Tax Filing & Preparation Glossary
88 terms defined. An authoritative reference for Tax Filing & Preparation.
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A
Additional Medicare Tax
An extra 0.9% Medicare tax on wages, compensation, and self-employment income above $200,000 (single) or $250,000 (married filing jointly). Employers withhold it but the self-employed must account for it on Schedule SE.
Adjusted Gross Income (AGI)
Total income minus specific deductions (student loan interest, IRA contributions, HSA contributions, self-employment tax). AGI determines eligibility for many tax benefits and credits. Found on Line 11 of Form 1040. Many tax thresholds and phaseouts are based on AGI or Modified AGI (MAGI).
Alternative Minimum Tax (AMT)
A parallel tax system designed to ensure high-income taxpayers pay a minimum amount of tax. It disallows certain deductions and exemptions, then applies a flat rate. You pay AMT only if it exceeds your regular tax.
At-Risk Rules
Tax rules limiting the amount of loss a taxpayer can deduct from an activity to the amount they have economically at risk — essentially their investment plus borrowed amounts for which they are personally liable.
Average Tax Rate
Total tax liability divided by total income (before deductions), giving a broad sense of overall tax burden. Unlike the effective rate, it uses gross income as the denominator.
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C
Capital Gains Tax
Tax on profit from selling investments. Short-term (held under 1 year): taxed as ordinary income (10-37%). Long-term (held over 1 year): taxed at preferential rates (0%, 15%, or 20%). The long-term rate incentivizes buy-and-hold investing. Tax-loss harvesting offsets gains with losses.
Capital Loss Carryforward
When capital losses exceed capital gains in a tax year, up to $3,000 can offset ordinary income. Any remaining excess loss carries forward indefinitely to offset future gains or income in subsequent years.
Collection Due Process (CDP) Hearing
A formal hearing taxpayers can request within 30 days of receiving a Final Notice of Intent to Levy. It provides an opportunity to propose collection alternatives and challenge the appropriateness of collection actions.
Correspondence Audit
The most common and least intrusive type of IRS audit, conducted entirely by mail. The IRS requests documentation for specific items on your return, and you respond with supporting records.
Cost Basis Methods
The approach used to determine the original value of an investment for calculating gain or loss on sale. Common methods include FIFO, LIFO, specific identification, and average cost (for mutual funds).
CP2000 Notice
An IRS notice proposing additional taxes when information reported on your return doesn't match income data the IRS received from third parties. It is not a bill but a proposal — you can agree, disagree, or request an appeal.
CP501 Notice (Balance Due)
An IRS reminder notice stating that you have an unpaid balance. It is typically the first in a series of collection notices and includes the amount owed plus accrued interest and penalties.
Currently Not Collectible (CNC)
An IRS status granted when the agency determines a taxpayer cannot pay their tax debt without preventing them from covering basic living expenses. Collection activity pauses, but the debt remains and interest continues to accrue.
D
Defined Benefit Plan
A traditional pension plan that promises a specific monthly benefit at retirement based on salary history and years of service. The employer bears investment risk and is responsible for funding the promised benefit.
Direct Rollover
Moving retirement funds directly from one plan to another without the funds passing through your hands. No withholding applies and there is no 60-day re-deposit deadline, making it the preferred method over an indirect rollover.
E
Early Withdrawal Penalty
A 10% additional tax on distributions taken from retirement accounts before age 59½. Numerous exceptions exist including disability, first-time home purchase (IRA only), substantially equal periodic payments, and separation from service at age 55+.
Earned Income Tax Credit (EITC)
A refundable tax credit for low-to-moderate income workers. Worth up to $7,430 for a family with 3+ children (2024). One of the most valuable and most-missed credits. Eligibility based on earned income, filing status, and number of qualifying children. Must file a return to claim it.
Effective Tax Rate
Your total tax paid divided by your total taxable income, expressed as a percentage. It represents the average rate at which your income is taxed across all brackets, always lower than your marginal rate.
F
Federal Tax Lien
A legal claim the government places on your property when you neglect or fail to pay a tax debt. It attaches to all assets (real estate, personal property, financial accounts) and can affect your credit and ability to sell property.
Field Audit
The most comprehensive and intense type of IRS audit, where an agent visits your home, business, or accountant's office to review records in person. Typically reserved for businesses or complex returns with significant discrepancies.
First-In, First-Out (FIFO)
A cost basis method that assumes the oldest shares purchased are the first ones sold. FIFO is the IRS default for most securities and often results in larger gains if share prices have risen over time.
Form 1040 (U.S. Individual Income Tax Return)
The standard IRS form used by U.S. citizens and residents to file their annual federal income tax return. It summarizes income, deductions, credits, and calculates the tax owed or refund due.
Form 1040-SR (Tax Return for Seniors)
A simplified version of Form 1040 designed for taxpayers age 65 and older. It uses larger print and includes a chart for the higher standard deduction available to seniors.
Form 1040-X (Amended U.S. Individual Income Tax Return)
The IRS form used to correct errors or make changes to a previously filed federal tax return. Common reasons include missed deductions, incorrect filing status, or unreported income.
Form 1099-B (Proceeds from Broker Transactions)
An IRS form issued by brokers reporting proceeds from the sale of stocks, bonds, mutual funds, and other securities. It provides cost basis information needed to calculate capital gains or losses.
Form 1099-DIV (Dividends and Distributions)
An IRS form issued by financial institutions reporting dividends, capital gain distributions, and other investment income paid to investors during the tax year. Taxpayers use it to report investment income.
Form 1099-G (Government Payments)
An IRS form reporting payments received from government sources, most commonly state or local tax refunds and unemployment compensation. Unemployment benefits are generally taxable federal income.
Form 1099-INT (Interest Income)
A form financial institutions send to taxpayers who earned $10 or more in interest income during the year. It reports the amount of interest earned on savings accounts, CDs, and bonds.
Form 1099-K (Payment Card and Third Party Network Transactions)
A form issued by payment processors (PayPal, Venmo, Stripe) and credit card companies reporting gross payment transactions. For tax year 2025 onward, the reporting threshold is $600.
Form 1099-MISC (Miscellaneous Income)
An IRS information return used to report miscellaneous income such as rent, prizes, medical payments, and other non-wage compensation not covered by 1099-NEC. Businesses issue it to recipients receiving $600 or more.
Form 1099-NEC (Nonemployee Compensation)
An IRS form used to report payments of $600 or more made to independent contractors, freelancers, and self-employed individuals. Recipients must report this income on their tax return.
Form 1099-R (Distributions from Pensions and Retirement)
A form reporting distributions from retirement accounts including IRAs, pensions, annuities, and profit-sharing plans. It indicates whether the distribution is taxable and if any withholding occurred.
Form 2441 (Child and Dependent Care Expenses)
An IRS form used to claim the Child and Dependent Care Credit for expenses paid to care for a qualifying child or dependent while you work or look for work. Requires the care provider's tax ID.
Form 4868 (Application for Automatic Extension of Time)
An IRS form that grants a six-month automatic extension to file your federal income tax return, moving the deadline from April 15 to October 15. It does not extend the time to pay any taxes owed.
Form 8863 (Education Credits)
An IRS form used to claim the American Opportunity Credit or Lifetime Learning Credit for qualifying higher education expenses. Only one credit per student per year may be claimed.
Form 8962 (Premium Tax Credit)
An IRS form used to reconcile the Affordable Care Act Premium Tax Credit received in advance with the actual credit you are entitled to based on your final income. Required for anyone who received marketplace insurance subsidies.
Form W-2 (Wage and Tax Statement)
An IRS form employers must send to each employee and the IRS annually, reporting wages paid and taxes withheld. Employees use it to file their federal and state income tax returns.
Form W-4 (Employee Withholding Certificate)
A form employees complete to tell their employer how much federal income tax to withhold from each paycheck. Filling it out accurately helps avoid owing taxes or receiving a large refund at year-end.
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Indirect Rollover
A distribution where you receive the retirement funds personally and then re-deposit them into another qualified account within 60 days. Employers must withhold 20% on 401(k) distributions, which you must replace out-of-pocket to avoid taxes.
Injured Spouse Allocation
A claim filed by a spouse whose share of a joint tax refund was applied to the other spouse's pre-existing debt (child support, student loans, past-due taxes). Filing Form 8379 allows recovery of the injured spouse's portion.
Innocent Spouse Relief
IRS relief available to taxpayers who are held responsible for tax errors or fraud committed by a spouse or former spouse on a joint return. Three types exist: innocent spouse, separation of liability, and equitable relief.
Installment Agreement
A payment plan with the IRS allowing taxpayers to pay their tax debt in monthly installments over time. Penalties and interest continue to accrue during the repayment period, but the agreement prevents levies and liens.
Itemized Deductions
Specific expenses you can deduct instead of the standard deduction. Common itemized deductions: mortgage interest, state/local taxes (SALT, capped at $10K), charitable contributions, and medical expenses exceeding 7.5% of AGI. Only itemize when total exceeds your standard deduction.
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M
Marginal Tax Rate
The tax rate applied to your last dollar of income. The US uses progressive brackets — each bracket taxes only the income within that range. A 24% marginal rate doesn't mean all income is taxed at 24%. Effective tax rate (total tax / total income) is always lower than marginal rate.
Modified Adjusted Gross Income (MAGI)
AGI with certain deductions added back in. MAGI determines eligibility for Roth IRA contributions, ACA premium tax credits, and other phase-out calculations. The specific add-backs vary by tax provision.
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O
Offer in Compromise (OIC)
An IRS program that allows qualifying taxpayers to settle their tax debt for less than the full amount owed. Eligibility depends on ability to pay, income, expenses, and asset equity. Most applications are rejected.
Ordinary Dividends
Dividends that do not meet the requirements for qualified status and are taxed as ordinary income at your regular marginal tax rate. They are reported in Box 1a of Form 1099-DIV.
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Pass-Through Deduction (Section 199A)
Another name for the QBI deduction, referring to the mechanism by which business income "passes through" to the owner's personal return. Certain service industries (law, consulting) face additional restrictions based on income.
Passive Activity Loss Rules
IRS rules that generally prohibit deducting losses from passive activities (like rental properties or limited partnerships) against active income. Passive losses can only offset passive income or are suspended until the activity is disposed of.
Personal Exemption (Eliminated)
A per-person deduction that reduced taxable income prior to 2018. The Tax Cuts and Jobs Act suspended personal exemptions to $0 through 2025, replaced in part by a near-doubled standard deduction and expanded child tax credit.
Pro-Rata Rule
An IRS rule that applies when converting IRA funds to Roth. If you have both pre-tax and after-tax IRA money, each conversion is considered a proportional mix of taxable and non-taxable funds, potentially creating unexpected tax liability.
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Qualified Business Income (QBI) Deduction
A deduction of up to 20% of qualified business income from pass-through entities (sole proprietorships, partnerships, S corps). Income and W-2 wage limitations apply for higher earners. Also called the Section 199A deduction.
Qualified Dividends
Dividends that meet IRS holding-period and payer requirements, taxed at the preferential long-term capital gains rates (0%, 15%, or 20%). They must be paid by a U.S. corporation or qualifying foreign company.
Quarterly Estimated Tax
Tax payments due four times per year (April 15, June 15, September 15, January 15) for income not subject to withholding — freelance, rental, and investment income. Underpayment penalties apply if you don't pay at least 90% of current year's tax or 100% of prior year's tax through quarterly payments.
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Required Minimum Distribution (RMD)
Mandatory annual withdrawals from traditional IRAs and most employer retirement plans beginning at age 73. The amount is calculated based on account balance and IRS life expectancy tables. Failure to take RMDs triggers a 25% excise tax.
Rollover vs. Direct Transfer
A rollover involves receiving retirement funds and re-depositing them within 60 days, triggering 20% withholding on 401(k) distributions. A direct transfer moves funds institution-to-institution with no withholding and no 60-day limit.
Roth 401(k)
An employer-sponsored retirement account funded with after-tax contributions. Qualified withdrawals in retirement are completely tax-free, making it advantageous for those who expect to be in a higher tax bracket later.
S
Schedule A (Itemized Deductions)
An IRS schedule attached to Form 1040 where taxpayers list individual deductible expenses such as mortgage interest, state taxes, charitable contributions, and medical costs exceeding 7.5% of AGI.
Schedule B (Interest and Ordinary Dividends)
An IRS schedule required when a taxpayer has more than $1,500 in taxable interest or ordinary dividends, or has a foreign account. It lists each payer and the amounts received.
Schedule C
The IRS form for reporting profit or loss from a sole proprietorship or freelance business. Filed with Form 1040. Reports gross income, deductible business expenses, and net profit. Net profit is subject to both income tax and self-employment tax (15.3%).
Schedule C (Profit or Loss from Business)
An IRS schedule used by sole proprietors and single-member LLCs to report business income and deductible expenses. Net profit flows to Form 1040 and is subject to self-employment tax.
Schedule D (Capital Gains and Losses)
An IRS schedule used to report the sale of capital assets such as stocks, bonds, and real estate. It summarizes short-term and long-term gains and losses and calculates net capital gain or loss.
Schedule E (Supplemental Income and Loss)
An IRS schedule for reporting income and expenses from rental real estate, royalties, partnerships, S corporations, and trusts. Rental net income or loss flows through to the main Form 1040.
Schedule K-1
A tax form issued by partnerships, S corporations, trusts, and estates that reports each owner's or beneficiary's share of income, deductions, and credits. Recipients report these items on their individual tax return.
Schedule SE (Self-Employment Tax)
An IRS schedule used to calculate the self-employment tax owed by individuals with net self-employment income of $400 or more. It covers both the employee and employer portions of Social Security and Medicare.
Self-Employment Tax
The Social Security and Medicare tax that self-employed individuals pay — currently 15.3% on net earnings (12.4% Social Security + 2.9% Medicare). Employees split this with employers; self-employed pay both halves. You can deduct half of SE tax as an above-the-line deduction on your 1040.
Self-Employment Tax Rate
Self-employed individuals pay 15.3% on net earnings — 12.4% for Social Security and 2.9% for Medicare — covering both the employee and employer share. Half of this tax is deductible as an above-the-line adjustment.
SEP-IRA (Simplified Employee Pension)
A retirement account allowing self-employed individuals and small business owners to contribute up to 25% of net self-employment income (max $69,000 for 2025). Contributions are tax-deductible and grow tax-deferred.
Short-Term Capital Gains
Profits from selling a capital asset held for one year or less, taxed at ordinary income rates (up to 37%). Keeping investments longer than one year qualifies them for the preferential long-term capital gains rate.
SIMPLE IRA (Savings Incentive Match Plan)
A retirement plan for small businesses (100 or fewer employees) that allows employee salary deferrals and requires employer matching or non-elective contributions. Lower contribution limits than a 401(k) but easier to administer.
Specific Identification
A cost basis method allowing investors to designate exactly which shares are being sold, enabling strategic selection of high-basis lots to minimize taxable gains or maximize deductible losses.
Standard Deduction
A flat amount that reduces your taxable income without itemizing specific expenses. 2024 amounts: $14,600 (single), $29,200 (married filing jointly), $21,900 (head of household). About 90% of filers take the standard deduction. Increased significantly by the 2017 Tax Cuts and Jobs Act.
Standard Deduction (2026)
A flat dollar amount that reduces taxable income without requiring itemized receipts. For tax year 2026 the IRS adjusts it annually for inflation; filers choose whichever is larger between the standard deduction and their itemized total.
Statute of Limitations (Tax)
The IRS generally has three years from the filing date to assess additional taxes and ten years to collect assessed taxes. Substantial underreporting of income (over 25%) extends the assessment period to six years.
Step-Up in Basis
When an asset is inherited, its cost basis is "stepped up" to the fair market value at the date of the decedent's death. This eliminates capital gains tax on appreciation that occurred during the original owner's lifetime.
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Tax Credit
A dollar-for-dollar reduction in your tax bill, more valuable than a deduction. A $1,000 credit saves $1,000 in taxes; a $1,000 deduction saves $220-370 depending on your bracket. Refundable credits (Child Tax Credit, EITC) can produce a refund even if you owe zero tax.
Tax Extension (Form 4868)
A filing that extends your tax return deadline from April 15 to October 15. Does NOT extend the payment deadline — you must estimate and pay any taxes owed by April 15 to avoid interest and penalties. Extensions are automatic upon filing; no approval needed. Free to file.
Tax Levy
The IRS's legal seizure of property to satisfy a tax debt, including wages, bank accounts, and physical assets. Unlike a lien (which is a claim), a levy is actual collection of property after proper notice.
Tax Withholding
The amount your employer deducts from each paycheck for federal and state taxes. Controlled by your W-4 form. If too little is withheld, you owe at tax time (possibly with penalties). If too much, you get a refund — which means you gave the government an interest-free loan.
Taxable Income
Your income after all deductions — the amount actually subject to tax. Calculated: AGI minus the greater of standard or itemized deductions, minus any qualified business income deduction. Tax brackets are applied to this number, not your gross income.
Traditional 401(k) Contribution
Pre-tax salary deferrals to an employer-sponsored retirement plan that reduce your current taxable income. Contributions and earnings grow tax-deferred, and withdrawals in retirement are taxed as ordinary income.
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W-2 Form
An annual form from your employer reporting wages earned and taxes withheld. Required for filing your tax return. You should receive it by January 31. Box 1 shows taxable wages, Box 2 shows federal tax withheld. Discrepancies between W-2 and your return trigger IRS notices.
Wash-Sale Rule
An IRS rule that disallows a capital loss deduction if you buy a "substantially identical" security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the replacement shares.