Tax Terms

A reference guide to the key terms and concepts behind U.S. federal income taxes. Whether you're filing your first return, navigating self-employment income, or trying to reduce what you owe through deductions and credits, these definitions will help you understand the tax system and make more informed financial decisions. Tax law is complex — knowing the vocabulary is the first step to understanding your options.

• Above-the-Line Deductions Above-the-line deductions are adjustments to income that reduce your AGI before you choose between the standard deduction and itemizing — they're available to every eligible taxpayer and are particularly valuable because they also affect eligibility for many other tax benefits.
• Adjusted Gross Income (AGI) Adjusted Gross Income (AGI) is your total gross income for the year minus specific above-the-line deductions — and it's one of the most important numbers on your tax return, as it determines your eligibility for dozens of credits and deductions.
• Alternative Minimum Tax (AMT) The Alternative Minimum Tax (AMT) is a parallel tax calculation that applies when it would result in a higher bill than the regular income tax — it disallows certain deductions to ensure high earners pay at least a minimum amount of tax.
• Amended Tax Return An amended tax return is a correction to a previously filed return — you file one using IRS Form 1040-X to fix errors, claim deductions you missed, report overlooked income, or update your filing status.
• Child Tax Credit The child tax credit is a federal tax credit worth up to $2,000 per qualifying child under age 17 that directly reduces your tax bill dollar-for-dollar — and up to $1,700 may be refundable through the Additional Child Tax Credit.
• Depreciation (Tax) Tax depreciation is a deduction that lets you recover the cost of a business asset or rental property over its useful life — spreading that cost as annual deductions that reduce your taxable income even though you're not spending any new money.
• Earned Income Tax Credit (EITC) The Earned Income Tax Credit (EITC) is a refundable federal tax credit for low- to moderate-income workers that can reduce your tax bill to zero and put money in your pocket — the credit grows with earned income up to a point, then phases out.
• Estate Tax The estate tax is a federal tax on the transfer of a deceased person's assets to their heirs — but a $13.99 million exemption (2025) means it only affects the very largest estates, less than 0.2% of deaths.
• FICA FICA refers to the Social Security and Medicare taxes deducted from every paycheck — employees pay 7.65% of their wages, employers match that amount, and self-employed workers pay both halves as the self-employment tax.
• Filing Status Your filing status is the IRS category you use when filing your taxes — Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Surviving Spouse — and it has a major impact on your tax brackets and standard deduction.
• Gift Tax The gift tax is a federal tax on transfers of money or property from one person to another, but an annual exclusion of $19,000 per recipient (2025) and a large lifetime exemption mean most givers will never owe a dollar of gift tax.
• IRS Audit An IRS audit is a formal examination of your tax return where the IRS reviews your income, deductions, and credits to verify they're accurate — most are handled by correspondence and don't require an in-person meeting.
• IRS Form 1040 IRS Form 1040 is the standard federal income tax return used by U.S. individuals — it's where you report your income, claim deductions and credits, and calculate whether you owe taxes or are owed a refund.
• Itemized Deductions Itemized deductions are a list of specific eligible expenses you can subtract from your Adjusted Gross Income instead of taking the standard deduction — you choose whichever gives you the bigger tax break.
• Net Investment Income Tax (NIIT) The Net Investment Income Tax (NIIT) is an additional 3.8% federal tax on investment income — capital gains, dividends, interest, and rental income — for taxpayers whose Modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly).
• Passive Activity Rules Passive activity rules limit your ability to deduct losses from business or rental activities you don't materially participate in — those losses can only offset passive income, not wages or active business income, unless you qualify for a special exception.
• Quarterly Estimated Taxes Quarterly estimated taxes are four tax payments made throughout the year by freelancers, small business owners, and investors to prepay taxes on income that isn't subject to employer withholding — skipping them leads to IRS penalties.
• Standard Deduction The standard deduction is a fixed dollar amount you can subtract from your adjusted gross income before calculating your tax bill — no receipts required. It's the most common deduction method, used by roughly 90% of taxpayers.
• Step-Up in Basis Step-up in basis resets the cost basis of inherited assets to the fair market value at the date of the previous owner's death — potentially wiping out years of capital gains that were never taxed, with no tax owed by the heirs on that appreciation.
• Tax Deduction A tax deduction is an eligible expense that reduces your taxable income, which lowers your tax bill by your marginal rate times the deduction amount — not dollar-for-dollar, but still meaningful savings.
• Tax Extension A tax extension gives you an automatic 6-month extension to file your tax return — moving the deadline from April 15 to October 15 — but taxes owed are still due on April 15, so you may need to send a payment with your extension request.
• Tax Withholding Tax withholding is the money your employer holds back from each paycheck and sends to the IRS as a prepayment of your annual income tax — your W-4 form controls how much gets withheld.
• Tax-Deferred Tax-deferred means you don't pay tax on income or investment growth now — instead, you pay taxes when you withdraw or realize the income later, such as when you take distributions from a traditional 401(k) or IRA in retirement.
• W-4 Form A W-4 form is the IRS employee withholding certificate you give your employer when you start a job — it tells them how much federal income tax to deduct from your paychecks based on your expected income, filing status, and deductions.
• Wash Sale Rule The wash sale rule disallows a claimed tax loss if you buy back the same or a substantially identical security within 30 days before or after selling it at a loss — designed to prevent "round-trip" loss harvesting without real change in position.