Tax Glossary — Understand Tax Terms Fast

Your total income minus certain adjustments. A key number that affects many tax credits and deductions.

The fair market value of goods or services received in exchange for your services. Taxable even when no cash changes hands.

When a lender forgives debt, the forgiven amount is generally treated as taxable income. Exceptions may apply for bankruptcy or insolvency.

Profits from selling assets like stocks or property. Taxed differently based on how long you held the asset.

Money you receive for working, including wages, salaries, tips, and self-employment income.

Income earned while working outside the United States. Eligible taxpayers may exclude a portion if residency or physical presence tests are met.

Non-cash compensation from employers, such as company cars, housing allowances, or tuition assistance. Some benefits are taxable, others are excluded.

Winnings from casinos, sports betting, lotteries, and raffles. All winnings are taxable and must be reported, even without a Form W-2G.

All money you receive before taxes and deductions. The starting point for calculating AGI and taxable income.

Money earned from activities not conducted with a profit motive. Income is taxable, but hobby expenses are generally not deductible.

The most common type of taxable income taxed at standard federal rates. Includes wages, salaries, bonuses, commissions, and interest income.

Income from business activities where the taxpayer does not materially participate. Examples include rental properties and limited partnership investments.

Earnings from investments like stocks, bonds, and mutual funds. Includes interest, dividends, and capital gains. Not subject to self-employment tax.

Income excluded from federal taxation. Examples include municipal bond interest, certain life insurance proceeds, and qualified Roth IRA distributions.

The amount of income subject to tax after deductions. Used to calculate your actual tax owed.

Income received without performing active work. Includes interest, dividends, capital gains, rental income, and certain retirement distributions.

Deductions subtracted before AGI is calculated. These reduce taxable income and may increase eligibility for other credits and deductions.

Deductions that reduce gross income to arrive at AGI. Valuable because they can be claimed even if you do not itemize deductions.

Reduces your taxable income. Choose between the standard deduction or itemizing specific expenses.

A refundable tax credit for low- to moderate-income workers. Can reduce tax or increase your refund.

Eligible teachers and educators can deduct unreimbursed classroom expenses like supplies, books, and equipment, up to IRS limits.

Contributions to an HSA are deductible above the line if you have a high-deductible health plan. Earnings and qualified withdrawals are tax-free.

Traditional IRA contributions may be deductible depending on income and workplace retirement plan coverage. Deductible contributions reduce AGI.

Generally nondeductible except for active-duty military members relocating under orders.

Self-employed individuals may deduct 100% of health insurance premiums paid for themselves, spouses, and dependents.

Contributions to a Simplified Employee Pension (SEP-IRA) are deductible business expenses and reduce taxable income for self-employed taxpayers.

SIMPLE IRA contributions made by self-employed individuals or small business employees are deductible and reduce AGI.

Fixed amount that reduces taxable income. Most taxpayers claim this instead of itemizing deductions.

Taxpayers may deduct interest paid on qualified student loans, subject to income phase-outs. Reduces AGI without requiring itemization.

Directly reduces your tax bill dollar-for-dollar. More powerful than a deduction for lowering taxes.

Credits reduce tax owed dollar-for-dollar, while deductions reduce taxable income. Credits are typically more valuable.

A child or qualifying person you support financially. Claiming dependents can unlock tax credits and deductions.

Your tax situation based on marital status and family structure. Affects your brackets and deductions.

Income is taxable when made available to you, even if not physically received. A December paycheck is taxable that year, even if collected in January.

Mandatory payroll taxes that fund Social Security and Medicare. Paid by employees, employers, and self-employed.

Tax paid on money you earn, calculated using progressive tax brackets. Includes federal and state taxes.

The rate at which your next dollar of income is taxed. Represents your top tax bracket.

Payroll tax (1.45% employee + 1.45% employer) that funds health insurance for seniors and disabled individuals.

Taxes withheld from your paycheck to fund Social Security, Medicare, and income tax obligations.

Whether money is taken from your paycheck before or after taxes. Affects take-home pay and retirement savings.

A tax system where rates increase as income increases. Higher earners pay higher rates only on income within each bracket.

Annual tax on real estate based on property value. Funds local schools, police, fire, and infrastructure.

Tax on goods and services collected at purchase. Rates vary by state, county, and city.

Tax (15.3%) that self-employed workers pay to cover both employee and employer portions of Social Security and Medicare.

Payroll tax (6.2% employee + 6.2% employer) that funds retirement, disability, and survivor benefits.

A range of income taxed at a specific rate. Your income is divided across multiple brackets, not all taxed at one rate.

Tax automatically taken from your paycheck and sent to the IRS as prepayment. Helps avoid owing a lump sum at tax time.