U.S. Tax Glossary: Key Terms Explained

Deductions subtracted from gross income before reaching Adjusted Gross Income (AGI). Available to all filers regardless of whether they itemize. Examples: student loan interest, self-employed health insurance, contributions to a traditional IRA, and alimony paid under pre-2019 agreements.

Your gross income minus certain above-the-line deductions. AGI is the starting point for calculating your taxable income and determines eligibility for many credits and deductions. It appears on Line 11 of Form 1040.

The refundable portion of the Child Tax Credit. For 2025, up to $1,700 per qualifying child can be received as a refund, even if your tax liability is zero.

A parallel tax system that ensures high-income taxpayers pay at least a minimum amount of tax, even after deductions. The AMT exemption for 2025 is $88,100 (single) and $137,000 (married filing jointly).

A partially refundable education credit of up to $2,500 per student for the first four years of higher education. 40% is refundable. Income phase-outs apply.

An IRS review of your tax return to verify accuracy. Most audits are conducted by mail (correspondence audits). Having documentation for all income and deductions is your best defense.

The original purchase price of an asset, used to calculate capital gains or losses when the asset is sold. If you inherit an asset, you generally receive a "stepped-up" basis equal to the fair market value on the date of the owner's death.

When inflation pushes income into higher tax brackets without a real increase in purchasing power. The IRS adjusts tax brackets annually for inflation to minimize bracket creep.

Profits earned from selling a capital asset (stock, real estate, cryptocurrency, etc.) for more than its cost basis. Short-term gains (assets held ≤1 year) are taxed as ordinary income; long-term gains (held >1 year) are taxed at lower rates of 0%, 15%, or 20%.

The loss from selling a capital asset for less than your cost basis. Capital losses can offset capital gains dollar-for-dollar. Up to $3,000 of net capital losses can be deducted against ordinary income per year; excess losses can be carried forward.

A tax credit of up to $2,200 per qualifying child under age 17. Up to $1,700 may be refundable as the Additional Child Tax Credit (ACTC). Income phase-out limits apply.

Amounts that directly reduce your tax bill dollar-for-dollar, as opposed to deductions which reduce taxable income. Credits can be refundable, non-refundable, or partially refundable.

An expense that reduces your taxable income. The value of a deduction depends on your tax bracket — a $1,000 deduction saves $220 in taxes for someone in the 22% bracket. See "Standard Deduction" and "Itemized Deductions."

A qualifying child or qualifying relative you can claim on your tax return. Dependents may entitle you to various credits and deductions, including the Child Tax Credit, Dependent Care Credit, and Head of Household filing status.

The annual deduction that allows businesses to recover the cost of an asset over its useful life. Common for equipment, vehicles, and real estate. The Section 179 deduction and bonus depreciation allow faster expensing of assets.

Income received from working — wages, salaries, tips, and net self-employment income. Earned income qualifies for the EITC and can be contributed to IRAs. Investment income (dividends, interest, capital gains) is not earned income.

A fully refundable credit for low-to-moderate income workers. For 2025, the maximum credit is $8,046 (3+ children), $7,152 (2 children), $4,328 (1 child), and $649 (no children). Income limits and other requirements apply.

The actual percentage of your total income paid in federal taxes. Always lower than your marginal rate because not all income is taxed at the top bracket rate. Calculate it by dividing total tax paid by total income.

A federally licensed tax practitioner authorized to represent taxpayers before the IRS. EAs must pass a comprehensive IRS exam and complete continuing education. They specialize in tax matters and can represent clients in audits, appeals, and collections.

Quarterly tax payments required for self-employed individuals, investors, and others who don't have enough tax withheld from income. Due four times per year using Form 1040-ES.

A 6-month extension to file your tax return, obtained by submitting Form 4868 by April 15. An extension extends your time to FILE, not your time to PAY. Taxes owed must still be paid by April 15 to avoid penalties.

The law that requires employees and employers to contribute to Social Security (6.2% each) and Medicare (1.45% each). Self-employed workers pay both sides — 15.3% total — as self-employment tax.

Your tax category based on your marital and family situation on December 31 of the tax year. The five statuses are: Single, Married Filing Jointly (MFJ), Married Filing Separately (MFS), Head of Household (HOH), and Qualifying Surviving Spouse (QSS).

The primary form used by U.S. individuals to file federal income tax returns. Most taxpayers file the standard Form 1040, with schedules attached for specific types of income or deductions.

A series of information return forms used to report various types of income other than wages. Common types: 1099-NEC (freelance/contractor income), 1099-INT (interest), 1099-DIV (dividends), 1099-K (payment platform income), 1099-R (retirement distributions).

The Wage and Tax Statement issued by employers to employees by January 31. It reports total wages earned and taxes withheld (federal income tax, Social Security, Medicare) for the prior tax year. You need it to file your return.

Employee's Withholding Certificate, submitted to your employer when you start a job (or when your situation changes). It tells your employer how much federal income tax to withhold from each paycheck.

All income received from all sources before any deductions or adjustments. Includes wages, self-employment income, investment income, rental income, alimony (for pre-2019 agreements), and more.

A favorable filing status for unmarried individuals who pay more than half the cost of maintaining a home for a qualifying person (child, parent, or other qualifying relative). Provides a larger standard deduction than Single status.

A 9-digit number (format: 9XX-XX-XXXX) issued by the IRS to individuals who need a tax ID but do not qualify for a Social Security Number. Used by nonresident aliens, their spouses/dependents, and certain immigrants to meet tax obligations.

A tax-advantaged personal savings account for retirement. Traditional IRA contributions may be tax-deductible; Roth IRA contributions are made with after-tax dollars but grow and can be withdrawn tax-free in retirement. 2025 contribution limit: $7,000 ($8,000 if age 50+).

The U.S. federal agency responsible for administering and enforcing the nation's tax laws, collecting federal taxes, and processing tax returns. It operates under the Department of the Treasury. Website: irs.gov.

A list of specific eligible expenses that can be subtracted from AGI instead of the standard deduction, reported on Schedule A. Common items include mortgage interest, state and local taxes (capped at $10,000 or $40,000 under 2025 legislation), charitable donations, and qualifying medical expenses.

A non-refundable education credit of up to $2,000 per tax return (not per student) for all years of post-secondary education and job training courses. Income limits apply; available to students in any year of schooling, including graduate school.

Gains from assets held more than one year. Taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income. Much lower than ordinary income tax rates for most taxpayers.

The tax rate that applies to the next dollar of your income — your "top" bracket. Because the U.S. uses a progressive system, only the income in each bracket is taxed at that bracket's rate; your entire income is NOT taxed at your marginal rate.

A filing status for legally married couples who combine their income and deductions on one return. Generally the most advantageous status for married couples — provides the highest standard deduction ($31,500 in 2025) and the widest tax brackets.

A filing status for married couples who file separate returns. Usually results in higher taxes than filing jointly. May be beneficial in limited situations, such as managing income-based student loan repayments or protecting one spouse from the other's tax liability.

The FICA tax component funding Medicare health coverage. Rate: 1.45% for both employee and employer (2.9% total). No income cap. High earners (over $200,000 single / $250,000 joint) also pay an Additional Medicare Tax of 0.9%.

AGI with certain deductions added back. Used to determine eligibility for many credits and deductions (Roth IRA contributions, AOTC, EITC, premium tax credit, etc.). The specific calculation varies by the benefit being tested.

An additional 3.8% tax on net investment income (interest, dividends, capital gains, rental income) for taxpayers whose income exceeds $200,000 (single) or $250,000 (married filing jointly).

A tax credit that can reduce your tax liability to $0 but cannot generate a refund if the credit exceeds your tax bill. Example: the Child and Dependent Care Credit and the Lifetime Learning Credit.

Taxes withheld from employees' wages by employers and remitted to the government. Includes federal income tax withholding, Social Security (OASDI), and Medicare taxes. Also includes state income tax withholding where applicable.

An additional charge imposed by the IRS for failing to meet tax obligations. Common penalties: failure-to-file (5%/month, max 25%), failure-to-pay (0.5%/month, max 25%), and underpayment of estimated taxes.

A tax system where higher incomes are taxed at higher rates. The U.S. federal income tax is progressive — it has seven brackets from 10% to 37%. Only the income within each bracket is taxed at that bracket's rate.

A deduction allowing eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income. Originally from the Tax Cuts and Jobs Act of 2017 and extended through 2025 legislation. Income limits and restrictions apply.

A child who meets IRS criteria for certain tax benefits, including the Child Tax Credit and EITC. Requirements include: relationship (child, sibling, or descendant), age (generally under 19, or under 24 if a student), residency (must live with you more than half the year), and dependency.

Money returned to you when your total tax payments (withholding + estimated payments) exceed your actual tax liability for the year. A refund is not free money — it is the return of your own money that you overpaid.

A tax credit that can reduce your tax liability below $0, resulting in a refund. Examples: the Earned Income Tax Credit (EITC) and the refundable portion of the Child Tax Credit (ACTC). Even taxpayers with no tax liability may receive these as a refund.

The minimum amount you must withdraw from traditional retirement accounts (401k, traditional IRA) each year once you reach age 73 (under current law). Failure to take RMDs results in a 25% penalty on the amount not withdrawn.

A retirement savings account funded with after-tax dollars. Contributions are not tax-deductible, but qualified withdrawals in retirement are completely tax-free, including investment earnings. 2025 contribution limit: $7,000 ($8,000 if 50+). Income limits apply for contributions.

An itemized deduction for state income taxes (or sales taxes) and property taxes paid. Currently capped at $10,000 per return ($5,000 for married filing separately) under the Tax Cuts and Jobs Act, though the 2025 One Big Beautiful Bill temporarily raised this to $40,000 for many filers.

The 15.3% tax that self-employed individuals pay to cover both the employee and employer portions of Social Security (12.4%) and Medicare (2.9%). You can deduct 50% of this tax from your gross income as an above-the-line deduction.

A 9-digit number issued by the Social Security Administration to U.S. citizens and eligible residents. Required for filing taxes in most cases. Used as a primary identifier by the IRS.

A fixed dollar amount you can subtract from your AGI without needing to document specific expenses. For 2025: $15,750 (single), $31,500 (married filing jointly), $23,625 (head of household). About 90% of taxpayers take the standard deduction.

An IRS test used to determine whether a foreign national is considered a U.S. tax resident. You pass if you were in the U.S. at least 31 days in the current year AND at least 183 days over the past 3 years using a weighted formula.

One of seven income ranges, each taxed at a specific rate (10%–37%) in the U.S. progressive tax system. Only income within each bracket is taxed at that bracket's rate — not your entire income. Most people have income spanning multiple brackets.

The total amount of taxes owed to the IRS for a given tax year, calculated on your taxable income after all deductions and before credits. Credits then reduce your tax liability dollar-for-dollar.

The formal document (Form 1040 and attachments) filed with the IRS reporting your income, deductions, credits, and taxes paid for the year. Not to be confused with a "refund" — a tax return is the form you file; a refund is what you may receive after filing.

A bilateral agreement between the U.S. and another country that can reduce or eliminate taxation on certain types of income. The U.S. has tax treaties with over 60 countries. Treaties may reduce or exempt certain income from U.S. tax for residents of the treaty country.

Your income after all deductions (standard or itemized) and above-the-line deductions have been subtracted. This is the amount your actual tax is calculated on using the tax bracket tables.

A retirement account where contributions may be tax-deductible (depending on income and whether you have a workplace retirement plan). Withdrawals in retirement are taxed as ordinary income. Mandatory distributions begin at age 73.

A penalty charged when you don't pay enough taxes throughout the year through withholding or estimated payments. You generally avoid the penalty if you owe less than $1,000, or if you paid at least 90% of the current year's tax or 100% of the prior year's tax.

The annual form your employer sends by January 31 showing total wages paid and taxes withheld (federal income tax, Social Security, Medicare, and state taxes) during the prior year. Required to file your tax return.

The form used to apply for an ITIN. Filed with the IRS along with documentation verifying foreign status and true identity. Required for individuals who need to file a U.S. tax return but are not eligible for a Social Security Number.

The amount your employer deducts from each paycheck and sends directly to the IRS on your behalf as a prepayment of your income taxes. Adjustable via Form W-4. Proper withholding helps you avoid owing a large amount at tax time or receiving an unnecessarily large refund.