Tax Glossary
228 US tax terms, in plain English.
Searchable, jargon-free definitions — every term used in our articles and calculators, explained the way a friend would explain it.
A
- Ability-to-Pay PrincipleThe idea that taxes should be levied based on a taxpayer's capacity to pay.
- Above-the-Line DeductionA deduction subtracted from gross income to calculate adjusted gross income (AGI).
- Accelerated DepreciationA method that allows larger depreciation deductions in the early years of an asset's life.
- Accountable PlanAn employer reimbursement arrangement that keeps reimbursements out of the employee's taxable wages.
- Accrual AccountingRecording income when earned and expenses when incurred, regardless of cash movement.
- Active IncomeWages, salaries, and earnings from a business in which you materially participate.
- Adjusted BasisYour original cost in an asset, increased by improvements and decreased by depreciation.
- Adjusted Gross Income (AGI)Gross income minus specific above-the-line adjustments.
- AlimonyCourt-ordered support payments to a former spouse.
- Alternative Minimum Tax (AMT)A parallel tax system designed to ensure high-income taxpayers pay at least a minimum amount.
- Amended ReturnA corrected tax return filed on Form 1040-X to fix errors on a previously filed return.
- AmortizationDeducting the cost of an intangible asset gradually over its useful life.
- Annual ExclusionThe amount you can give any one person each year without filing a gift tax return.
- AnnuityA contract that pays out income, typically purchased for retirement.
- Assessed ValueThe dollar value local government assigns to a property for tax purposes.
- AssetAnything of value owned by a person or business.
- At-Risk RulesLimits on the losses you can deduct to the amount you actually have at risk in the activity.
- AuditAn IRS examination of a tax return to verify its accuracy.
B
- Backup WithholdingA 24% federal tax withheld from certain payments when the payee fails to provide a correct TIN.
- Bad Debt DeductionA deduction for money owed to you that has become uncollectible.
- BasisYour investment in an asset for tax purposes — usually what you paid.
- Below-the-Line DeductionA deduction taken after AGI is calculated — either the standard or itemized deductions.
- BeneficiaryThe person or entity entitled to receive proceeds from an account, trust, or estate.
- Bonus DepreciationAn additional first-year deduction for qualifying business property.
- BootNon-like-kind property received in a 1031 exchange — usually cash or debt relief.
- BracketA range of taxable income subject to a specific marginal tax rate.
- Built-In GainUnrealized appreciation on assets at the time a C-corp converts to an S-corp.
- Business ExpenseAn ordinary and necessary cost of carrying on a trade or business.
C
- C CorporationA business entity taxed separately from its owners.
- Cafeteria PlanAn employee benefit plan letting workers choose between cash and qualified pre-tax benefits.
- Capital AssetProperty held for investment or personal use, excluding inventory and depreciable business property.
- Capital GainThe profit from selling a capital asset for more than your basis.
- Capital LossThe loss from selling a capital asset for less than your basis.
- Carryover (Carryforward)A tax attribute moved from one year to later years.
- Cash MethodRecording income when received and expenses when paid.
- Casualty LossA loss from a sudden, unexpected event like a fire or storm.
- Charitable ContributionA donation of cash or property to a qualifying 501(c)(3) organization.
- Child and Dependent Care CreditA non-refundable credit for paying someone to care for a child or disabled dependent so you can work.
- Child Tax Credit (CTC)A credit of up to $2,000 per qualifying child under 17.
- Circular EIRS Publication 15 — the employer's tax guide for payroll withholding.
- Citizen TestOne of the dependency tests — the person must be a US citizen, national, or resident alien.
- Cliff VestingAn all-or-nothing vesting schedule where you receive 100% after a set period.
- Combat PayMilitary pay earned while serving in a designated combat zone.
- Community PropertyProperty acquired during marriage that is owned equally by both spouses under state law.
- Constructive ReceiptThe doctrine that income is taxable when made available to you, even if you haven't physically collected it.
- Contribution LimitThe maximum amount you can put into a tax-advantaged account each year.
- Cost BasisWhat you paid for an asset, plus certain adjustments — the starting point for computing gain or loss.
- Cost of Goods Sold (COGS)The direct cost of producing the goods a business sells.
- CreditA dollar-for-dollar reduction of your tax bill.
D
- Death BenefitThe amount paid to beneficiaries by a life insurance policy upon the insured's death.
- DeductionAn amount subtracted from income before calculating tax.
- Deferred CompensationEarnings paid out in a later year than they're earned.
- Dependency ExemptionA deduction for each qualifying dependent (suspended through 2025).
- DependentA qualifying child or relative whose support entitles you to certain tax benefits.
- DepreciationAnnual deduction for the wearing out of business or income-producing property.
- Direct DepositElectronic transfer of a tax refund directly into a bank account.
- Disregarded EntityA business entity not separate from its owner for federal tax purposes.
- Distributable Net Income (DNI)A trust's taxable income that limits the deduction for distributions to beneficiaries.
- DividendA distribution of a corporation's earnings to shareholders.
- Dividends Received Deduction (DRD)A deduction corporations can take for dividends received from other domestic corporations.
- Double TaxationTaxing the same income twice — typically at the corporate level and again as a shareholder dividend.
E
- E-FileElectronic filing of a tax return.
- Earned IncomeCompensation from work — wages, salaries, tips, and net self-employment earnings.
- Earned Income Tax Credit (EITC)A refundable credit for low- and moderate-income workers, especially those with children.
- Effective Tax RateTotal tax divided by total income — your true average rate.
- EIN (Employer Identification Number)A nine-digit number the IRS assigns to identify a business entity.
- Employer-Sponsored PlanA retirement plan offered through an employer, such as a 401(k), 403(b), or pension.
- Enrolled Agent (EA)A federally licensed tax practitioner authorized to represent taxpayers before the IRS.
- Equity CompensationPay in the form of stock or stock-based instruments.
- EstateAll the property a person owns at death.
- Estate TaxA federal tax on the transfer of property at death, above an exemption.
- Estimated TaxQuarterly tax payments made by taxpayers whose income isn't subject to withholding.
- Excise TaxA tax imposed on specific goods, services, or transactions.
- ExemptionA specific dollar amount excluded from taxable income.
- Expatriation TaxAn exit tax on certain US citizens and long-term residents who give up that status.
- ExtensionAdditional time to file a tax return, not to pay.
F
- Fair Market Value (FMV)The price an asset would change hands for between a willing buyer and willing seller.
- FATCAThe Foreign Account Tax Compliance Act — requires US persons to report foreign financial assets.
- FBARReport of Foreign Bank and Financial Accounts (FinCEN Form 114).
- Federal Insurance Contributions Act (FICA)Payroll taxes that fund Social Security and Medicare.
- Federal Unemployment Tax Act (FUTA)An employer-only payroll tax that funds unemployment programs.
- Filing StatusThe category that determines your tax brackets, standard deduction, and credit eligibility.
- First-Year ExpensingTreating the full cost of qualifying assets as an expense in the year placed in service.
- Fiscal YearA 12-month accounting period ending on the last day of any month other than December.
- Flexible Spending Account (FSA)An employer-sponsored account funded with pre-tax salary deferrals for medical or dependent care expenses.
- Foreign Earned Income Exclusion (FEIE)An exclusion of up to $126,500 (2024) of foreign-earned wages for qualifying US expats.
- Foreign Tax Credit (FTC)A credit against US tax for income taxes paid to foreign countries.
- Form 1040The main US individual income tax return.
- Form 1099An information return reporting income other than wages.
- Form W-2An annual statement employers send employees reporting wages and taxes withheld.
- Form W-4The form employees use to tell their employer how much federal tax to withhold.
- Form W-9The form used to provide a TIN to a payer who must file an information return about you.
G
- GainThe amount by which proceeds exceed basis on a sale or exchange.
- Generation-Skipping Transfer Tax (GST)A federal tax on transfers that skip a generation, such as grandparent to grandchild.
- Gift TaxA federal tax on the transfer of property during life.
- Gross IncomeAll income from any source, before adjustments or deductions.
- Gross ReceiptsThe total amount a business takes in before subtracting any costs.
H
- Head of HouseholdA filing status for unmarried taxpayers maintaining a home for a qualifying person.
- Health Savings Account (HSA)A tax-advantaged account paired with a high-deductible health plan.
- High-Deductible Health Plan (HDHP)A health plan with higher deductibles and lower premiums, required to contribute to an HSA.
- Hobby Loss RuleLimits on deducting losses from activities not engaged in for profit.
- Home Office DeductionA deduction for the business use of part of your home.
- Hope Credit / American Opportunity CreditA credit of up to $2,500 per eligible student for the first four years of college.
I
- Imputed IncomeNon-cash compensation treated as taxable income.
- Imputed InterestInterest the IRS treats as paid even when little or none is stated in a loan agreement.
- Income AveragingA method (largely repealed) that let taxpayers smooth tax across high and low income years.
- Independent ContractorA self-employed worker hired to perform services without being an employee.
- Individual Retirement Account (IRA)A personal retirement account with tax advantages.
- Individual Taxpayer Identification Number (ITIN)A tax processing number for people who can't get an SSN.
- Inherited PropertyAssets received from a deceased person.
- Innocent Spouse ReliefProtection from joint liability when one spouse hides or understates income.
- Installment SaleA sale where at least one payment is received after the year of sale.
- Intangible AssetA non-physical asset like goodwill, patents, trademarks, or customer lists.
- IRSThe Internal Revenue Service — the US federal tax authority.
- Itemized DeductionDeductions taken in lieu of the standard deduction, reported on Schedule A.
J
K
L
- Like-Kind ExchangeAn exchange of real property held for business or investment, deferring gain under §1031.
- Limited Liability Company (LLC)A state-law entity offering limited liability with flexible tax treatment.
- Long-Term Capital GainGain from selling a capital asset held more than one year.
- Loss CarryoverUnused losses moved to a later year.
- Lump-Sum DistributionA single-payment distribution of an entire qualified retirement account balance.
M
- Marginal Tax RateThe rate applied to your next dollar of income.
- Married Filing Jointly (MFJ)Filing status combining both spouses' income on one return.
- Married Filing Separately (MFS)Filing status where each spouse files an individual return.
- Medicare TaxA 1.45% payroll tax on all wages, with no wage cap.
- Mileage RateThe IRS standard rate for deducting vehicle expenses without tracking actual costs.
- Minimum DistributionSee: Required Minimum Distribution (RMD).
- Modified Adjusted Gross Income (MAGI)AGI plus certain add-backs, used in many phaseout calculations.
- Mortgage Interest DeductionAn itemized deduction for interest on qualifying home loans.
N
- Net Investment Income Tax (NIIT)A 3.8% surtax on investment income above $200,000 single / $250,000 MFJ.
- Net Operating Loss (NOL)A loss that exceeds taxable income and can be carried to other years.
- NexusThe minimum connection a business needs with a state before that state can tax it.
- Nonqualified Stock Option (NSO)A stock option that doesn't meet ISO requirements.
- Nonresident AlienAn individual who is not a US citizen and doesn't meet either residency test.
O
P
- PartnershipAn unincorporated entity carrying on a business with two or more owners.
- Pass-Through EntityA business whose income is taxed at the owner level, not the entity level.
- Passive ActivityA trade or business in which you don't materially participate, including most rentals.
- Payroll TaxTaxes on wages — primarily Social Security, Medicare, and unemployment.
- PenaltyA monetary charge for failing to meet a tax obligation.
- PhaseoutA gradual reduction in a tax benefit as income rises above a threshold.
- Pre-Tax ContributionA retirement or benefit contribution made before income tax is applied.
- Premium Tax Credit (PTC)A refundable credit that helps pay for ACA marketplace health insurance.
- Primary ResidenceThe main home you live in.
- PrincipalThe amount of a loan being repaid, separate from interest.
- Profit MotiveThe intent to make a profit that distinguishes a business from a hobby.
- Progressive TaxA tax system where higher income is taxed at higher rates.
Q
- Qualified Business Income Deduction (QBI)A 20% deduction on pass-through business income under §199A.
- Qualified Charitable Distribution (QCD)A direct transfer of up to $105,000 (2024) from an IRA to charity by someone 70½ or older.
- Qualified DividendA dividend taxed at long-term capital gains rates rather than ordinary rates.
- Qualified PlanA retirement plan that meets IRS requirements for favorable tax treatment.
- Qualifying ChildA child who meets relationship, age, residency, support, and joint return tests to be claimed as a dependent.
- Qualifying RelativeA non-child dependent who meets gross income, support, and relationship tests.
R
- Realized vs RecognizedRealized = the economic event occurred; recognized = the gain or loss appears on your return.
- RecaptureTreating a portion of prior deductions as ordinary income upon sale.
- Recovery PeriodThe number of years over which an asset is depreciated.
- RefundMoney returned to a taxpayer who overpaid during the year.
- Refundable CreditA credit that can reduce tax below zero, generating a refund.
- Required Minimum Distribution (RMD)Mandatory annual withdrawals from most retirement accounts starting at age 73.
- Resident AlienA non-US-citizen who meets the green card or substantial presence test.
- Retirement Savings Contributions CreditA non-refundable credit of up to $1,000 ($2,000 MFJ) for contributions to retirement accounts.
- Revenue RulingAn official IRS interpretation of how tax law applies to a specific situation.
- RolloverMoving retirement funds from one qualified account to another without triggering tax.
- Roth ConversionMoving pre-tax retirement money to a Roth, paying tax now in exchange for tax-free future growth.
- Roth IRAA retirement account funded with after-tax dollars where qualified withdrawals are tax-free.
- RoyaltyIncome from the right to use intellectual property or natural resources.
S
- S CorporationA pass-through entity that avoids double taxation while paying owner-employees reasonable wages.
- Safe HarborA rule that protects taxpayers from penalty if specific requirements are met.
- SalaryFixed regular compensation paid to an employee.
- Sales TaxA state and local consumption tax on retail sales.
- Schedule AForm 1040 schedule for itemized deductions.
- Schedule BForm 1040 schedule for interest and dividend income exceeding $1,500.
- Schedule CForm 1040 schedule for sole proprietor business income.
- Schedule DForm 1040 schedule for capital gains and losses.
- Schedule EForm 1040 schedule for rental, royalty, partnership, S-corp, and trust income.
- Schedule SEForm 1040 schedule for self-employment tax.
- SECURE ActFederal legislation that significantly reshaped retirement account rules.
- Self-Employment TaxSocial Security and Medicare tax for self-employed people.
- SEP IRAA Simplified Employee Pension IRA for self-employed people and small employers.
- Short-Term Capital GainGain on a capital asset held one year or less.
- SIMPLE IRAA Savings Incentive Match Plan for Employees of small employers.
- Single FilerAn unmarried taxpayer who doesn't qualify for head of household or surviving spouse status.
- Social Security TaxA 6.2% payroll tax on wages up to the annual wage base ($168,600 in 2024).
- Sole ProprietorshipAn unincorporated business owned by one person.
- Standard DeductionA flat deduction available to taxpayers who don't itemize.
- Standard Mileage RateThe IRS rate per mile for deducting vehicle expenses.
- State Income TaxIncome tax imposed by individual US states.
- Stepped-Up BasisAdjustment of an inherited asset's basis to fair market value at the date of death.
- Stock OptionThe right to buy company stock at a specified price.
- Substantial Presence TestA test for whether a foreign individual is a US tax resident.
T
- Tax BracketSee: Bracket.
- Tax CreditSee: Credit.
- Tax Cuts and Jobs Act (TCJA)The 2017 tax overhaul that lowered individual rates, doubled the standard deduction, and capped SALT.
- Tax DeferralPostponing the payment of tax to a later year.
- Tax HomeThe general area of your main place of business or employment.
- Tax Identification Number (TIN)Any number used to identify a taxpayer — SSN, ITIN, EIN, or ATIN.
- Tax TreatyA bilateral agreement that reduces double taxation between the US and another country.
- Tax YearThe 12-month period for which a return is filed.
- Tax-ExemptIncome or organizations not subject to tax.
- Tax-FreeIncome that is permanently not subject to tax.
- Tax-Loss HarvestingSelling investments at a loss to offset taxable gains.
- Taxable IncomeThe amount of income subject to tax after deductions and exemptions.
- Tip IncomeCompensation received directly from customers.
- Traditional IRAAn individual retirement account with potentially deductible contributions and tax-deferred growth.
- Transfer TaxA tax on the transfer of property, including gift, estate, and GST taxes.
- TrustA legal arrangement where a trustee holds property for the benefit of others.
U
- Underpayment PenaltyA charge for failing to pay enough tax throughout the year via withholding or estimates.
- Unearned IncomeIncome from sources other than work, like interest, dividends, and capital gains.
- Uniform Transfers to Minors Act (UTMA)A way to hold custodial assets for a minor until they reach the age of majority.
- Unrelated Business Income Tax (UBIT)Tax on a tax-exempt organization's income from unrelated business activities.
- Use TaxA tax on taxable goods purchased out-of-state for use in your home state.
V
W
- Wage BaseThe maximum amount of wages subject to Social Security tax in a year.
- Wage GarnishmentCourt- or IRS-ordered withholding of wages to satisfy a debt.
- Wash-Sale RuleA rule disallowing a loss when you buy substantially identical securities within 30 days before or after the sale.
- WithholdingTax taken from each paycheck or payment and remitted to the IRS by the payer.
- Withholding AllowanceAn obsolete concept used on pre-2020 W-4 forms.
- Work Opportunity Tax Credit (WOTC)A credit for employers who hire from targeted groups facing barriers to employment.
- Worthless SecurityA security with no remaining value, treated as sold on the last day of the year.