Tax Terms

Your adjusted gross income (AGI) is your taxable income minus certain deductions. It’s a significant number because the IRS uses your AGI to calculate if you qualify for other tax credits or deductions.

Also, the IRS may ask you to provide last year’s AGI to file your tax return electronically.

Source: Forbes

Below-the-line deductions are amounts you can claim to reduce your overall taxes. Generally, there are two types: itemized deductions and the standard deduction (though many people do not typically refer to the standard deduction as a below-the-line deduction). You can choose the deduction that lowers your tax bill the most.

Source: Forbes

A capital gain occurs when you sell a capital asset, such as real estate, stocks, or bonds, for more than you paid for it. The amount of tax you pay depends on how long you hold the asset.

If you hold your capital asset for one year or less, your gains are taxed at ordinary income tax rates. If you hold it longer than a year, your gains are taxed at long-term capital gains rates, which are generally lower.

Source: Forbes

You may incur a capital loss when you sell an asset for less than you paid for it. For example, if you purchase a stock and later sell it for less than your purchase price, the difference is your capital loss.

When your total capital losses exceed your capital gains in a year, you can claim a limited amount of the loss to reduce your taxable income. The IRS allows you to carry any unused losses forward to future tax years.

Source: Forbes

The child and dependent care credit is a tax credit available to families who pay for the care of a loved one while working, or looking for work. The amount of the credit is a percentage of how much you paid for care, up to a maximum amount.

A qualifying person must meet one of the following requirements:

• Your dependent under the age of 13, or
• Your spouse or a dependent who is unable to care for themselves and lives with you more than half of the year.

Source: Forbes

The child tax credit provides a financial benefit to families with qualifying children. The credit lowers the amount you owe in taxes and, when refundable, can generate a refund even if you do not owe taxes.

Your child must meet the following qualifications to claim the credit:

• You must claim your child as a dependent on your tax return, and they must be related to you.
• Your child must be within the qualifying age limit and a U.S. citizen, national, or resident alien.
• Your child must have a valid Social Security number and live with you for at least half of the year.
• You must provide at least half of their financial support.

Source: Forbes

The cost basis is the original amount paid for an asset. For example, if you buy a stock, the price you pay for it is your cost basis.

Source: Forbes

Generally, the IRS taxes cryptocurrency similar to capital gains. How much you’ll pay in taxes on your crypto depends on how long you hold it before you sell or use it. If you hold it for more than one year, any gains are taxed at the lower long-term capital gains rate. If you hold it for one year or less, your gains are taxed at ordinary income tax rates.

Source: Forbes

A dependent is someone who relies on the taxpayer for financial support. For tax purposes, the IRS allows you to claim a dependent, which may entitle you to tax breaks.

Source: Forbes

The earned income tax credit (EITC) is designed to provide financial assistance to taxpayers who earn a low-to-moderate income. The EITC is a refundable tax credit, which means it can reduce the amount of taxes you owe and generate a refund.

The EITC is based on a percentage of the income you’ve earned during the year, including wages, tip income, and self-employment income. However, unemployment income, alimony, child support, and interest aren’t considered earned income. Generally, the amount you can claim increases with the number of qualifying children.

Source: Forbes

You must pay federal income taxes when you receive income throughout the year. Typically, if you’re an employee, your employer will withhold federal income taxes and pay them on your behalf. However, if you own a business, you must make estimated tax payments throughout the year.

Estimated tax payments are generally due on a quarterly basis, with deadlines that fall in April, June, and September, and in January of the following year. Confirm the exact due dates for the current tax year, as they can shift slightly.

Source: Forbes

Your filing status is an IRS classification based generally on your marital status. It is used for your filing requirements, standard deduction, ability to claim certain tax breaks and the amount of your tax. There are five filing statuses:

• Single
• Head of Household
• Married filing separately
• Married filing jointly
• Qualifying Widow(er)

Source: Forbes

Interest deduction causes a reduction in taxable income. If a taxpayer or business pays interest, in certain cases the interest may be deducted from income subject to tax. Some examples of interest payments that can be deducted are interest payments for a home mortgage or home equity loan, margin account interest, and student loan interest.

Source: Investopedia

An investment interest expense is any amount of interest that is paid on loan proceeds used to purchase investments or securities. Investment interest expenses include margin interest used to leverage securities in a brokerage account and interest on a loan used to buy property held for investment. An investment interest expense is deductible in certain circumstances.

Source: Investopedia

Itemized deductions are expenses you can claim on your federal income tax return to lower your taxes. Some examples are medical and dental costs, charitable donations, state income taxes and casualty losses. When choosing whether to itemize your deductions, or go with the standard deduction, use whichever is the higher amount.

Source: Forbes

Long-term capital gains are derived from assets that are held for more than one year before they are disposed of. Long-term capital gains are taxed according to graduated thresholds for taxable income, at rates that are generally lower than ordinary income tax rates. Most taxpayers who report long-term capital gains are taxed at a rate below their ordinary income tax rate.

Source: Investopedia

Margin interest is the interest that is due on loans made between you and your broker concerning your portfolio’s assets. For instance, if you short sell a stock, you must first borrow it on margin and then sell it to a buyer. Or, if you purchase on margin, you will be offered the ability to leverage your money to purchase more shares than the cash you outlay.

Source: Investopedia

Nontaxable income is any income you receive on which you don’t have to pay taxes. Some examples of nontaxable income are child support payments, gifts, and cash rebates.

Source: Forbes

Ordinary, or non-qualified, dividends are a share of a company’s profits passed on to the shareholders periodically. The dividends are taxed as ordinary income.

Source: Investopedia

A personal exemption was a dollar amount you could deduct from your taxable income, which would reduce the income on which you are taxed. The personal exemption was suspended by the Tax Cuts and Jobs Act (TCJA) for tax years 2018 through 2025. Whether a personal exemption applies in any given year depends on current tax law, so confirm the latest rules.

Source: Forbes

A qualified dividend is a dividend that must meet special requirements put in place by the IRS and falls under capital gains tax rates, which are lower than the income tax rates applied to unqualified or ordinary dividends. Because of this difference in rates, the distinction between ordinary and qualified dividends can be substantial when it comes time to pay taxes.

Source: Investopedia

Self-employment income is money or property received for services you provide. Typically, a self-employed person is a sole proprietor, freelancer, or independent contractor.

Source: Forbes

A short-term gain is a profit realized from the sale of personal or investment property that has been held for one year or less. The amount of the short-term gain is the difference between the basis of the capital asset – or the purchase price – and the sale price received for selling it. Short-term gains are taxed at the taxpayer’s ordinary income tax rate.

Source: Investopedia

A sole proprietor is someone who owns a business by themselves. They report their share of income and expenses on Form 1040, Schedule C.

Source: Forbes

A standard deduction is a flat amount that the IRS allows you to use to reduce your taxes based on your filing status, and it is adjusted for inflation each year. The IRS allows you to choose between deducting your itemized deductions or the applicable standard deduction — choose the method that lowers your tax bill the most.

Source: Forbes

A tax deduction is an amount that reduces the amount of your income that can be taxed, lowering your tax bill. Examples of tax deductions are standard deductions, itemized deductions, or above-the-line deductions.

Source: Forbes

Taxable interest is interest on bonds, mutual funds, CDs, and demand deposits at or above a minimum reporting threshold. Taxable interest is taxed just like ordinary income.

Source: Investopedia

Taxable interest income is the money you earn on investments (for example, bonds, mutual funds, and interest-bearing accounts) for which you’re required to pay taxes. In most cases, your tax rate on earned interest income is the same rate as the rest of your income.