Tax Glossary
30 tax and personal finance terms explained in plain English. From marginal rates to Roth conversions, every concept you need to understand your tax return.
Income Tax
Marginal Tax Rate
The tax rate applied to the last dollar of your taxable income, determined by which federal tax bracket that dollar falls into.
Effective Tax Rate
The average percentage of your total income that you actually pay in federal income tax, calculated by dividing total tax owed by total income.
Tax Bracket
A range of income taxed at a specific rate within the progressive federal income tax system.
Adjusted Gross Income (AGI)
Your total gross income minus specific "above-the-line" adjustments such as retirement contributions, student loan interest, and self-employment tax deductions.
Taxable Income
The portion of your income subject to federal income tax, calculated as adjusted gross income minus deductions (standard or itemized).
Filing Status
Your tax classification based on marital and family status, which determines your standard deduction amount, tax bracket thresholds, and eligibility for certain credits.
Head of Household
A filing status for unmarried taxpayers who pay more than half the cost of maintaining a home for a qualifying dependent.
Alternative Minimum Tax (AMT)
A parallel tax system with fewer deductions designed to ensure high-income taxpayers pay at least a minimum amount of tax.
Deductions & Credits
Standard Deduction
A fixed dollar amount that reduces your taxable income, available to all taxpayers who do not itemize deductions.
Itemized Deductions
Specific expenses you can deduct from your adjusted gross income instead of taking the standard deduction, including mortgage interest, state taxes, and charitable contributions.
Property Tax Deduction
A federal itemized deduction for property taxes paid on real estate, subject to the combined $10,000 SALT cap.
SALT Deduction Cap
The $10,000 federal limit on the total state and local tax deduction, including state income tax, property tax, and sales tax combined.
Investment Taxes
Capital Gains Tax
Tax on the profit from selling an asset such as stocks, bonds, or real estate, with rates depending on how long you held the asset.
Long-Term Capital Gains
Profits from selling assets held for more than one year, taxed at preferential rates of 0%, 15%, or 20% at the federal level.
Short-Term Capital Gains
Profits from selling assets held for one year or less, taxed as ordinary income at your regular marginal tax rate.
Net Investment Income Tax (NIIT)
An additional 3.8% tax on investment income for individuals with modified AGI above $200,000 (single) or $250,000 (married filing jointly).
Tax-Loss Harvesting
Selling investments at a loss to offset capital gains and reduce your tax bill, while maintaining your desired portfolio allocation by purchasing similar (but not identical) securities.
Payroll Taxes
Social Security Tax
A payroll tax of 6.2% on wages up to the annual wage base ($176,100 in 2025) that funds the Social Security retirement and disability program.
Medicare Tax
A payroll tax of 1.45% on all wages with no income cap, plus an additional 0.9% on wages above $200,000 for single filers.
FICA (Federal Insurance Contributions Act)
The combined payroll tax of 7.65% (6.2% Social Security + 1.45% Medicare) that funds Social Security and Medicare programs.
W-2 vs. 1099
The two primary employment classifications for tax purposes: W-2 employees have taxes withheld by employers, while 1099 independent contractors pay their own taxes including self-employment tax.
Self-Employment Tax
The 15.3% tax on net self-employment earnings that covers both the employee and employer portions of Social Security (12.4%) and Medicare (2.9%).
State Taxes
State Income Tax
Income tax levied by individual states on wages, investment income, and other earnings, with rates and structures varying widely across the country.
No Income Tax States
The nine states that do not levy a state income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Tax Planning
Child Tax Credit
A tax credit of up to $2,000 per qualifying child under age 17, which directly reduces your tax bill dollar-for-dollar.
Earned Income Tax Credit (EITC)
A refundable federal tax credit for low- to moderate-income workers that can provide up to $7,830 for families with three or more qualifying children.
401(k) Tax Benefit
Tax-deferred retirement savings through employer-sponsored 401(k) plans, with pre-tax contributions reducing current taxable income up to $23,500 in 2025.
Roth IRA vs. Traditional IRA
Two retirement account types with opposite tax treatment: Traditional IRAs offer a tax deduction now with taxable withdrawals later, while Roth IRAs offer no deduction now but tax-free withdrawals in retirement.
Estimated Tax Payments
Quarterly tax payments made by self-employed individuals, freelancers, and others who don't have taxes withheld from their income.
Tax Refund vs. Owing
Whether you receive a refund or owe additional tax when filing depends on whether your withholding and estimated payments exceeded or fell short of your actual tax liability.
Tax changes and calculators, explained
Get TaxCompare tax-law updates and calculators by email. No spam, unsubscribe anytime.