Tax glossary, in plain English
Forty-six definitions our editorial team finds itself repeating on phone calls. Each one tells you what the term actually means on a paystub or return, where it sits in the Internal Revenue Code, and what changes for tax year 2026. Browse by category or use your browser’s in-page search (Cmd-F / Ctrl-F) to jump.
Federal terms
Above-the-line deduction
Adjusts AGI directly. Available even if you take the standard deduction.
A deduction that reduces your Adjusted Gross Income directly, before the choice between standard and itemized. Above-the-line items live on Schedule 1 of Form 1040 and include the traditional IRA deduction, HSA contributions made outside payroll, student loan interest up to $2,500, half of self-employment tax, the self-employed health insurance deduction, $300 of educator expenses, and Armed Forces moving expenses for active-duty members. The label “above the line” is a holdover from when Form 1040 had a visible horizontal line separating these from itemized deductions; the line is gone, the name stuck.
Adjusted Gross Income (AGI)
Gross income minus above-the-line adjustments. The base for most phase-outs.
AGI is gross income minus “adjustments to income” (above-the-line deductions on Schedule 1). It is the number on Form 1040 line 11. Lots of credits and deductions phase out based on AGI rather than taxable income, which is why two households with the same taxable income can end up with very different credit eligibility. MAGI (Modified AGI) adds back specific items for specific phase-outs — foreign earned income exclusion, IRA deduction, student loan interest, etc.
Alternative Minimum Tax (AMT)
A parallel tax computation with different rules. Mostly affects ISO exercises and very-high earners now.
Authorized by IRC §§ 55-59. The AMT is a separate calculation with its own definition of taxable income (more inclusive than regular tax), its own deductions, and a flatter rate structure (26% and 28%). You owe the higher of regular tax or AMT. After the 2017 TCJA and OBBBA exemption expansions, AMT affects very few households under $500,000 of income. The most common trigger is a large incentive stock option (ISO) exercise that creates a bargain element which is an AMT preference item.
Box 1 vs Box 3 vs Box 5 (W-2)
Federal taxable wages, Social Security wages, Medicare wages. They will almost never match.
Box 1 of Form W-2 is federal taxable wages: gross minus traditional 401(k), HSA, Section 125 health, FSA, commuter, and qualified parking. Box 3 is Social Security wages: gross minus Section 125, HSA, FSA, commuter — but not 401(k) — capped at the OASDI wage base ($176,100 in 2026). Box 5 is Medicare wages: same as Box 3 but with no cap. The three numbers rarely match. That is not a payroll error; it is how the statutes define their respective tax bases.
Earned Income Tax Credit (EITC)
Refundable credit for low- and moderate-income workers, with or without children.
Authorized by IRC § 32. The largest refundable credit in the US code. 2026 maximum is $8,232 for three or more children. Phase-in and phase-out by AGI; investment income disqualification at $12,200 of investment income in 2026. The most common way to miss it is by not filing at all — a part-year W-2 plus a side gig that lands in EITC range and produces no balance due can lead a household to skip filing, leaving thousands of dollars on the table.
Effective tax rate
Total tax divided by income. Almost always lower than your marginal rate.
Total federal tax divided by either taxable income or gross income (label depends on context). Different from your marginal rate, which is the rate that would apply to your next dollar earned. A single filer with $66,500 of taxable income in 2026 has a marginal rate of 22% but an effective rate on taxable income of roughly 14%, and an effective rate on gross income (with $95,000 of wages and $12,400 of pre-tax deductions) of about 9.8%. Three numbers, same return, all true.
Form W-2
The wage and tax statement your employer issues every January.
Reports wages paid, federal and state tax withheld, FICA wages, and various Box 12 items (401(k) deferrals, HSA contributions, employer-paid health coverage value). Due to employees by January 31 of the following year. If you change jobs mid-year you get a W-2 from each employer.
Form W-4
The form you give your employer to tell them how much federal tax to withhold.
The IRS overhauled the W-4 for the 2020 tax year and the new form doesn’t use allowances anymore. Step 1 is filing status. Step 2 is the multiple-jobs checkbox (most-missed field on the entire form). Step 3 is dependents and credits. Step 4 is other income, deductions, and extra withholding. Updating it is the fastest way to fix paycheck withholding mid-year.
Itemized deduction
Adds up specific deductible expenses instead of taking the standard deduction.
Schedule A of Form 1040. Includes state and local taxes (capped at $40,000 for most MFJ households under OBBBA 2026), home mortgage interest under IRC § 163(h), charitable contributions, medical expenses above 7.5% of AGI, and casualty losses in federally declared disaster areas. Most filers take the standard deduction; itemizing only beats standard when total itemized exceeds the standard amount.
Marginal tax rate
The rate that applies to your next dollar earned. Different from effective rate.
Your top federal bracket. For 2026 single filers: 10% up to $12,400, 12% to $50,400, 22% to $107,500, 24% to $205,150, 32% to $260,400, 35% to $651,000, 37% above. Used in planning to decide whether an extra dollar of income or deduction is “worth” the change. Combined marginal in a high-tax jurisdiction like NYC stacks federal 32-37% on top of NY State 6.85% on top of NYC 3.876% on top of Medicare and the 0.9% surtax.
Net Investment Income Tax (NIIT)
3.8% surtax on investment income for high-AGI households.
Authorized by IRC § 1411. Applies to interest, dividends, capital gains, rental income, royalties, and passive business income for households with modified AGI over $200,000 single or $250,000 MFJ. Stacks on top of the long-term capital gains rate, so the “true” top long-term gain rate at the federal level is 23.8%. Often overlooked when planning a large stock sale.
Phase-out
The income range over which a credit or deduction shrinks to zero.
Many credits and deductions phase out as AGI rises. Some phase-outs are gradual (Roth IRA, student loan interest, Saver’s Credit). Some are cliffs (the historical ACA Premium Tax Credit 400% FPL cliff, certain dependent eligibility tests). For households near a phase-out boundary, even a small AGI shift can move hundreds or thousands of dollars of eligibility. The honest fix is an October year-end projection, not December surprises.
Progressive bracket structure
Rate climbs through brackets. Only dollars inside a bracket are taxed at that bracket's rate.
Used by the US federal income tax and most state income tax systems. The 2026 federal brackets for single filers are 10/12/22/24/32/35/37 percent across seven bands. Earning one more dollar can never make your net pay drop because of the bracket structure — only the dollars within a higher bracket get taxed at that higher rate. The “raise pushed me into a worse bracket” myth is just that.
Qualified Charitable Distribution (QCD)
Direct IRA-to-charity distribution that counts toward RMDs but is excluded from AGI.
Available to traditional IRA owners aged 70½ and older under IRC § 408(d)(8). Up to $108,000 in 2026 can be sent directly from an IRA to qualified charities. The QCD satisfies your RMD for the year and doesn’t hit AGI, which helps avoid IRMAA Medicare brackets and the Social Security taxability phase-in. The cleanest charitable vehicle for retirees.
Refundable credit
A credit that can exceed your tax liability and produce a refund.
Compared to a non-refundable credit, which can reduce tax only to zero. Refundable credits include the Earned Income Tax Credit, the Premium Tax Credit, the refundable portion of the American Opportunity Credit (40%), and the Additional Child Tax Credit ($1,800 per child in 2026). The remainder of credits are non-refundable. See our deductions-vs-credits explainer.
Required Minimum Distribution (RMD)
Annual mandatory withdrawal from traditional retirement accounts.
Starts at age 73 under SECURE 2.0 (moving to 75 for people who turn 74 after 12/31/2032). Computed on prior-year December 31 balance divided by the IRS Uniform Lifetime Table life expectancy factor. Penalties under SECURE 2.0 for missed RMDs are 25% of the shortfall (10% if corrected within two years). Roth IRA owners aren’t subject to RMDs during life.
Roth conversion
Moving dollars from a traditional retirement account to a Roth, paying the tax now.
Recognize ordinary income now in exchange for tax-free growth and qualified withdrawals later. The right years to do significant conversions are usually between retirement and the start of Social Security, between jobs, or any low-income year. The art is converting just enough to fill a bracket without spilling into the next. No RMD on the Roth side, so conversions can also be an estate-planning tool.
Saver's Credit
Non-refundable credit of 10/20/50% of the first $2,000 of retirement contributions.
IRC § 25B. Phased by AGI: 50% rate up to about $24,500 single / $49,000 MFJ in 2026; 20% to about $26,750 / $53,500; 10% to about $40,250 / $80,500; nothing above. Pair with a 401(k), IRA, or ABLE contribution. The most underused credit at the low end of the income distribution.
Standard deduction
Flat deduction in lieu of itemizing. Most filers take it.
2026 amounts: $16,100 single, $32,200 MFJ, $24,100 head of household. Extra $2,050 (single/HOH) or $1,650 (MFJ/MFS) per qualifying condition for age 65+ or blind. After the 2017 TCJA roughly doubled the standard deduction, the share of filers itemizing dropped from about 30% to under 15%. OBBBA’s SALT-cap increase to $40,000 in 2026 shifts some MFJ households in high-tax states back toward itemizing.
Supplemental wages
Bonuses, commissions, severance, retroactive pay. Withheld differently than regular wages.
Treasury Reg 31.3402(g)-1. Employer chooses between the flat method (22% under $1M, 37% above) and the aggregate method (combine with regular wages and use the regular withholding tables). Most employers use the flat method because it’s easier. If your marginal rate is well above 22%, the flat method under-withholds your bonus; if it’s well below, the flat method over-withholds. The April return resolves the difference.
TCJA / Tax Cuts and Jobs Act
The 2017 tax law that gave us the current bracket structure and expanded standard deduction.
Public Law 115-97 (2017). Cut the corporate rate, restructured individual brackets (10/12/22/24/32/35/37), roughly doubled the standard deduction, capped state and local tax deductions at $10,000, and changed many specific provisions. Most individual provisions were originally scheduled to sunset after 2025; the 2025 OBBBA extended the bracket structure through 2030 with chained-CPI indexing.
Withholding (federal income tax)
Money your employer takes out of each check and sends to the IRS on your behalf.
Computed using IRS Publication 15-T tables, your filing status, and your W-4 elections. Counts as evenly-paid throughout the year for safe-harbor purposes, even if it was actually withheld late in the year. That last detail is why some clients fix a Q1 underpayment with a December bonus over-withholding instead of a separate estimated payment.
FICA terms
Additional Medicare Tax
A 0.9% Medicare surtax on high-wage earners. Threshold depends on filing status.
Authorized by IRC § 3101(b)(2) and added by the Affordable Care Act. It’s 0.9% withheld on wages above $200,000 from any single job, regardless of filing status. The actual liability is computed at filing on Form 8959 using the true filing-status threshold: $200,000 single, $250,000 married filing jointly, $125,000 MFS. If two spouses each earn $180,000 there’s no withholding (neither crossed $200k on a single job) but the household owes the surtax above $250,000 of combined wages. Surprise tax bill at filing.
FICA
Federal Insurance Contributions Act. The umbrella for Social Security and Medicare payroll taxes.
Two parts: OASDI (Old Age, Survivors, and Disability Insurance) at 6.2% up to the wage base, and HI (Hospital Insurance, aka Medicare) at 1.45% on all wages. Employee pays both halves; employer matches both halves. Total payroll FICA on an employee is 7.65% from the employee plus 7.65% from the employer = 15.3% of wages funding the two programs. The self-employed person pays the full 15.3% as self-employment tax under IRC § 1401.
OASDI / Old-Age, Survivors, and Disability Insurance
The Social Security half of FICA. 6.2% to a yearly wage base.
6.2% employee, 6.2% employer, on Social Security wages up to the year’s wage base. 2026 wage base is $176,100, set annually by the SSA in mid-October. Once you hit the cap, OASDI stops withholding for the rest of the year. Maximum annual employee OASDI withholding in 2026 is $10,918.20 per employer (multiple employers withhold independently, so two jobs can over-withhold and you reclaim at filing).
Wage base
The annual ceiling on wages subject to Social Security tax. Doesn't apply to Medicare.
Sometimes confused with the standard deduction or bracket boundaries. The wage base is specifically the cap on Social Security wages each year, $176,100 in 2026. Medicare has no wage base; it’s 1.45% all the way up, plus 0.9% additional above $200,000 of single-job wages.
State & local terms
Convenience-of-employer rule
Why a Florida resident working remotely for a New York employer still owes New York tax.
A state-tax doctrine applied by New York, Pennsylvania, Connecticut, Delaware, and Nebraska. Under NY 20 NYCRR § 132.18(a) and similar rules in the other states, days worked outside the state are taxed as if worked inside the state unless the work-from-home was for the employer’s necessity, not the employee’s convenience. New Jersey adopted a retaliatory mirror version in 2023. See our multi-state filing guide.
Credit-for-tax-paid-to-another-state
The mechanism that usually prevents double-taxation of cross-border income.
Every state with an income tax allows residents a credit for income tax paid to another state on income sourced there. The credit equals the lesser of the tax paid to the work state or the resident state’s own tax on the same income. The practical effect is that you pay the higher of the two rates, not both rates stacked. California, New York, and Illinois have the broadest credit; some states (Michigan, Minnesota, Arizona) apply narrower definitions of qualifying source income.
Flat-rate state income tax
A single rate applied to all taxable income, regardless of amount.
Used in 2026 by roughly eleven states including Arizona (2.5%), Colorado (4.4%), Idaho (5.8%), Illinois (4.95%), Indiana (3.0%), Kentucky (4.0%), Michigan (4.05%), Mississippi (4.4%), North Carolina (4.25%), Pennsylvania (3.07%), and Utah (4.55%). Compare to progressive states, where the rate climbs through brackets, and to no-income-tax states like Florida and Texas. The flat rate is simpler at the cost of being less progressive.
Reciprocity agreement
Two states agree that wages earned by a resident of one in the other are taxed only by the resident state.
Major 2026 agreements include Pennsylvania’s with IN, MD, NJ, OH, VA, WV; Michigan’s with IN, KY, IL, MN, OH, WI; Virginia’s with DC, KY, MD, PA, WV; New Jersey’s with PA only. Covers wages, not self-employment or partnership income. Trigger by filing the appropriate non-residency certificate with the work-state employer.
State Disability Insurance / Paid Family Leave
State-administered wage-replacement programs funded by small employee or employer contributions.
California (SDI 1.2%, no wage cap from 2024), New York (PFL), New Jersey (TDI and FLI), Washington (PFML), Massachusetts (PFML), Oregon (Paid Leave Oregon), Colorado (FAMLI), Connecticut (PFML), and Rhode Island (TDI) all administer programs that show up on the paystub as small percentages. Hawaii and Puerto Rico operate separate TDI systems. Small numbers individually but they add up.
Benefits terms
HSA (Health Savings Account)
The only triple-tax-advantaged account in the US code. Requires HDHP enrollment.
Authorized by IRC § 223. Pre-tax going in, tax-free in growth, tax-free coming out for qualified medical expenses. 2026 limits: $4,400 self-only, $8,750 family, $1,000 catch-up at 55+. Requires enrollment in a High Deductible Health Plan with no disqualifying other coverage. After age 65 you can withdraw for any purpose at ordinary rates with no penalty, which makes the HSA function like a traditional IRA with extra optionality. See our pre-tax vs post-tax guide.
Pre-tax deduction
Payroll deduction that reduces one or more tax bases before tax is calculated.
Authorized by specific Code sections: Section 125 for cafeteria plans (health, dental, vision, FSA, dependent-care FSA), Section 401 for traditional 401(k) and similar, Section 132 for commuter and qualified parking, Section 223 for HSAs. Different items reduce different tax bases. Traditional 401(k) reduces federal income tax but not FICA. HSA and Section 125 items reduce both. Roth 401(k) reduces neither.
Section 125 (cafeteria plan)
The Code section that authorizes pre-tax health, FSA, and dependent-care payroll deductions.
Lets employees pay for qualified benefits with pre-tax dollars. Health, dental, vision premiums; healthcare FSA up to $3,300 in 2026; dependent-care FSA up to $5,000 per household. Mid-year election changes require a qualifying life event under Treasury Reg 1.125-4 — marriage, divorce, birth, death, employment change, dependent eligibility change, residence change, or significant cost change.
Self-employed terms
Annualized installment method
An alternative to the four-equal-quarters estimated tax method, for taxpayers with uneven income.
Allowed under IRC § 6654(d)(2) and computed on Form 2210 Schedule AI. Lets you compute each quarter’s required estimated payment based on income actually earned through that quarter, rather than 25% of the annual estimate. The annualization fractions are 4 (Q1), 2.4 (Q2), 1.5 (Q3), and 1 (full year). Useful for freelancers with a back-loaded year. Tedious to compute by hand. Most modern tax software handles it if you flag “uneven income” in the setup.
Estimated tax (Form 1040-ES)
Quarterly tax payments for people whose income isn't fully withheld.
Required under IRC § 6654 for taxpayers whose withholding doesn’t cover their liability. Due April 15, June 15, September 15, and the following January 15. Underpayment penalty is the IRS short-term rate plus 3 points, computed by day. See our quarterly tax guide for the safe-harbor math.
Form 1099-NEC
What you get instead of a W-2 when you do contract work.
Replaced the relevant boxes of the legacy Form 1099-MISC starting tax year 2020 for nonemployee compensation. Issued by a payer to a contractor when the contractor was paid $600 or more in the year. The IRS gets a copy. If your reported income doesn’t match the IRS’s aggregate of your 1099-NECs, you’ll get a CP2000 notice within about a year.
QBI deduction (Section 199A)
Up to 20% deduction on qualified business income from pass-throughs.
Added by the 2017 TCJA. Self-employed individuals, partners, and S-corp owners may deduct up to 20% of Qualified Business Income, subject to income thresholds ($241,950 single / $483,900 MFJ in 2026 before phase-out limitations kick in) and limits for specified service trades or businesses (SSTBs — health, law, accounting, consulting, financial services, performing arts). Frequently missed by sole proprietors whose software didn’t prompt.
Schedule C (Form 1040)
Where sole proprietors report business income and expenses.
Reports gross receipts, cost of goods sold, business expenses (car, home office, supplies, professional services, etc.), and net profit. The net profit flows to Form 1040 and to Schedule SE for self-employment tax. Single-member LLCs that haven’t elected corporate treatment also file Schedule C.
Schedule SE (Form 1040)
Computes the 15.3% self-employment tax on net self-employment earnings.
15.3% on net self-employment earnings up to the Social Security wage base, then 2.9% on earnings above the cap, with the 0.9% Additional Medicare Tax on earnings above $200,000 single / $250,000 MFJ. Half of the SE tax is deductible above the line on Schedule 1, so the “real” cost on the income side of the federal return is less than the 15.3% sticker.
Section 179 expense election
Immediate expensing of qualified business equipment up to a generous annual cap.
IRC § 179. For 2026, up to $1,250,000 of qualified equipment placed in service can be expensed immediately, subject to phase-out above $3,130,000 of total purchases. “Placed in service” means actually installed and ready for use, not just ordered or invoiced. Bonus depreciation runs alongside Section 179 at 40% for 2026.
Self-employment tax
FICA, but you pay both halves. 15.3% total on net SE earnings.
IRC § 1401. The self-employed person pays both the employee and employer halves of Social Security (12.4% combined) and Medicare (2.9% combined) = 15.3% on net SE earnings. Half is deductible above the line, partly offsetting it on the income tax side. The single biggest reason “just put 25% aside for taxes” advice undershoots by 5-10 percentage points for full-time freelancers.
Underpayment penalty
Penalty for not paying enough tax through withholding and estimated payments during the year.
IRC § 6654. Computed at the IRS short-term rate plus 3 percentage points, by day, on the per-quarter shortfall. Currently around 8% annualized. Not deductible. Avoided by meeting safe harbor: 90% of current-year liability or 100% of prior-year (110% if prior-year AGI exceeded $150,000). No penalty if total balance due is under $1,000 after withholding and credits.
Filing terms
Filing status
Five buckets the IRS uses to apply brackets and deductions. Not the same as marital status.
Single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse. Head of household is for unmarried taxpayers maintaining a household for a qualifying person; the eligibility rules are stricter than people assume. MFS rarely produces a lower combined tax than MFJ unless one spouse has very high medical or miscellaneous deductions tied to AGI floors. Qualifying surviving spouse is available for two years after a spouse’s death if you maintain a household with a qualifying child.
Head of household
Filing status for unmarried taxpayers who maintain a home for a qualifying person.
Requires being unmarried (or considered unmarried under specific rules), paying more than half the cost of maintaining a home, and having a qualifying person live with you for more than half the year. Provides a larger standard deduction ($24,100 in 2026 versus $16,100 single) and more favorable bracket widths than single. Stricter than people realize — a roommate doesn’t make you a head of household.
How we wrote the definitions
Each entry was written by a member of the CalcYet editorial team and checked against the cited Internal Revenue Code section, Treasury regulation, or IRS publication for the 2026 tax year. Where a dollar amount appears, the figure is the inflation-adjusted value from IRS Revenue Procedure 2025-32 or the SSA contribution-base announcement — not last year’s value. Corrections welcome at corrections@calcyet.com; we publish them with a dated note on the affected entry within five business days.
For deeper treatment of any topic, the relevant article in our Insights section usually walks the worked examples. For situations the glossary doesn’t cover, the IRS has a public-access term index at the bottom of every Publication, and the Tax Foundation’s annual State Tax Resource Center is the most useful third-party reference for state-level rules.
Social Security wage base