Tax glossary

A

Adjusted Gross Income (AGI)

Your total income minus specific adjustments such as retirement contributions and student loan interest. AGI is the starting point for many deductions, credits, and phase-outs.

Amended Return

A corrected version of a previously filed tax return, filed on Form 1040-X for individuals, used to fix errors or claim missed deductions and credits.

Audit

An IRS or state review of your return and records to verify that income, deductions, and credits were reported correctly.

B

Basis

Your investment in an asset for tax purposes — usually what you paid, plus improvements, minus depreciation. Basis determines gain or loss when you sell.

Bookkeeping

The ongoing recording and organizing of a business’s financial transactions — the foundation for accurate financial statements and tax filings.

C

Capital Gain

Profit from selling an asset such as stock or property. Gains on assets held over one year are “long-term” and taxed at lower rates than ordinary income.

C Corporation

A corporation taxed separately from its owners at the corporate rate. Profits distributed as dividends are taxed again at the shareholder level.

Credit (Tax Credit)

A dollar-for-dollar reduction of tax owed. Credits are more valuable than deductions, which only reduce taxable income.

D

Deduction

An expense that reduces taxable income — either through the standard deduction or by itemizing eligible expenses such as mortgage interest and charitable gifts.

Dependent

A qualifying child or relative you support financially, who may entitle you to credits such as the Child Tax Credit.

Depreciation

Deducting the cost of a business asset over its useful life — or faster, using bonus depreciation or Section 179 expensing.

E

EIN (Employer Identification Number)

A federal identification number for a business entity — required to hire employees, open business bank accounts, and file business returns.

Estimated Taxes

Quarterly prepayments of income and self-employment tax required when income isn’t subject to withholding — typical for the self-employed.

Effective Tax Rate

Your total tax divided by your total income — the average rate you actually pay, as opposed to your marginal (top bracket) rate.

F

FICA

Federal Insurance Contributions Act taxes — Social Security (6.2%) and Medicare (1.45%) withheld from wages and matched by employers.

Filing Status

The category that determines your rates and standard deduction: single, married filing jointly, married filing separately, head of household, or qualifying surviving spouse.

Form 990

The annual information return filed by tax-exempt organizations — publicly available and closely read by donors and watchdogs.

G

Gross Income

All income from every source before any deductions — wages, business income, investment income, rents, and more.

H

Head of Household

A filing status with better rates and a larger standard deduction for unmarried taxpayers who pay more than half the cost of keeping up a home for a qualifying person.

HSA (Health Savings Account)

A triple-tax-advantaged account for those with high-deductible health plans: deductible contributions, tax-free growth, and tax-free medical withdrawals.

I

Innocent Spouse Relief

IRS relief that can free you from responsibility for tax, interest, and penalties caused by a spouse’s (or ex-spouse’s) errors on a joint return.

Installment Agreement

A monthly payment plan with the IRS for taxpayers who can’t pay their balance in full.

Itemized Deductions

Individual deductions — mortgage interest, state and local taxes, charitable gifts, medical expenses — claimed instead of the standard deduction when they total more.

K

K-1 (Schedule K-1)

The form partnerships, S corporations, and some trusts issue to owners and beneficiaries reporting each person’s share of income, deductions, and credits.

L

Lien (Tax Lien)

The government’s legal claim against your property when tax debt goes unpaid — it can affect credit and property sales until resolved.

LLC (Limited Liability Company)

A flexible legal entity that protects owners’ personal assets. For taxes, an LLC can be treated as a sole proprietorship, partnership, S corporation, or C corporation.

M

Marginal Tax Rate

The rate applied to your last dollar of income — your top bracket. Useful for evaluating the tax impact of additional income or deductions.

Modified Adjusted Gross Income (MAGI)

AGI with certain items added back — used to determine eligibility for credits, IRA deductions, and the net investment income tax.

N

Net Investment Income Tax (NIIT)

An additional 3.8% tax on investment income for taxpayers with MAGI above $200,000 (single) or $250,000 (married filing jointly).

Nexus

A connection between a business and a state — physical or economic — that creates tax obligations there, including sales tax registration and filing.

O

Offer in Compromise (OIC)

An IRS program that settles tax debt for less than the full amount owed when the taxpayer genuinely cannot pay — eligibility is based on income, expenses, and assets.

P

Pass-Through Entity

A business — S corporation, partnership, or most LLCs — whose income passes through to owners’ personal returns instead of being taxed at the entity level.

Payroll Taxes

Employment taxes on wages: income tax withholding, FICA, and unemployment taxes — with strict deposit schedules and steep penalties for misses.

Penalty Abatement

The removal of IRS penalties — available for first-time offenses or for reasonable cause such as illness or disaster.

Q

QBI Deduction (Section 199A)

A deduction of up to 20% of qualified business income for owners of pass-through businesses, subject to income limits and rules.

Quarterly Estimates

See Estimated Taxes — the four payments due each year, typically April 15, June 15, September 15, and January 15.

R

Reconciliation

Matching your books against bank and credit card statements to catch errors, omissions, and fraud — the heartbeat of reliable bookkeeping.

Required Minimum Distribution (RMD)

The amount retirees must withdraw annually from most retirement accounts starting at age 73, with substantial penalties for shortfalls.

S

S Corporation

A pass-through entity whose owners take a reasonable salary plus distributions — often reducing self-employment tax compared to a sole proprietorship or default LLC.

Self-Employment Tax

The 15.3% Social Security and Medicare tax paid by self-employed individuals on net earnings — both the employee and employer halves.

Standard Deduction

The flat amount you can deduct without itemizing — for 2026: $16,100 (single), $32,200 (married filing jointly), $24,150 (head of household).

T

Taxable Income

The amount tax is actually calculated on: adjusted gross income minus your standard or itemized deductions (and any qualified business income deduction).

Trial Balance

A report listing every account’s balance — used to verify that the books balance before producing financial statements.

W

W-2 vs. 1099

A W-2 reports employee wages with taxes withheld; a 1099-NEC reports payments to independent contractors, who handle their own taxes. Misclassification carries serious penalties.

Withholding

Tax your employer deducts from each paycheck and forwards to the IRS on your behalf — tuned by the W-4 you file.

Write-Off

Informal term for a deductible business expense — ordinary and necessary costs of running your business that reduce taxable income.