Confused by Tax Terminology? This Handy Glossary Will Get You Up To Speed
A guide to important tax terms, including specific credits and deductions.
When it’s time to do your taxes, all the jargon can be overwhelming. Even if you’ve been paying taxes for many decades, there are still things that may trip you up. If you want to brush up on your tax terminology, and make sure you know your deductions from your credits, and your Form 1099-INTs from your Form 1099-MISCs, this tax glossary is the guide for you. We wish you a stress-free tax season!
An employer-sponsored retirement account that allows you to set aside a portion of your paycheck before taxes are taken out.
Expenses that lower your total income for tax purposes.
After-Tax Retirement Accounts
Retirement accounts such as a Roth IRA or Roth 401(k) that don’t provide an immediate
tax deduction for contributions but aren’t taxed when you make withdrawals in retirement.
American Opportunity Tax Credit (AOTC)
A tax credit for individuals, who are pursuing their first four years of college education, to help offset educational expenses such as tuition, room and board, and textbooks.
Profit from the sale of capital assets such as stock, a business, or a parcel of land.
The loss incurred when a security is sold for less than the original purchase price. Capital losses can reduce your tax liability by offsetting capital gains, and might also offset some of your earned income.
Certified Public Accountant (CPA)
A professional often used for preparing taxes who has passed a certification exam and has a background in accounting and finance. He or she typically has expertise in a wide range of accounting skills.
Child and Dependent Care Credit
A credit that allows you to claim up to 35 percent of the costs of child care or other dependent care while you are working or looking for work. Includes day care and summer day camp expenses.
Child Tax Credit
A partially refundable tax credit worth $2,000 for each qualifying dependent child, stepchild, or foster child under the age of 17 at the end of the tax year. The credit includes a nonrefundable tax credit of $500 for each qualifying non-child dependent.
Tax write-offs that help offset your taxable earnings and reduce your tax bill.
A child or other relative whom you can claim for either tax credits or deductions.
Distribution of a corporation’s profits to its shareholders.
Earned Income Tax Credit (EITC)
A refundable tax credit for working people with low to moderate income.
Taxes on the assets you pass on to your beneficiaries after your death, including cash, securities, insurance, real estate, and business interests. These taxes generally only apply to estates above a certain asset level.
Quarterly tax payments to the IRS made by self-employed taxpayers or others who receive income that is not subject to withholding by an employer.
Similar to sales taxes, these taxes are charged when you make a purchase. Excise taxes only apply to certain goods and services, such as alcohol.
Exemptions reduce your taxable income by an amount that the government predetermines.
A document listing the interest paid to a lender for the tax year. Variations of the 1098 include documentation of mortgage loan interest, student loan interest, tuition statements, and certain charitable donations.
A document that details interest earned on investment income such as dividends and capital gains in a given tax year.
A document that details taxable interest earned on a savings account or certificate of deposit in a given tax year.
A document that details non-wage earnings for independent contractors or self-employed workers. Companies that pay non-employees more than $600 in a tax year are required to send these forms to each worker.
The form used by individuals filing for an extension on their tax returns.
The form you must fill out if you’re deducting more than $500 in property you’ve given in charitable contributions.
Generation-Skipping Transfer Tax
A tax on estates that allows assets to be left directly to grandchildren in order to avoid an estate being taxed each time it’s handed down a generation.
Head of Household
A filing status that can make you eligible for a lower tax rate and higher deductions than those available to a single filer. To qualify, you must be unmarried by the end of the previous year and your children must spend at least 50 percent of their time in your care.
Health Savings Account (HSA)
A tax-advantaged account for setting aside money for medical expenses. HSAs are only allowed in conjunction with a high-deductible health insurance policy.
Home Office Deduction
The portion of expenses, such as mortgage interest, property tax, utilities, and home repairs, that the IRS allows you to deduct for a qualifying home office.
A tax that is imposed on residents who receive a bequest. Inheritance taxes are payable by the beneficiary — this differs from the estate tax, which is paid by the estate.
An eligible expense that an individual taxpayer can claim on a federal tax return in order to decrease taxable income; it can be used instead of the standard deduction.
Lifetime Learning Credit
A tax credit worth up to $2,000 per tax return for the costs of tuition and education expenses.
Long-Term Capital Gains
Profits from a capital asset held for more than a year. Long-term capital gains are taxed at a maximum of 20 percent.
Marginal Tax Rate
The rate at which your next dollar of income will be taxed.
Married Filing Jointly
A filing status married couples often choose, meaning both spouses are responsible for reporting any income earned and paying any taxes due.
Married Filing Separately
A filing status that is available to couples who are married, in the event that they want to file their taxes separately despite being married.
A deduction available for those who choose to itemize their deductions. You may qualify for the medical deduction if your qualifying medical expenses — such as Medicare premiums, prescription drugs, and medical insurance co-pays for in-office visits — exceed 10 percent of your taxable income.
Fees paid to a lender at closing in order to secure a reduced rate on a mortgage. Points are typically fully deductible in the year you purchased your home.
Nonrefundable Tax Credits
Credits that reduce the amount of your income tax up to the amount of income tax you owe — they do not result in a refund if they total more than your current tax liability.
Also known as “employment taxes,” these taxes are withheld automatically from your paycheck by your employer to meet your Social Security and Medicare obligations. They are reported on your W-2.
The numbers you enter on a W-4 form to determine how much your employer will withhold to cover your federal income taxes.
Pretax Retirement Accounts
Retirement accounts, such as 401(k)s and IRAs, that offer an immediate deduction for your contributions — meaning these accounts are funded with pretax money. Withdrawals in retirement are taxed as ordinary income.
Premium Tax Credit
A tax credit designed to help cover the cost of insurance purchased through the Health Insurance Marketplace for households where income is 100 to 400 percent of the federal poverty level for that size of family.
Preparer Tax Identification Number (PTIN)
An identification number that professional tax return preparers are required to provide. This number is designated by the IRS.
Progressive Tax Code
A tax code designed so that people who make more money are taxed at a higher rate than people who make less money.
Taxes levied at the state and/or local level, usually on real estate but sometimes on other large purchases, such as cars.
Qualifying Widow/Widower with Dependent Child
A filing status available to a taxpayer whose spouse has died during the current tax year. It gives qualifying widows and widowers the same tax benefits as those married filing jointly.
Refundable Tax Credits
Credits subtracted from the taxes you owe after deductions are calculated. These credits can result in a tax refund.
Regressive Tax Code
A tax code structured so those who make less money are taxed at a proportionally higher rate than people who make more.
Required Minimum Distributions (RMDs)
The minimum amount of assets people age 70 ½ and over must withdraw from their retirement accounts every year to avoid incurring a penalty. (RMDs do not apply to Roth IRAs.)
Retirement Saving Contributions Credit (the Savers Credit)
A credit available to lower or moderate-income workers who have made a voluntary contribution to a retirement account, such as an IRA or employer-sponsored plan.
A retirement account that functions like a traditional 401(k), but your contributions are made with after-tax dollars and are not subject to income tax when you make withdrawals in retirement.
A retirement account funded with after-tax dollars. Your contributions and any earnings grow tax-free, and your withdrawals generally are not subject to income tax.
The tax self-employed people must pay to cover the employer portion of their Medicare and Social Security taxes.
Short-Term Capital Gains
Profits from a capital asset held for less than a year. Short-term capital gains are taxed at the same rate as wages and salaries.
SIMPLE (Savings Incentive Match Plan for Employees) IRA
A type of IRA that can be opened by any employer, including self-employed individuals. Much like a 401(k), a SIMPLE IRA allows employees to make pretax contributions.
SEP (Simplified Employee Pension) IRA
A retirement account designed for self-employed individuals that allows higher contribution limits than traditional IRAs do.
A filing status for those who are unmarried, legally separated, divorced, or widowed as of December 31 of the tax year.
A set dollar amount determined by the IRS that varies based on your filing status. (It is an alternative to choosing to itemize your deductions.) The amount usually changes yearly.
The range of taxable income taxed at a specific rate, as described by the IRS.
An amount of money that reduces your tax liability on a dollar-for-dollar basis. Credits are typically offered in order to help offset certain expenses, such as buying a first home or child care costs.
Selling an underperforming position before year-end to realize a loss that will offset gains you’ve earned on other holdings that year.
Your total income minus adjustments, deductions, and exemptions. Also known as adjusted gross income (AGI).
A retirement account in which contributions and earnings grow tax-deferred. Contributions to IRAs are generally tax-deductible.
A form issued by employers to document the tips and wages you’ve earned, as well as taxes that have been withheld during the tax period.
The IRS form that gives your employer information about how much money it is required to withhold from each paycheck to cover your federal income taxes.
The income taxes withheld from your paycheck each pay period. Your employer remits this amount to the government on your behalf.
A version of this article appeared in our partner magazine, The Essential Tax Guide: 2023 Edition.