Glossary

Tax words, in plain English

The 39 terms that come up most in the explainers. Inside any explainer, tap a term with a dotted underline to see its definition.

A

adjusted gross income: Your total income minus a short list of "above the line" adjustments, such as half of self-employment tax, deductible IRA and HSA contributions, and student loan interest. Many credits and phase-outs are based on it. § 62

backup withholding: A flat 24% that payers must withhold when they don't have a correct taxpayer ID for you. It counts as tax paid and is usually fixed by giving the payer a W-9. § 3406

capital gain: Profit from selling an asset such as stock or property. Gains on assets held over a year are taxed at lower long-term rates of 0%, 15% or 20%. § 1222
cost basis: What you paid for an asset, adjusted for improvements and depreciation. Your taxable gain is the sale price minus the basis. § 1012
credit: An amount subtracted directly from the tax you owe. A $1,000 credit saves $1,000, so it's worth more than a deduction of the same size.

deduction: An amount subtracted from income before tax is calculated. A $1,000 deduction saves $1,000 times your top tax rate, for example $220 in the 22% bracket.
dependent: A qualifying child or relative you support. Claiming a dependent can unlock credits such as the child tax credit and head-of-household status. § 152
disregarded entity: A single-owner LLC that the IRS ignores for income tax: its income is treated as the owner's own. It still exists for other purposes, such as Form 5472 and payroll. § 7701

effectively connected income: Income of a nonresident tied to a US trade or business, such as work done in the US or a US office. Taxed at normal rates rather than the flat 30%. § 864
EIN: A nine-digit federal tax ID for a business, written 12-3456789. Needed to open a business bank account and file business forms. § 6109
estimated tax: Tax paid during the year by people without enough withholding, such as freelancers and landlords, in four installments. § 6654

fair market value: The price a willing buyer and seller would agree on. Used to value barter, gifts, crypto received and estates.
FBAR: FinCEN Form 114, the report of foreign bank and financial accounts US persons file when their foreign accounts together exceed $10,000 at any time in the year. It's under banking law (Title 31), not the tax code.
FDAP income: "Fixed, determinable, annual or periodical" income, meaning passive US income like dividends, interest, rents and royalties paid to nonresidents. Taxed at a flat 30% unless a treaty lowers it. § 871
filing status: How you file, which sets your brackets and standard deduction: single, married filing jointly, married filing separately, head of household, or qualifying surviving spouse. § 1
Form 1099: A family of information returns reporting non-wage payments to you and to the IRS: contractor pay, interest, dividends, payment-app sales and more. § 6041

head of household: A filing status for unmarried people who pay more than half the cost of keeping up a home for a qualifying person, usually a child. It has wider brackets and a larger standard deduction than single. § 2
high-deductible health plan: A health plan with a deductible of at least $1,700 (self-only) or $3,400 (family) for 2026. Needed to contribute to an HSA. From 2026, individual-market bronze and catastrophic plans also count. § 223

itemized deductions: Specific deductible expenses, mainly mortgage interest, state and local taxes and charitable gifts, listed on Schedule A. Worth it only if they add up to more than the standard deduction. § 63
ITIN: A tax ID the IRS issues to people who must file but can't get a Social Security number. It lets you file and pay but doesn't unlock credits that require an SSN. § 6109

marginal rate: The rate on your last, highest dollar of taxable income. Only the income inside each bracket is taxed at that bracket's rate. § 1

nonresident alien: A non-citizen who isn't a US tax resident. Taxed only on US-source income, files Form 1040-NR, and gets no standard deduction. § 871

pass-through: A business, such as a sole proprietorship, partnership or S corporation, whose profit isn't taxed at the business level but "passes through" to the owners' personal returns. § 199A
phase-out: A range of income over which a credit or deduction shrinks gradually to zero.
pro forma Form 1120: A corporate return filled in only with identifying information, filed as a cover sheet for Form 5472 by foreign-owned single-member LLCs. § 6038A

qualified dividends: Dividends from most US and many foreign companies, held long enough, that are taxed at the lower long-term capital gains rates. § 1

refundable credit: A credit that's paid out to you even if it's larger than the tax you owe. A non-refundable credit can only reduce your tax to zero.
resident alien: A non-citizen treated like an American for tax: taxed on worldwide income. You become one with a green card or by meeting the substantial presence test. § 7701

Schedule C: The part of Form 1040 where a sole proprietor or single-owner LLC reports business income and expenses. § 162
Schedule K-1: A form a partnership, S corporation, trust or estate gives each owner or beneficiary showing their share of income, deductions and credits. § 6031
self-employment tax: Social Security and Medicare tax for people who work for themselves: 15.3% on about 92% of net profit, covering both the "employee" and "employer" halves. § 1401
Social Security number: The nine-digit number issued by the Social Security Administration. Several credits and deductions now require one that's valid for work. § 24
standard deduction: A flat amount everyone may subtract instead of listing individual deductions: $16,100 single, $32,200 married filing jointly, $24,150 head of household for 2026. § 63
substantial presence test: The day-counting rule for US tax residency: 31 days this year and 183 weighted days over three years (all of this year, a third of last year, a sixth of the year before). § 7701

tax treaty: An agreement between the US and another country that decides who taxes what and often lowers withholding rates. Usually claimed with Form W-8BEN or Form 8833. § 894
taxable income: What's left after subtracting the standard or itemized deductions (and a few others, like the 20% business deduction) from adjusted gross income. The tax rates apply to this number. § 63

W-8BEN: The form a foreign individual gives a US payer to show they aren't a US person and to claim treaty rates. § 1441
W-9: The form a US person gives a payer with their name and taxpayer ID, so the payer can issue 1099s. § 3406
withholding: Tax taken out of a paycheck or payment in advance and sent to the IRS for you. It counts as tax paid when you file. § 3402