10 Tax Terms You Should Know
The word “taxes” makes most people grimace and we get it: taxes can seem daunting! Even the language around taxes can feel overwhelming. To help combat the confusion, we’re breaking down some popular tax terms and what they mean. Keep reading to learn more!
1. FILING STATUS
This refers to how the IRS categorizes you based on your family situation and determines your standard deduction, tax brackets, and eligibility for certain credits (see below). The five options are: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er). Pick the right one, and you maximize deductions and credits; pick the wrong one, and you could pay thousands more than necessary.
2. ADJUSTMENTS TO INCOME
These are the first set of deductions (amounts you can subtract from your total income to reduce the portion that is taxed) you take on your tax return, before calculating your Adjusted Gross Income (AGI). Common examples include contributions to traditional IRAs, student loan interest, and educator expenses. Lowering your AGI through these adjustments can make you eligible for more deductions and credits, reducing your overall tax bill. Your AGI—or Modified AGI (MAGI), a small variation used in certain calculations—determines eligibility for many additional tax benefits.
3. STANDARD DEDUCTION
The fixed dollar amount that the IRS allows you to deduct from your income to reduce your taxable income and, therefore, your tax liability further.
There is a different amount assigned to each filing status (single, married filing joint, married filing separate, head of household). The standard deduction establishes a base deduction that applies to everyone who does not claim itemized deductions, as well as some additional amounts for aged 65 plus, and/or blindness.
The standard deduction is adjusted for inflation each year, and you can determine yours here.
4. ITEMIZED DEDUCTION
A deduction to be subtracted from your income to reduce your tax liability, but only certain expenses are allowed and are subject to limits (see image below). If you have enough eligible expenses that qualify, itemizing your deductions could result in a lower tax bill than the standard reduction. Remember that itemized deductions will only factor into your return if the sum of those deductions is greater than the standard deduction.
EXAMPLES OF ITEMIZED DEDUCTIONS
Medical and Dental Expenses: Unreimbursed medical and dental expenses that exceed a certain percentage of your adjusted gross income (AGI).
State and Local Taxes: State and local income taxes or general sales taxes (you can choose one or the other), real estate taxes, & personal property taxes.
Interest Expenses: Home mortgage interest on the first and second homes, points paid on purchasing a home, & mortgage insurance premiums (subject to phase-out).
Charitable Contributions: Donations made to qualifying charitable organizations.
Casualty and Theft Losses: Losses from federally or certain state-declared disasters, such as natural disasters and fires, can be deductible.
Job Expenses and Certain Miscellaneous Deductions: Deductible in the past, but were suspended by the Tax Cuts and Jobs Act for tax years 2018 through 2025. The suspension was made permanent by the OBBB in 2025.
Other Miscellaneous Deductions: Items like gambling losses (up to the amount of gambling winnings) and federal estate tax on income.
5. MARGINAL TAX RATE
A progressive method of taxation in which the tax rate increases as income increases. There are different rates at each tax bracket.
As taxable income increases to the next tax bracket, the next tax rate is then charged on those additional dollars. Currently, in the US, there are 7 IRS tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The income range for these tax brackets varies depending on filing status.
See 2025's tax brackets here. For example, a single filer pays 10% on income up to $11,925, then 12% on income between $11,926 and $48,475, and so on.
6. EFFECTIVE TAX RATE
The effective tax rate is a helpful metric for understanding what percentage of your total income is paid in taxes. It differs from your nominal or marginal tax rate, which indicates the rate you pay on the last dollar of your income. Instead, the effective tax rate provides an average rate considering all the tax brackets you fall into. By definition, your effective tax rate is calculated by dividing the total tax you pay by your total income. In simple terms:
Effective Tax Rate (%) = (Total Taxes Paid / Total Income) x 100
For instance, if you earned $100,000 this year and, after considering all deductions, credits, and different tax rates applied to various portions of your income, you paid $15,000 in taxes, your effective tax rate would be 15%.
7. CAPITAL GAINS
Represent the profit realized from the sale of an asset that has increased in value over time, such as stocks, real estate, or other investments. They are categorized as either short-term or long-term, depending on the duration of asset ownership, and are subject to different tax rates.
SHORT-TERM CAPITAL GAIN is the profit from the sale of assets that have been held for one year or less. They are taxed as ordinary income, up to a maximum of 37%, depending on tax brackets. Since long-term capital gains are taxed at a lower rate, investors must consider whether net profits will be increased by holding on to assets for the long term.
LONG-TERM CAPITAL GAIN is the profit made from the sale of assets, such as stocks or bonds, that have been held for more than one year. Long-term capital gains are taxed on a graduated scale, up to a maximum of 20%. This tax rate is an important consideration for investors since short-term gains, in contrast, are taxed as ordinary income, and this tends to be more costly (a maximum of 37%).
8. TAX CREDIT
A tax credit is a dollar-for-dollar reduction of your tax bill, which makes it more powerful than a deduction (since deductions only lower taxable income). For example, a $1,000 credit cuts your taxes owed by $1,000—no math tricks, just straight savings.
The most common tax credits are:
Child Tax Credit: For families with qualifying kids under 17
Earned Income Tax Credit: Designed to support low-to-moderate income workers
Child and Dependent Care Credit: For childcare costs that allow you to work
9. ESTIMATED TAXES
Estimated taxes are quarterly payments you make directly to the IRS (and sometimes your state) if you don’t have enough tax withheld from paychecks—common for self-employed people, freelancers, or investors. They cover income and self-employment taxes, so you don’t end up with a giant bill and penalties at the end of the year. Think of it as making sure you are paying enough as you go, rather than waiting until April and hoping for the best.
10. ALTERNATIVE MINIMUM TAX
The purpose of the Alternative Minimum Tax (AMT)—a separate tax levied by the Federal Government—is that taxpayers pay a minimum amount of tax each year. Most people do not pay AMT since regular income tax is usually the greater of the two taxes.
However, in cases where individuals claim numerous deductions and exemptions, the government may deem a taxpayer's income tax to be too low, thereby triggering AMT.
While AMT has historically applied to high-income taxpayers, inflation and ordinary tax cuts have meant that more individuals find themselves subject to it today. The proliferation of ISOs has also increased the occurrence of AMT. AMT currently has two tax brackets: 26% and 28%.
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