Plain-English definitions of 26+ essential tax terms.
Your total gross income minus specific deductions (known as 'above-the-line' deductions). AGI is used to determine eligibility for many tax credits and deductions. It includes wages, interest, dividends, capital gains, business income, and other sources, minus adjustments like student loan interest, IRA contributions, and self-employment tax.
Read moreYour AGI with certain deductions added back in. MAGI determines eligibility for Roth IRA contributions, premium tax credits, education credits, and other tax benefits. The specific add-backs depend on which tax benefit is being evaluated.
Read moreAll income received in the form of money, goods, property, and services that is not exempt from tax. Includes wages, salaries, tips, interest, dividends, rents, royalties, alimony (for pre-2019 agreements), business income, capital gains, and retirement distributions.
Read moreThe portion of your income that is subject to federal income tax. Calculated by subtracting either the standard deduction or itemized deductions (and any qualified business income deduction) from your AGI.
Read moreThe profit from selling a capital asset (stocks, real estate, etc.) for more than its purchase price. Short-term gains (assets held ≤1 year) are taxed as ordinary income. Long-term gains (held >1 year) get preferential rates: 0%, 15%, or 20% depending on income.
Read moreThe loss from selling a capital asset for less than its cost basis. Capital losses offset capital gains dollar-for-dollar. Excess losses can offset up to $3,000 of ordinary income per year, with remaining losses carried forward to future years.
Read moreThe original value of an asset for tax purposes, usually the purchase price plus certain expenses. Used to calculate capital gains or losses when the asset is sold. Can be adjusted for stock splits, dividends reinvested, improvements (real estate), and depreciation.
Read moreA fixed dollar amount that reduces the income you're taxed on. For 2025: $15,000 for single filers, $30,000 for married filing jointly. Most taxpayers take the standard deduction rather than itemizing.
Read moreSpecific expenses you can deduct from AGI instead of taking the standard deduction. Common itemized deductions include mortgage interest, state and local taxes (SALT, capped at $10,000), charitable contributions, and medical expenses exceeding 7.5% of AGI.
Read moreState and Local Tax deduction allows taxpayers to deduct state income taxes (or sales taxes) and property taxes on Schedule A. Currently capped at $10,000 ($5,000 for married filing separately) under the Tax Cuts and Jobs Act through 2025.
Read moreA tax deduction that allows businesses to recover the cost of certain assets over their useful life. Common methods include straight-line, MACRS (Modified Accelerated Cost Recovery System), and Section 179 immediate expensing. Applies to equipment, vehicles, buildings, and other business property.
Read moreAllows businesses to deduct the full purchase price of qualifying equipment and software in the year of purchase, rather than depreciating over multiple years. The 2025 limit is $1,220,000 with a phase-out starting at $3,050,000 in total equipment purchases.
Read moreThe Social Security and Medicare tax for self-employed individuals. The rate is 15.3% (12.4% Social Security + 2.9% Medicare) on net self-employment income. Half of this tax is deductible as an above-the-line adjustment to income.
Read moreA business structure (S corporation, partnership, LLC, sole proprietorship) where income 'passes through' to the owners' personal tax returns rather than being taxed at the entity level. Owners report their share of income on Schedule K-1.
Read moreAlso known as the Section 199A deduction. Allows eligible self-employed and small business owners to deduct up to 20% of their qualified business income. Subject to income thresholds and limitations for specified service businesses.
Read moreQuarterly tax payments made by self-employed individuals and others who don't have taxes withheld from income. Due April 15, June 15, September 15, and January 15. Failure to pay can result in underpayment penalties.
Read moreThe amount of income tax your employer deducts from each paycheck and sends to the IRS on your behalf. Determined by your W-4 form selections. Withholding acts as prepayment of your annual tax liability.
Read moreDetermines your tax bracket, standard deduction, and eligibility for certain credits. Five statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse.
Read moreA filing status for unmarried taxpayers who paid more than half the cost of keeping up a home for a qualifying person. Provides a larger standard deduction and wider tax brackets than Single status.
Read moreThe income ranges that determine your marginal tax rate. The U.S. uses a progressive system with 7 brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%). Only income within each bracket is taxed at that rate — your effective rate is lower than your marginal rate.
Read moreA qualifying child or qualifying relative you support financially. Claiming dependents can provide tax benefits including the Child Tax Credit, Earned Income Credit, and dependent care credit. Dependents generally cannot be claimed on another person's return.
Read moreA tax credit of up to $2,000 per qualifying child under age 17. Up to $1,700 may be refundable as the Additional Child Tax Credit. Phases out for AGI over $200,000 ($400,000 married filing jointly).
Read moreA refundable tax credit for low-to-moderate-income workers. The credit amount depends on income, filing status, and number of qualifying children. For 2025, the maximum credit ranges from $632 (no children) to $7,830 (3+ children).
Read moreA retirement account funded with after-tax dollars. Contributions are not deductible, but qualified withdrawals (including earnings) are tax-free. 2025 contribution limit: $7,000 ($8,000 if age 50+). Income limits apply for eligibility.
Read moreA retirement account that may allow tax-deductible contributions. Earnings grow tax-deferred until withdrawal. Required Minimum Distributions (RMDs) begin at age 73. 2025 contribution limit: $7,000 ($8,000 if age 50+).
Read moreThe minimum amount you must withdraw annually from traditional IRAs, 401(k)s, and other tax-deferred retirement accounts starting at age 73 (under SECURE 2.0 Act). Failure to take RMDs results in a 25% penalty on the amount not withdrawn.
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