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.).

How a tax return actually flows

The vocabulary clicks once you see the assembly line. Start with total income (W-2 wages, 1099s, interest, capital gains). Subtract above-the-line items like Traditional IRA and HSA contributions to get AGI — the gatekeeper number that determines eligibility for dozens of credits and deductions. Subtract the standard deduction (or itemized deductions, if larger) to get taxable income. Run that through the progressive brackets to get tax owed, then subtract credits dollar-for-dollar. Finally, compare against what was already withheld from your paychecks: the difference is your refund or your bill. A refund is not a gift — it's your own money returned after an interest-free loan to the government.

A worked example: marginal vs effective

A single filer earns $85,000 in 2026. After a $16,100 standard deduction (estimate), taxable income is $68,900. The first ~$12,400 is taxed at 10%, the next slice at 12%, and the remainder at 22%. Total federal income tax: roughly $10,200 — an effective rate of about 12% on gross income, even though the marginal rate is 22%. This is the single most misunderstood mechanic in the tax code: a raise that pushes you into a higher bracket taxes only the dollars inside that bracket. Nobody has ever taken home less money because of a raise, yet the myth declines promotions every year.

Common misunderstandings

• Tax-deferred is not tax-free: Traditional 401(k) and IRA money is fully taxed on withdrawal — the account postpones the bill, it doesn't cancel it.
• The W-4 doesn't change what you owe, only when you pay it. Big refund every year? You're over-withholding; adjust the W-4 and put the difference in savings monthly.
• 1099 income arrives with zero withholding — the freelancer's rule of thumb is banking 25-30% of every payment for the IRS before spending a cent.
• The SALT cap and standard deduction interact: many homeowners assume their mortgage interest 'counts' when in fact the standard deduction already beats their itemized total.
• Step-up in basis means inherited stock owes essentially no capital gains tax on decades of growth — selling grandma's shares the week after inheritance is usually nearly tax-free, not a taxable windfall.

The bottom line

Tax vocabulary intimidates because it arrives all at once every April, attached to a deadline and a penalty. But the terms sort into three buckets with very different stakes. The mechanical bucket — W-2, W-4, 1099, withholding, filing status — is bookkeeping that software handles; your only job is an accurate W-4 so you neither owe a surprise nor float the IRS an interest-free loan. The comprehension bucket — marginal versus effective rates, deduction versus credit, AGI versus taxable income — exists so that headlines and coworkers cannot mislead you about what a raise, a deduction, or a bracket change actually does. And the planning bucket is where the money lives: pre-tax retirement contributions that cut this year's bill, Roth accounts and HSAs that cut future bills, capital gains timing, and for the self-employed, quarterly estimates and the deductions that come with running a business. April is just the scorekeeping. Every dollar of tax you will ever legally avoid gets decided between January and December — by contributions made, gains timed, and accounts chosen while the year is still in progress.