EXAM 2 Tax Vocab

Gross income

All income you receive before deductions, except income the law excludes.

Exclusion

Income that does NOT get added to gross income.

Adjusted gross income (AGI)

Gross income minus adjustments

Modified AGI (MAGI)

AGI with certain items added back; used to see if you qualify for certain tax benefits.

Taxable income

The amount of income that is actually taxed.

Filing status

Your tax category, such as Single, MFJ, MFS, HOH, or qualifying surviving spouse.

Dependent

A qualifying child or relative who may help you qualify for tax benefits.

Phaseout

When a tax benefit gets smaller as your income gets higher.

Deduction for AGI (adjustment)

A deduction taken before calculating AGI; you can take it even if you do not itemize.

Above-the-line deduction

Another name for a deduction to reach AGI.

Health savings account (HSA)

A tax-friendly account used to pay medical expenses.

Traditional IRA

A retirement account where contributions may be deductible and withdrawals are taxed.

Self-employed health insurance deduction

A deduction for health insurance premiums paid by a self-employed person.

Student loan interest deduction

A deduction of up to $2,500 for interest paid on qualified student loans.

Educator expense deduction

A deduction of up to $300 for classroom supplies bought by K–12 educators.

Deduction from AGI

A deduction taken after AGI, such as the standard or itemized deduction.

Standard deduction

A set deduction amount based on filing status instead of itemizing.

Additional standard deduction

Extra standard deduction for someone age 65+ or blind.

Itemized deductions

Specific expenses you can deduct instead of taking the standard deduction.

SALT, Medical Expenses, Mortgage Interest, and Charity Contributions

The four types of itemized deductions

SALT

State and local taxes plus property taxes

Medical Expenses

Only amount over 7.5% of AGI is deductible

Schedule A

The tax form used to report itemized deductions.

Floor

The minimum amount expenses must exceed before they become deductible.

SALT cap

The limit on deductions for state and local taxes.

Acquisition indebtedness

Debt used to buy, build, or greatly improve a home.

Senior deduction

Up to a $6,000 deduction for a person age 65+.

Qualified business income (QBI) deduction

A deduction of up to 20% of qualified pass-through business income.

Self-employment tax

Social Security and Medicare taxes paid by self-employed people.

Net earnings from self-employment (NESE)

Net self-employment profit × 92.35%; used to calculate self-employment tax.

Schedule C

Form used to report profit or loss from a sole proprietorship.

Schedule SE

Form used to calculate self-employment tax.

FICA - Federal Insurance Contributions Act

Social Security and Medicare taxes paid by employees and employers.

Social Security wage base

The maximum amount of earnings subject to Social Security tax.

Additional Medicare tax

Extra 0.9% Medicare tax on income above certain limits.

Marginal tax rate

The tax rate on your next dollar of taxable income.

Average (effective) tax rate

Total tax divided by income.

Progressive tax system

A tax system where tax rates increase as income increases.

Ordinary income

Income taxed at normal tax rates, like wages and interest.

Capital asset

Property held for investment or personal use.

Holding period

How long you own an asset; over 1 year is long-term.

Short-term capital gain

Profit from selling a capital asset owned for 1 year or less; taxed like ordinary income.

Long-term capital gain

Profit from selling a capital asset owned for more than 1 year; usually taxed at lower rates.

Qualified dividend

A dividend that qualifies for the lower capital gain tax rates.

Preferential (net capital gain) income

Long-term capital gains and qualified dividends that receive special lower tax rates.

Netting

Using capital losses to offset capital gains.

Capital loss carryforward

Capital losses you cannot use this year that carry into future years.

Collectibles gain

Long-term gain from things like art, coins, or stamps; maximum 28% tax rate.

Unrecaptured §1250 gain

Gain from depreciation on real estate; maximum 25% tax rate.

Net investment income tax (NIIT)

Extra 3.8% tax on investment income for certain higher-income taxpayers.

Tax credit

A dollar-for-dollar reduction of the tax you owe.

Nonrefundable credit

A credit that can reduce your tax to $0, but cannot create a refund.

Refundable credit

A credit that can give you a refund even if your tax reaches $0.

Child tax credit

Up to $2,200 credit for each qualifying child under age 17.

Additional child tax credit

The refundable part of the child tax credit.

Credit for other dependents

A $500 nonrefundable credit for certain dependents who do not qualify for the child tax credit.

Earned income tax credit (EITC)

A refundable credit for lower- to moderate-income workers.

American opportunity tax credit (AOTC)

Up to $2,500 per student for the first 4 years of college; 40% can be refundable.

Lifetime learning credit

A nonrefundable education credit worth 20% of up to $10,000 of tuition.

Child and dependent care credit

A credit for certain care expenses that allow you to work.

Saver's credit

A credit for certain lower-income taxpayers who contribute to retirement.

Carryforward

An unused deduction or credit that can be used in a future year.