — your total income minus specific deductions (retirement contributions, student loan interest, etc.). Determines eligibility for many tax benefits.
• AMT (Alternative Minimum Tax) — a parallel tax system ensuring high earners pay at least a minimum tax even after deductions.
• Capital gains tax — tax on profit from selling an investment. Short-term (ordinary income rates) vs. long-term (0%, 15%, or 20%).
• Deduction — an amount subtracted from your taxable income. Standard deduction ($15k single, $30k married) or itemized deductions.
• Dependent — a person (usually a child) you support financially. Qualifies you for certain tax benefits.
• Depreciation — a tax deduction for the declining value of a business or rental property asset over time.

E–M

• Effective tax rate — your total tax divided by total income. Always lower than your marginal rate.
• Estimated taxes — quarterly tax payments made by self-employed people and others without employer withholding.
• Filing status — how you file (single, married filing jointly, married filing separately, head of household). Affects brackets and standard deduction.
• FSA (Flexible Spending Account) — pre-tax account for medical or dependent care expenses. 'Use it or lose it' in most cases.
• MAGI (Modified Adjusted Gross Income) — AGI with certain deductions added back. Used to determine Roth IRA eligibility and ACA subsidies.
• Marginal tax rate — the rate applied to your last dollar of income. Not the rate on all your income.

P–W

• Progressive tax — a system where higher income is taxed at higher rates. The US federal income tax is progressive.
• SALT (State and Local Tax) deduction — an itemized deduction for state income, sales, and property taxes, capped at $10,000.
• Self-employment tax — the 15.3% Social Security + Medicare tax paid by self-employed individuals on their profit.
• Standard deduction — a fixed dollar amount ($15,000 single, ~$30,000 married in 2025) that reduces taxable income. Most taxpayers take this instead of itemizing.
• Step-up in basis — when you inherit an asset, your cost basis becomes its market value at the date of death, potentially eliminating decades of capital gains.
• Tax bracket — the range of income taxed at a specific marginal rate. Moving into a higher bracket only affects the income within that bracket.
• Tax credit — a dollar-for-dollar reduction in tax owed. More valuable than a deduction of the same amount.
• Tax-deferred — an account where you don't pay taxes until you withdraw (Traditional IRA, 401k). Taxes are postponed, not eliminated.
• Tax-exempt — an account where qualified withdrawals are never taxed (Roth IRA). You paid tax going in.
• W-2 — the form your employer sends showing your annual wages and taxes withheld.
• W-4 — the form you fill out to tell your employer how much tax to withhold from each paycheck.
• Withholding — tax your employer deducts from your paycheck and sends to the IRS on your behalf.
• 1099 — a form reporting non-employment income (freelance, interest, dividends, etc.).