Financial & Tax Terms Glossary
100+ essential terms every tax professional and taxpayer needs to know — with real numbers, current thresholds, and plain-English explanations for TY2025-2026.
Updated April 2026 • Reflects Big Beautiful Bill changes
Tax Return & Filing
Adjusted Gross Income (AGI)
Total gross income minus specific "above-the-line" deductions such as educator expenses, student loan interest, and IRA contributions. Found on Line 11 of Form 1040. For TY2025, AGI determines eligibility for most credits and deductions. Example: If you earned $75,000 in wages and contributed $6,500 to a Traditional IRA, your AGI is $68,500.
Modified Adjusted Gross Income (MAGI)
AGI with certain deductions added back. Different credits/deductions use different MAGI calculations. For example, the Premium Tax Credit MAGI adds back tax-exempt interest and non-taxable Social Security. MAGI is not a single line on your return — it's calculated differently depending on what benefit you're evaluating.
Taxable Income
The portion of income subject to federal income tax after subtracting either the standard or itemized deductions and any qualified business income deduction from AGI. This is the number used to determine your tax bracket. Found on Line 15 of Form 1040.
Filing Status
One of five categories that determines your tax bracket thresholds, standard deduction amount, and credit eligibility: Single, Married Filing Jointly (MFJ), Married Filing Separately (MFS), Head of Household (HOH), and Qualifying Surviving Spouse. For TY2025, the standard deduction ranges from $15,000 (Single) to $30,000 (MFJ).
Standard Deduction
A fixed dollar amount that reduces taxable income, available to taxpayers who do not itemize. For TY2025: $15,000 (Single/MFS), $22,500 (HOH), $30,000 (MFJ). Additional amounts for age 65+ or blind: $1,600 (Single) or $1,300 (Married). Most taxpayers (~90%) take the standard deduction.
Itemized Deductions
Individual deductions claimed on Schedule A instead of the standard deduction, including medical expenses (exceeding 7.5% of AGI), state/local taxes (SALT, capped at $10,000), mortgage interest, charitable contributions, and casualty losses from federally declared disasters. You should itemize when these total more than your standard deduction.
Tax Bracket / Marginal Tax Rate
The rate applied to your last dollar of taxable income. The U.S. uses a progressive system with 7 brackets for TY2025: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The 37% bracket begins at $626,350 (Single) and $751,600 (MFJ). Only income within each bracket is taxed at that rate — not your entire income.
Effective Tax Rate
The average rate at which your income is taxed, calculated as total tax ÷ total income. Always lower than your marginal rate due to the progressive bracket system. Example: A single filer with $100,000 taxable income has a 22% marginal rate but approximately 17.4% effective rate for TY2025.
Withholding (W-4)
Federal income tax withheld from each paycheck by your employer based on your Form W-4 elections. Withholding is a pre-payment of your annual tax liability. If too little is withheld, you may owe at filing; if too much, you receive a refund. The IRS Tax Withholding Estimator helps calculate the correct amount.
Estimated Tax Payments
Quarterly tax payments required for self-employed individuals and those with significant non-wage income. Due dates: April 15, June 16, September 15, and January 15. Penalties apply under IRC §6654 if you underpay. Safe harbor: Pay 100% of prior year tax (110% if AGI > $150,000) or 90% of current year tax.
Tax Return (Form 1040)
The primary annual federal income tax return filed by U.S. individuals. Due April 15 of the year following the tax year (April 15, 2026 for TY2025). Includes schedules for itemized deductions (A), business income (C), capital gains (D), rental income (E), and more. E-filed returns are typically processed in 21 days.
Extension (Form 4868)
An automatic 6-month extension to file your tax return (not to pay). Extends the filing deadline from April 15 to October 15. Does NOT extend the payment deadline — interest and late payment penalties still accrue from April 15 on any unpaid balance. No reason required; filing the form grants automatic approval.
Amended Return (Form 1040-X)
Used to correct errors on a previously filed return. Can be filed to change filing status, correct income, or claim missed deductions/credits. Must be filed within 3 years of the original filing date or 2 years of the date you paid the tax, whichever is later. Can now be e-filed for TY2019 and later.
e-Filing / Electronic Filing
Electronic submission of tax returns to the IRS through approved software or an authorized e-file provider. Over 90% of individual returns are now e-filed. Benefits include faster processing (21 days vs. 6-8 weeks for paper), immediate confirmation of receipt, and fewer errors. Paid preparers filing 11+ returns MUST e-file.
Tax Transcript
An official IRS document showing key information from a filed tax return. Types include: Return Transcript (shows most line items), Account Transcript (shows payments and adjustments), Wage & Income Transcript (shows W-2s/1099s), and Record of Account (combines return and account info). Available via IRS.gov or Form 4506-T.
IRS Notices & Communications
CP2000 Notice (Underreporter)
Automated notice from the IRS Automated Underreporter (AUR) program proposing tax changes when income reported on your return does not match information statements (W-2s, 1099s) received by the IRS. Not an audit. You have 30 days to respond by agreeing, partially agreeing, or fully disputing. The IRS processes over 4 million CP2000 notices annually.
CP501/CP503/CP504 (Collection Notices)
A series of increasingly urgent collection notices. CP501: First reminder of unpaid balance. CP503: Second reminder. CP504: Final notice of intent to levy — the IRS can seize your state tax refund and may levy other assets. Responding before CP504 gives you the most options including installment agreements and penalty abatement.
Notice of Deficiency (90-Day Letter)
Formal legal notice proposing additional tax after an examination or when the IRS determines your return understated income. You have exactly 90 days (150 days if addressed to you outside the US) to petition the U.S. Tax Court. If you don't petition within this window, the IRS can assess and collect the proposed amount. One of the most important deadlines in tax law.
Letter 566 (Examination Notice)
Initial notification that your tax return has been selected for examination (audit). Identifies the items being examined, requests specific documentation, and provides the examiner's contact information. Types of audits: correspondence (mail), office (at IRS office), and field (at your location). The overall audit rate is approximately 0.4% for TY2025.
IRS Levy
Legal seizure of your property or assets to satisfy a tax debt. The IRS can levy bank accounts, wages, Social Security benefits, retirement accounts, and other assets. Before levying, the IRS must send a Final Notice of Intent to Levy (CP504 or Letter 1058) and provide 30 days to respond. A levy is different from a lien — a levy takes property; a lien is a claim against property.
IRS Lien (Notice of Federal Tax Lien)
A legal claim by the government against your property when you neglect or fail to pay a tax debt. Filed as a public record with your county recorder. Attaches to all current and future assets including real estate, vehicles, and financial accounts. Can damage credit scores. Releases automatically within 30 days of full payment. Can request withdrawal after lien release.
Offer in Compromise (OIC)
An agreement with the IRS to settle tax debt for less than the full amount owed. Three types: Doubt as to Liability, Doubt as to Collectibility (most common), and Effective Tax Administration. Requires filing Form 656 with $205 application fee (waived for low-income). The IRS accepted approximately 17,000 of 52,000 OIC applications in 2025. Average accepted offer is about 33% of total liability.
Currently Not Collectible (CNC)
IRS designation for taxpayers who cannot pay their tax debt because doing so would create financial hardship. Collection actions are suspended but interest and penalties continue to accrue. The 10-year collection statute continues to run. CNC status is reviewed periodically — if your financial situation improves, the IRS may resume collection.
Installment Agreement
A payment plan to pay your tax debt over time. Types: Guaranteed (owe < $10,000, pay within 3 years), Streamlined (owe < $50,000, pay within 72 months), and Non-Streamlined (> $50,000, requires financial disclosure). Online setup available via IRS.gov for debts under $50,000. Setup fee: $31 (online direct debit) to $225 (non-direct debit).
Penalty Abatement
IRS removal or reduction of penalties. Two main types: First-Time Abatement (FTA) — available if you had no penalties in the prior 3 years, filed all required returns, and have paid or arranged to pay; and Reasonable Cause — requires demonstrating circumstances beyond your control (serious illness, natural disaster, death in family, fire, reliance on professional advice).
Taxpayer Advocate Service (TAS)
An independent organization within the IRS that helps taxpayers resolve problems they haven't been able to resolve through normal IRS channels. Available when you're experiencing economic harm, facing an immediate threat of adverse action, or the IRS hasn't responded by the promised date. Contact TAS at 1-877-777-4778 or file Form 911.
Collection Due Process (CDP)
Your right to a hearing before the IRS Office of Appeals before certain collection actions. Triggered by filing Form 12153 within 30 days of receiving a CDP notice (Letter 1058 or LT11). During CDP, you can propose alternatives to levy/lien including installment agreements, OIC, or CNC status. Important: You can petition Tax Court if you disagree with the Appeals decision.
Credits & Deductions
Earned Income Tax Credit (EITC)
Refundable credit for low-to-moderate income working individuals and families. For TY2025: maximum credit ranges from $632 (no children) to $7,830 (3+ qualifying children). Income limits: $18,591 (single, no children) to $63,398 (MFJ, 3+ children). Requires earned income and valid SSN. Subject to strict due diligence requirements for preparers under IRC §6695(g) — $650 penalty per failure.
Child Tax Credit (CTC)
Credit for each qualifying child under age 17. For TY2025: $2,200 per qualifying child (newly indexed for inflation). Begins phasing out at $200,000 AGI ($400,000 MFJ). The refundable portion (Additional Child Tax Credit/ACTC) is calculated on Schedule 8812. Child must have a valid SSN issued before the return due date. Subject to preparer due diligence requirements.
Additional Child Tax Credit (ACTC)
The refundable portion of the Child Tax Credit, allowing taxpayers to receive a refund even if they owe no tax. For TY2025, the refundable amount is up to $1,700 per child. Calculated on Schedule 8812 based on earned income exceeding $2,500. Only available for children with valid SSNs (not ITINs).
Other Dependent Credit (ODC)
A $500 non-refundable credit for each qualifying dependent who doesn't qualify for the Child Tax Credit — including children 17+, dependent parents, and other qualifying relatives. Also available for children with ITINs who don't qualify for CTC. Subject to the same income phase-out thresholds as CTC ($200,000/$400,000).
American Opportunity Tax Credit (AOTC)
Education credit of up to $2,500 per eligible student for the first 4 years of post-secondary education. 40% refundable ($1,000 max refund). Covers tuition, fees, and course materials. MAGI phase-out: $80,000-$90,000 (Single), $160,000-$180,000 (MFJ). Student must be enrolled at least half-time. Subject to preparer due diligence under IRC §6695(g).
Lifetime Learning Credit (LLC)
Education credit of up to $2,000 per return (not per student) for tuition and fees at eligible institutions. No limit on years claimed. Available for undergraduate, graduate, and professional degree courses, including courses to improve job skills. Non-refundable. MAGI phase-out: $80,000-$90,000 (Single), $160,000-$180,000 (MFJ) for TY2025.
Child and Dependent Care Credit
Credit for expenses paid for the care of a qualifying child under 13 or a disabled dependent so you can work or look for work. For TY2025: 20-35% of up to $3,000 in expenses for one qualifying individual ($6,000 for two or more). Non-refundable. Both spouses must have earned income (or be full-time students). Expenses must be reported with provider's SSN or EIN.
Premium Tax Credit (PTC)
Refundable credit to help pay for health insurance purchased through the Health Insurance Marketplace. Amount based on household income, family size, and cost of the benchmark plan. Can be taken in advance (APTC) to reduce monthly premiums or claimed at filing. Reconciled on Form 8962. Excess advance payments must be repaid.
Saver's Credit (Retirement Savings Contribution Credit)
Non-refundable credit of 10%, 20%, or 50% of retirement contributions up to $2,000 ($4,000 MFJ). For TY2025, available to taxpayers 18+ who are not full-time students with AGI below $38,250 (Single), $57,375 (HOH), or $76,500 (MFJ). Applies to contributions to 401(k), IRA, SIMPLE, and other retirement plans.
SALT Deduction (State and Local Tax)
Itemized deduction for state and local taxes paid, including income taxes (or sales taxes as an alternative) and property taxes. Currently capped at $10,000 per return ($5,000 MFS) under the Tax Cuts and Jobs Act through 2025. The Big Beautiful Bill (2025) raised the SALT cap to $40,000 for TY2025+ for taxpayers with AGI under $500,000.
Qualified Business Income Deduction (QBI / Section 199A)
Deduction of up to 20% of qualified business income from pass-through entities (sole proprietorships, S corps, partnerships) and certain REITs/PTPs. Complex limitations apply based on taxable income, W-2 wages paid, and type of business. Specified service businesses (law, accounting, consulting, etc.) face phase-outs above $191,950 (Single) / $383,900 (MFJ) for TY2025.
Mortgage Interest Deduction
Itemized deduction for interest paid on a mortgage secured by your main home or a second home. Limited to interest on the first $750,000 of mortgage debt ($375,000 MFS) for loans taken after December 15, 2017. Loans before that date are grandfathered at the $1 million limit. Reported on Form 1098 from your lender.
Charitable Contribution Deduction
Itemized deduction for donations to qualified charitable organizations. Cash contributions limited to 60% of AGI. Non-cash property donations limited to 30% or 50% of AGI depending on the type of organization. Donations over $250 require written acknowledgment from the charity. Non-cash donations over $500 require Form 8283.
Business & Self-Employment
Schedule C (Profit or Loss from Business)
IRS form used by sole proprietors and single-member LLCs to report business income and expenses. Net profit is subject to both income tax and self-employment tax. Key expense categories include: cost of goods sold, advertising, car/truck expenses, insurance, legal/professional services, office expense, rent, and utilities. Must file if you had $400+ in net self-employment earnings.
Self-Employment Tax
Social Security and Medicare taxes for self-employed individuals, calculated on Schedule SE. Rate: 15.3% of net self-employment earnings (12.4% Social Security up to $176,100 for TY2025 + 2.9% Medicare on all earnings). The Social Security wage base is indexed annually. You can deduct 50% of SE tax as an above-the-line deduction on your 1040.
Home Office Deduction
Deduction for the business use of your home. Two methods: Simplified ($5/sq ft, max 300 sq ft = $1,500) or Regular (actual expenses × business use percentage including mortgage interest, insurance, utilities, repairs, and depreciation). Space must be used regularly and exclusively for business. Not available to W-2 employees after TCJA.
Vehicle/Mileage Deduction
Deduction for business use of a vehicle. Two methods: Standard Mileage Rate (70 cents/mile for TY2025) or Actual Expenses (gas, insurance, repairs, depreciation × business use percentage). Must maintain a contemporaneous mileage log. The standard rate includes gas, insurance, and depreciation — you cannot deduct those separately if using it.
Depreciation
Annual deduction for the wear and tear of business property over its useful life. Common recovery periods: 5 years (computers, vehicles), 7 years (office furniture), 27.5 years (residential rental property), 39 years (commercial property). Methods include straight-line, MACRS (Modified Accelerated Cost Recovery System), and declining balance.
Section 179 Expensing
Election to deduct the full cost of qualifying business property in the year it's placed in service, rather than depreciating over several years. For TY2025: maximum deduction of $1,250,000 with a phase-out beginning at $3,130,000 in total equipment purchases. Applies to tangible personal property, off-the-shelf software, and certain real property improvements.
Bonus Depreciation
Additional first-year depreciation for qualifying business assets. Under the Big Beautiful Bill (2025), 100% bonus depreciation was restored retroactively for assets placed in service after 2022. This allows immediate write-off of the entire cost of qualifying property. Applies to new and used property with a recovery period of 20 years or less.
Pass-Through Entity
A business structure where income "passes through" to the owners' personal tax returns rather than being taxed at the entity level. Includes sole proprietorships, partnerships (Form 1065), S corporations (Form 1120-S), and most LLCs. Owners pay tax at their individual rates. Subject to the Section 199A QBI deduction (up to 20% of qualified business income).
S Corporation
A corporation that has elected pass-through tax treatment by filing Form 2553. Limits: max 100 shareholders, one class of stock, shareholders must be U.S. citizens/residents. Key tax advantage: S corp owner-employees can split income between reasonable salary (subject to payroll tax) and distributions (not subject to SE tax), potentially saving 15.3% on the distribution portion.
Payroll Tax (FICA)
Federal Insurance Contributions Act taxes paid by both employers and employees. Rate: 7.65% each (6.2% Social Security + 1.45% Medicare). Social Security wage base for TY2025: $176,100. Additional 0.9% Medicare surtax on wages exceeding $200,000 (Single) / $250,000 (MFJ). Employers must file Form 941 quarterly and Form 940 (FUTA) annually.
Quarterly Estimated Taxes
Pre-payments of income and self-employment tax required when you expect to owe $1,000+ at filing. Paid using Form 1040-ES. Due dates for TY2026: April 15, June 16, September 15, 2026 and January 15, 2027. The IRS charges penalties under §6654 for underpayment. Safe harbor: Pay 100% of prior year tax or 90% of current year tax.
Business Entity Selection
Choosing the optimal legal and tax structure for a business. Options include: Sole Proprietorship (simplest, unlimited liability), Single-Member LLC (liability protection, disregarded for tax), Partnership/Multi-Member LLC (shared ownership), S Corporation (salary/distribution split), and C Corporation (separate tax entity, subject to double taxation at 21% corporate rate).
Tax Practice & Compliance
PTIN (Preparer Tax Identification Number)
A unique identification number required for anyone who prepares or assists in preparing federal tax returns for compensation. Issued by the IRS; must be renewed annually ($19.75 renewal fee for 2026). Required to be included on every return you prepare. Apply or renew at IRS.gov/ptin. Having a PTIN does not authorize you to represent clients before the IRS.
EFIN (Electronic Filing Identification Number)
A number assigned by the IRS to authorized e-file providers. Required to electronically file tax returns on behalf of clients. Application requires IRS suitability check including fingerprinting and background check. Apply via IRS e-Services. An EFIN is assigned to the firm, not individual preparers. Responsible Officials and Principals must pass suitability.
Circular 230
Treasury Department Circular No. 230 — the regulations governing practice before the IRS. Applies to attorneys, CPAs, enrolled agents, and other authorized practitioners. Covers: duties and restrictions, sanctions for violations, rules for written advice, fees, advertising, and solicitation. Key sections: §10.22 (diligence), §10.33 (best practices), §10.34 (standards for returns and documents).
Due Diligence Requirements
IRC §6695(g) requirements for paid preparers claiming EITC, CTC/ACTC/ODC, AOTC, or HOH filing status. Must complete Form 8867 for each applicable credit/status, compute credits using the worksheet, meet knowledge requirements, and retain records for 3 years. Penalty for TY2025: $650 per failure (up to $2,600 per return if all 4 credits apply).
Form 8867 (Paid Preparer's Due Diligence Checklist)
Required form documenting that a paid preparer met due diligence requirements for EITC, CTC/ACTC/ODC, AOTC, and/or HOH filing status. Must be filed with every return claiming these credits/statuses. Contains questions about eligibility, documentation reviewed, and knowledge of the client's circumstances. Failure to complete = $650 penalty per credit/status.
IRC §7216 (Disclosure/Use of Tax Return Information)
Federal law prohibiting tax return preparers from disclosing or using tax return information for any purpose other than preparing the return without the taxpayer's written consent. Violations are a federal crime (misdemeanor: up to $1,000 fine and/or 1 year imprisonment). Separate written consent is required for disclosure (sharing with third parties) and use (marketing, cross-selling).
IRC §6694 (Preparer Penalties — Understatement)
Penalties on tax return preparers for understating a client's tax liability. Two tiers: §6694(a) — Unreasonable positions: Greater of $1,000 or 50% of income derived from the return. Applies unless preparer had substantial authority or reasonable basis with disclosure. §6694(b) — Willful or reckless conduct: Greater of $5,000 or 75% of income derived. Cannot be insured against.
IRC §6695 (Preparer Penalties — Other)
Various penalties for tax preparers: §6695(a) failure to furnish copy to taxpayer ($50/failure), §6695(b) failure to sign return ($50/failure), §6695(c) failure to furnish PTIN ($50/failure), §6695(e) failure to file correct information return ($50/failure), §6695(f) endorsing/negotiating refund check ($600/check), §6695(g) due diligence failure ($650/failure for TY2025). Maximum $28,000/year per subsection.
Engagement Letter
A written agreement between a tax preparer and client that defines the scope of services, responsibilities, fees, and terms. While not legally required federally, it is considered a best practice under Circular 230 §10.33 and may be required by state boards. Protects the preparer from scope creep, fee disputes, and liability for services not performed.
Power of Attorney (Form 2848)
IRS form authorizing an individual to represent a taxpayer before the IRS. Grants authority to receive confidential tax information, negotiate with the IRS, and sign certain documents. Representatives must be authorized practitioners (attorney, CPA, EA, etc.). Specify tax forms and years covered. Can be submitted via fax, mail, or IRS online account. Expires as specified or when revoked.
Continuing Education (CE)
Ongoing professional education required to maintain tax preparer credentials. Enrolled Agents: 72 hours per 3-year cycle (minimum 16/year, including 2 hours ethics). Annual Filing Season Program (AFSP): 18 hours/year (including 6 hours federal tax law update). CPAs: varies by state, typically 40 hours/year. CE providers must be IRS-approved.
Enrolled Agent (EA)
A federally authorized tax practitioner with unlimited rights to represent taxpayers before the IRS. Earned by passing the Special Enrollment Examination (SEE) — a 3-part exam covering individual tax, business tax, and representation/ethics — or through IRS employment experience. EAs can represent clients in audits, collections, and appeals at all IRS levels nationwide.
Banking & Financial Products
Refund Transfer (RT)
A bank product that allows taxpayers to pay their tax preparation fees from their refund rather than out-of-pocket. The bank opens a temporary account, the IRS deposits the refund there, the bank deducts fees and any advance repayment, then sends the remaining refund to the taxpayer. Typical bank fee: $30-$49. Processing time: 1-2 days after IRS releases refund.
Refund Advance (RA)
A short-term loan offered by tax preparation bank partners, allowing taxpayers to receive a portion of their expected refund within 24-48 hours of filing. Amounts typically range from $250 to $7,000. Many are 0% APR (no interest). The advance is repaid when the IRS refund is received. Approval based on expected refund amount and identity verification.
Service Bureau
A company that partners with independent tax preparers to provide technology, bank products, marketing support, and business services. Service bureaus like Formality Tax connect EROs with multiple bank partners, tax software options, and business tools. They earn a portion of bank product fees in exchange for the services provided to the tax professional.
ERO (Electronic Return Originator)
A tax professional or firm authorized by the IRS to originate electronic filing of tax returns. The ERO is the first point of contact for taxpayers in the e-file process. Responsible for ensuring returns are complete, verifying taxpayer identity, and transmitting returns to the IRS or transmitter. Must have an EFIN and comply with IRS e-file requirements.
Transmitter
An IRS-authorized e-file provider that sends electronic return data directly to the IRS on behalf of EROs. Must meet IRS technology requirements and pass testing. Many service bureaus and software companies serve as transmitters. The transmitter is responsible for the secure transmission of returns and must maintain records of all transmissions.
Funded Referral
A referral program where tax professionals earn commissions for referring clients to partner services such as bank products, insurance, or financial services. Commissions are typically paid from the service provider's fee, not the client's pocket. Example: A $50 referral fee for each client who takes a Refund Transfer through your recommended bank partner.
Bank Product Fees
Fees charged by bank partners for financial products offered through tax preparation. Common fees: Refund Transfer: $30-$49, Refund Advance: $0 (0% APR advances) to varies, Check Printing: $0-$25, Prepaid Card Loading: $0-$15. These fees are deducted from the taxpayer's refund before disbursement. Full disclosure is required by federal and state regulations.
Direct Deposit
Electronic transfer of a tax refund directly into a bank account. The fastest refund delivery method — typically 21 days from e-filing. Can split refund into up to 3 accounts using Form 8888. Required for bank product advances. Verify routing and account numbers carefully — the IRS cannot redirect deposits sent to the wrong account.
Earned Income Advance
A type of Refund Advance specifically tied to expected EITC refund amounts. Some bank partners offer these at 0% APR for qualifying taxpayers with verified EITC eligibility. Amounts are typically limited to a percentage of the expected EITC amount. Available within 24-48 hours of filing. Reduces the final refund by the advance amount plus any applicable fees.
Investment & Retirement
Traditional IRA
Individual Retirement Account with tax-deductible contributions (subject to income limits if covered by an employer plan). For TY2025: contribution limit of $7,000 ($8,000 if age 50+). Earnings grow tax-deferred. Withdrawals taxed as ordinary income. Early withdrawal before age 59½ subject to 10% penalty (exceptions exist). Required Minimum Distributions (RMDs) begin at age 73.
Roth IRA
Retirement account funded with after-tax contributions. For TY2025: same $7,000/$8,000 contribution limits as Traditional IRA. MAGI phase-out: $150,000-$165,000 (Single), $236,000-$246,000 (MFJ). Qualified withdrawals are tax-free (account open 5+ years and age 59½+). No RMDs during owner's lifetime. Contributions (not earnings) can be withdrawn anytime without penalty.
401(k) / 403(b) / 457 Plans
Employer-sponsored retirement plans. TY2025 contribution limits: $23,500 employee deferral ($31,000 if age 50+, special catch-up of $34,750 if age 60-63). Traditional 401(k): pre-tax contributions, taxed on withdrawal. Roth 401(k): after-tax contributions, qualified withdrawals tax-free. Employer matches are always pre-tax. 403(b) for nonprofits/schools, 457 for government employees.
Required Minimum Distribution (RMD)
The minimum amount you must withdraw from retirement accounts annually starting at age 73 (under SECURE 2.0 Act, increasing to 75 in 2033). Applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and other qualified plans. Does NOT apply to Roth IRAs during owner's lifetime. Penalty for missed RMD: 25% of the amount not distributed (reduced from 50% by SECURE 2.0).
Capital Gains Tax
Tax on profit from selling capital assets (stocks, bonds, real estate, etc.). Short-term (held ≤1 year): taxed as ordinary income. Long-term (held >1 year): preferential rates of 0%, 15%, or 20% for TY2025. The 0% rate applies up to $48,350 (Single) / $96,700 (MFJ). Net Investment Income Tax (NIIT) adds 3.8% above $200,000/$250,000 MAGI.
Cost Basis
The original value of an asset for tax purposes, usually the purchase price plus certain costs (commissions, fees, improvements). Used to calculate gain or loss on sale: Sale Price − Cost Basis = Gain/Loss. Methods include specific identification, FIFO (first in, first out), and average cost. Brokers report basis on Form 1099-B for covered securities.
Tax-Loss Harvesting
Strategy of selling investments at a loss to offset capital gains and reduce taxable income. Net capital losses can offset up to $3,000 of ordinary income per year ($1,500 MFS), with unused losses carrying forward indefinitely. Watch the wash sale rule: cannot repurchase substantially identical securities within 30 days before or after the sale.
Social Security Benefits (Taxation)
Up to 85% of Social Security benefits may be taxable depending on your "combined income" (AGI + nontaxable interest + ½ of benefits). For TY2025, if combined income exceeds $25,000 (Single) or $32,000 (MFJ), up to 50% is taxable. Above $34,000/$44,000, up to 85% is taxable. Calculated on Worksheet in Form 1040 instructions or the optional simplified method.
Net Investment Income Tax (NIIT)
An additional 3.8% tax on the lesser of net investment income or MAGI exceeding $200,000 (Single), $250,000 (MFJ), or $125,000 (MFS). Investment income includes interest, dividends, capital gains, rental income, and royalties. Does NOT include wages, self-employment income, Social Security benefits, or tax-exempt interest. Reported on Form 8960.
Tax Reform & Legislation
Tax Cuts and Jobs Act (TCJA) of 2017
Major tax reform law that reduced individual rates, nearly doubled the standard deduction, eliminated personal exemptions, capped SALT deductions at $10,000, increased the Child Tax Credit, and created the Section 199A QBI deduction. Most individual provisions were set to expire after 2025. The Big Beautiful Bill extended many of these provisions through 2028.
Big Beautiful Bill (2025)
The One Big Beautiful Bill Act passed in 2025 that extended and modified many TCJA provisions. Key changes: SALT cap raised to $40,000 (with income phase-out above $500,000), 100% bonus depreciation restored retroactively, Child Tax Credit increased to $2,200 per child with inflation indexing, tip and overtime income exclusions, and various energy credit modifications. Most provisions effective TY2025.
SECURE Act 2.0 (2022)
Legislation enhancing retirement savings provisions. Key changes: RMD age increased to 73 (75 starting 2033), reduced penalty for missed RMDs from 50% to 25% (10% if corrected timely), Roth employer contributions allowed, student loan matching contributions, emergency savings accounts in 401(k)s, and enhanced catch-up contributions for ages 60-63.
Inflation Reduction Act (IRA) of 2022
Legislation creating and extending energy-related tax credits. Key provisions: Clean Vehicle Credit up to $7,500 for new EVs (with domestic manufacturing requirements), Used Clean Vehicle Credit up to $4,000, Energy Efficient Home Improvement Credit up to $3,200/year, Residential Clean Energy Credit (30% of solar, battery, geothermal costs), and Premium Tax Credit enhancements.
Alternative Minimum Tax (AMT)
A parallel tax system designed to ensure high-income taxpayers pay a minimum amount of tax. AMT exemption for TY2025: $88,100 (Single), $137,000 (MFJ). AMT rates: 26% and 28%. Computed on Form 6251. Common AMT triggers: large SALT deductions, incentive stock option exercises, private activity bond interest. TCJA significantly reduced the number of taxpayers subject to AMT.
Clean Energy Credits
Tax credits for renewable energy and energy efficiency. Residential Clean Energy Credit (§25D): 30% of costs for solar, wind, geothermal, and battery storage through 2032. Energy Efficient Home Improvement Credit (§25C): 30% of costs up to $3,200/year for insulation, windows, heat pumps, etc. Clean Vehicle Credit (§30D): up to $7,500 for qualifying new electric vehicles.
Opportunity Zones
Designated low-income census tracts where investment of capital gains into Qualified Opportunity Funds receives preferential tax treatment. Benefits: temporary deferral of invested capital gains until 2026, and exclusion of up to 15% of the gain. Gains from the Opportunity Zone investment held 10+ years are permanently excluded from income. Established by TCJA in 2017.
Corporate Transparency Act (CTA)
Enacted in 2021, requiring most small companies to report beneficial ownership information (BOI) to FinCEN. Affected entities must disclose individuals who own 25%+ or exercise substantial control. While initially requiring filings starting 2024, enforcement was paused by court injunctions in 2025. Tax professionals should monitor developments and advise clients on compliance requirements.
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