Tax Terminology Glossary: 100+ Terms Explained in Plain English

Taxes come with their own language — a dense mix of acronyms, legal terms, and technical jargon that can make even simple concepts feel impenetrable. This glossary translates over 100 common tax terms into plain English. Bookmark it and come back whenever you hit a term you don’t understand.

Data Notice: Tax figures and thresholds related to tax terminology glossary cited in this article are projected 2026 values based on IRS guidance and current legislation. Tax law is subject to change. Verify all figures with IRS.gov or a licensed tax professional before making decisions.

Terms are listed alphabetically. Where applicable, links point to our detailed guides on the topic.

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A

Above-the-Line Deduction — A deduction you can take even if you don’t itemize. These reduce your gross income to arrive at your AGI. Examples include student loan interest, IRA contributions, and HSA contributions. Called “above the line” because they appear before the AGI line on your tax return.

Adjusted Gross Income (AGI) — Your total income minus above-the-line deductions. AGI appears on Line 11 of Form 1040 and determines eligibility for many credits and deductions. See our full guide: What Is AGI?.

Alternative Minimum Tax (AMT) — A parallel tax system designed to ensure high-income taxpayers pay at least a minimum amount of tax. The AMT has its own set of rules, rates (26% and 28%), and exemption amounts. You pay whichever is higher — your regular tax or the AMT.

Amended Return — A corrected tax return filed on Form 1040-X after you discover an error on your original return. You generally have three years from the original filing date to amend.

Audit — An examination of your tax return by the IRS to verify that your reported income, deductions, and credits are accurate. Most audits are conducted by mail, not in person. See How the IRS Actually Works.

B

Basis (Cost Basis) — The original cost of an asset, used to calculate your gain or loss when you sell it. If you bought stock for $5,000 and sold it for $8,000, your basis is $5,000 and your gain is $3,000. Basis can be adjusted for things like improvements (real estate), stock splits, and reinvested dividends.

Beneficiary — The person designated to receive assets from a retirement account, life insurance policy, or estate upon the owner’s death.

Bracket — See Tax Bracket.

C

Capital Gain — The profit from selling an asset (stock, real estate, collectible, etc.) for more than its basis. Short-term capital gains (assets held one year or less) are taxed at ordinary income rates. Long-term capital gains (held over one year) are taxed at preferential rates: 0%, 15%, or 20% depending on income.

Capital Loss — The loss from selling an asset for less than its basis. You can use capital losses to offset capital gains. If your losses exceed your gains, you can deduct up to $3,000 ($1,500 if Married Filing Separately) of excess losses against ordinary income per year.

Carryforward (Carryover) — The ability to apply unused tax benefits to future tax years. Common carryforwards include excess capital losses (carried forward indefinitely), charitable contribution deductions (up to 5 years), and net operating losses.

Child and Dependent Care Credit — A credit for expenses you paid for child care or dependent care so you could work or look for work. The credit is a percentage (20%–35%) of up to $3,000 in expenses for one dependent or $6,000 for two or more.

Child Tax Credit (CTC) — A credit of up to ~$2,200 per qualifying child under age 17 for the 2026 tax year. The credit begins to phase out at higher income levels. See our guide: Child Tax Credit.

Contribution Limit — The maximum amount you can contribute to a tax-advantaged account in a given year. For example, the 2026 traditional/Roth IRA limit is $7,000 ($8,000 if age 50+), and the 401(k) limit is $23,500 ($31,000 if age 50+).

Credit (Tax Credit) — A dollar-for-dollar reduction in the amount of tax you owe. A $1,000 credit reduces your tax bill by $1,000. Credits are more valuable than deductions because they reduce tax directly, not just taxable income. See also: Refundable Credit, Nonrefundable Credit.

D

Deduction — An amount subtracted from your income before tax is calculated. There are two types: above-the-line (reduce gross income to AGI) and below-the-line (standard or itemized deductions that reduce AGI to taxable income). See also: Standard Deduction, Itemized Deductions.

Dependent — A person you support financially who qualifies you for certain tax benefits. Dependents are either “qualifying children” (under 19, or under 24 if a student) or “qualifying relatives” (who meet income and support tests).

Depreciation — A method of deducting the cost of a business asset over its useful life rather than all at once. For example, if you buy a $30,000 vehicle for business, you might depreciate it over 5 years, deducting $6,000 per year.

Dividend — A payment made by a corporation to its shareholders from its profits. Qualified dividends are taxed at favorable capital gains rates; ordinary (nonqualified) dividends are taxed at regular income rates.

E

Earned Income — Income from working — wages, salaries, tips, self-employment income, and certain disability payments. This is distinguished from unearned income (interest, dividends, capital gains, rental income). Many tax credits, including the EITC, require earned income.

Earned Income Tax Credit (EITC) — A refundable credit for low-to-moderate-income workers and families. The amount depends on income, filing status, and number of qualifying children. It can be worth up to ~$7,830 for a family with 3+ children. See EITC Guide.

Effective Tax Rate — The average tax rate you pay across all your income. Calculated as total tax divided by total taxable income. Always lower than your marginal tax rate.

Employer Identification Number (EIN) — A nine-digit number assigned by the IRS to businesses for tax purposes. Think of it as a Social Security number for businesses. It appears in Box b of your W-2.

Estimated Tax — Quarterly tax payments made by individuals who have income not subject to withholding — self-employed people, investors, landlords, and retirees. Payments are due in April, June, September, and January.

Exemption — Historically, a per-person deduction that reduced taxable income. Personal exemptions were suspended through 2025 by the Tax Cuts and Jobs Act. For 2026 and beyond, check current legislation for the status of personal exemptions.

Extension — A request (Form 4868) for additional time to file your tax return. An extension gives you until October 15 but does NOT extend the time to pay — any tax owed is still due by the original filing deadline.

F

FICA — Federal Insurance Contributions Act. The law authorizing payroll taxes for Social Security (6.2%) and Medicare (1.45%). Both employer and employee pay these taxes.

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. Filing status determines your standard deduction, tax brackets, and credit eligibility. See Filing Status Explained.

Form 1040 — The main federal income tax return form used by individual taxpayers. See Form 1040 Walkthrough.

Form 1099 — A family of information returns reporting various types of non-wage income. See What Is a 1099?.

Form W-2 — The wage and tax statement your employer sends you each January. See What Is a W-2?.

Form W-4 — The form you fill out for your employer to determine how much federal income tax to withhold from your paycheck. See W-4 Guide.

G

Gift Tax — A tax on transfers of money or property to another person. For 2026, you can give up to ~$19,000 per recipient per year without any gift tax implications (the annual exclusion). Amounts above that count toward your lifetime gift and estate tax exemption.

Gross Income — The total of all income you received during the year from all sources, before any deductions or adjustments. See Taxable Income vs Gross Income.

H

Head of Household (HOH) — A filing status for unmarried individuals who pay more than half the cost of maintaining a home for a qualifying dependent. HOH provides a larger standard deduction and wider tax brackets than Single.

Health Savings Account (HSA) — A tax-advantaged account for people with high-deductible health plans. Contributions are tax-deductible (or pre-tax), growth is tax-free, and withdrawals for qualified medical expenses are tax-free. Triple tax benefit.

I

Installment Agreement — A payment plan with the IRS that allows you to pay your tax debt over time in monthly installments, rather than all at once. You can apply online through your IRS Online Account.

Itemized Deductions — Individual deductions you list on Schedule A instead of taking the standard deduction. Common itemized deductions include state and local taxes (SALT), mortgage interest, charitable donations, and medical expenses above 7.5% of AGI.

IRS (Internal Revenue Service) — The federal agency responsible for collecting taxes and enforcing tax laws. See How the IRS Actually Works.

J

Joint Return — A single tax return filed by a married couple that combines their income, deductions, and credits. See Married Filing Jointly under Filing Status Explained.

K

Kiddie Tax — A rule that taxes a child’s unearned income (investment income) above a threshold at the parent’s marginal tax rate, to prevent parents from shifting investment income to children in lower brackets.

L

Liability (Tax Liability) — The total amount of tax you owe. Your tax liability is calculated by applying tax brackets to your taxable income, then subtracting credits.

Long-Term Capital Gain — Profit from selling an asset held for more than one year. Taxed at preferential rates: 0%, 15%, or 20% depending on your income.

M

MAGI (Modified Adjusted Gross Income) — AGI with certain deductions and exclusions added back. Different tax provisions define MAGI differently. Common add-backs include student loan interest, foreign earned income exclusion, and tax-exempt interest. See AGI vs. MAGI.

Marginal Tax Rate — The tax rate applied to your last (highest) dollar of income. In a progressive tax system, this is the rate of your highest tax bracket. It’s always higher than your effective tax rate.

Married Filing Jointly (MFJ) — A filing status where a married couple files one return combining all income, deductions, and credits. Usually the most tax-favorable status for married couples.

Married Filing Separately (MFS) — A filing status where each married spouse files their own return. Generally results in higher combined tax but has specific strategic uses.

Medicare Tax — The 1.45% payroll tax (employee share) that funds Medicare hospital insurance. No wage cap. An additional 0.9% applies to wages above ~$200,000 (single).

N

Net Income — Income remaining after subtracting all expenses. In business, it’s revenue minus expenses. On Schedule C, it’s your profit (or loss) from self-employment.

Net Investment Income Tax (NIIT) — A 3.8% surtax on investment income (interest, dividends, capital gains, rental income) for individuals with MAGI above ~$200,000 (single) or ~$250,000 (MFJ).

Nonrefundable Credit — A tax credit that can reduce your tax to zero but won’t generate a refund beyond that. If you owe $800 and have a $1,000 nonrefundable credit, your tax becomes $0 but you don’t get the extra $200.

O

OBBB (One Big Beautiful Bill) — Informal name for recent tax legislation that made changes to brackets, standard deductions, and credits. See One Big Beautiful Bill Tax Changes for details.

P

Pass-Through Entity — A business structure (sole proprietorship, partnership, S corporation, LLC) where business income “passes through” to the owner’s personal tax return rather than being taxed at the business level.

Payroll Tax — Taxes on wages that fund Social Security and Medicare. Employees pay 7.65% and employers match. See What Are Payroll Taxes?.

Penalty — An additional charge imposed by the IRS for various infractions: late filing, late payment, underpayment of estimated tax, early withdrawal from retirement accounts, or accuracy-related issues.

Phaseout — A gradual reduction of a tax benefit as your income rises above a certain threshold. For example, the Child Tax Credit begins to phase out at ~$150,000 AGI for single filers. Phaseout ranges mean you lose the benefit gradually, not all at once.

Progressive Tax — A tax system where higher income is taxed at higher rates. The U.S. federal income tax is progressive — the first dollars of income are taxed at 10%, and only income above certain thresholds faces higher rates. See How Tax Brackets Work.

Q

QBI Deduction (Qualified Business Income) — A deduction of up to 20% of qualified business income from pass-through entities (sole proprietorships, partnerships, S corps). Also called the Section 199A deduction. Subject to income limits and trade/business restrictions.

Qualifying Child — A dependent who meets the IRS’s relationship, age, residency, and support tests. Qualifying children may make you eligible for the Child Tax Credit, EITC, and other benefits.

Quarterly Estimated Tax — See Estimated Tax.

R

Refund — Money returned to you by the IRS (or state) because you overpaid your taxes through withholding or estimated payments. Track yours with the IRS Refund Tracker.

Refundable Credit — A tax credit that can not only reduce your tax to zero but also generate a refund. The EITC and the refundable portion of the Child Tax Credit are examples.

Required Minimum Distribution (RMD) — The minimum amount you must withdraw from traditional IRAs and employer retirement plans each year starting at age 73. Failing to take your RMD results in a steep penalty (currently 25%).

Rollover — Moving money from one retirement account to another (e.g., 401(k) to IRA) without triggering taxes. Must be completed within 60 days for indirect rollovers; direct (trustee-to-trustee) rollovers have no time limit.

Roth IRA / Roth 401(k) — Retirement accounts funded with after-tax dollars. Contributions are not deductible, but qualified withdrawals in retirement are completely tax-free — no tax on the growth.

S

SALT (State and Local Taxes) — The combination of state income tax (or sales tax) and local property tax that can be deducted if you itemize. Capped at ~$40,000 per return under the One Big Beautiful Bill (raised from the previous ~$10,000 cap).

Schedule C — The IRS form used to report profit or loss from a sole proprietorship or single-member LLC. Attached to Form 1040. See Schedule C Business Income.

Section 199A — See QBI Deduction.

Self-Employment Tax — The Social Security and Medicare tax paid by self-employed individuals. The rate is 15.3% (12.4% Social Security + 2.9% Medicare) on net self-employment income. See Self-Employment Tax Guide.

Short-Term Capital Gain — Profit from selling an asset held for one year or less. Taxed at ordinary income rates, which are higher than long-term capital gains rates.

Social Security Tax — The 6.2% payroll tax (employee share) that funds Social Security retirement, disability, and survivor benefits. Applied to wages up to the annual wage base (~$176,100 for 2026).

Standard Deduction — A flat-dollar amount that reduces your AGI to arrive at taxable income. For 2026: ~$15,000 (Single), ~$30,000 (MFJ), ~$22,500 (HOH). You choose either the standard deduction or itemized deductions — whichever is larger. See Standard Deduction Guide.

T

Tax Bracket — An income range taxed at a specific rate. The U.S. has seven federal brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Only income within each bracket is taxed at that rate. See How Tax Brackets Work.

Tax Credit — See Credit.

Tax-Deferred — An account or investment where taxes on earnings are postponed until withdrawal. Traditional IRAs and 401(k)s are tax-deferred — you get a deduction now but pay tax when you withdraw in retirement.

Tax-Exempt — Income or an entity that is not subject to tax. Municipal bond interest is tax-exempt at the federal level. Tax-exempt organizations (like 501(c)(3) nonprofits) generally don’t pay income tax.

Tax Home — Your regular place of business, regardless of where you live. Important for determining whether travel expenses are deductible.

Tax Withholding — The process by which your employer deducts estimated federal income tax from each paycheck and sends it to the IRS. See Withholding Explained.

Taxable Income — Your income after all deductions — the amount your tax brackets actually apply to. Found on Line 15 of Form 1040. See Taxable Income vs Gross Income.

Taxpayer Advocate Service (TAS) — An independent organization within the IRS that helps taxpayers resolve problems with the IRS and recommends systemic changes. See How the IRS Works.

Transcript — A summary of your tax return information that the IRS can provide. Types include Tax Return Transcript, Tax Account Transcript, and Wage and Income Transcript. Available through your IRS Online Account.

U

Underpayment Penalty — A penalty charged when you haven’t paid enough tax through withholding or estimated payments during the year. Triggered when you owe more than ~$1,000 at filing time. Essentially interest on the unpaid amount.

Unearned Income — Income not from working — interest, dividends, capital gains, rental income, royalties, and retirement distributions. Unearned income is not subject to payroll taxes (though it may be subject to the 3.8% Net Investment Income Tax at higher income levels).

V

Voluntary Compliance — The principle underlying the U.S. tax system: taxpayers are expected to calculate and report their own taxes honestly. “Voluntary” means you calculate it yourself; it does not mean paying taxes is optional.

W

W-2 — See Form W-2.

W-4 — See Form W-4.

Wage Base — The maximum amount of earnings subject to Social Security tax in a given year. For 2026, the wage base is ~$176,100. Earnings above this amount are not subject to Social Security tax (but are still subject to Medicare tax). See What Are Payroll Taxes?.

Withholding — See Tax Withholding.

Z

Zero-Bracket Amount — An older term for what is now the standard deduction. It represents the amount of income effectively taxed at 0% because it’s sheltered by the standard deduction.

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Frequently Asked Questions

How do I know if a tax term applies to me?

Start with the basics that apply to almost everyone: AGI, standard deduction, tax brackets, filing status, and withholding. Then explore terms related to your specific situation — self-employment, investments, dependents, etc.

What’s the difference between a deduction and a credit?

A deduction reduces your taxable income. A credit reduces your tax bill dollar-for-dollar. A $1,000 deduction might save you $220 (if you’re in the 22% bracket), but a $1,000 credit saves you the full $1,000. Credits are always more valuable.

Where can I look up my specific tax situation?

The IRS website (irs.gov) has publications on nearly every topic. For a guided experience, see our Form 1040 walkthrough or set up your IRS Online Account.

Are these terms the same for state taxes?

Many states use the same terminology (AGI, taxable income, standard deduction), often starting with your federal AGI as a baseline. However, state-specific terms and rules vary widely. Check your state’s tax authority website for state-specific definitions.

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Tax information is for educational purposes only and does not constitute tax, legal, or financial advice. Consult a licensed tax professional for guidance specific to your situation.