Tax Terms Glossary 2026 — 56 Federal & State Definitions

Plain-English definitions of 56 US tax terms for tax year 2026, organized by category. Each term cites the IRS form, publication, or Internal Revenue Code section that governs it. Updated against IRS Rev. Proc. 2025-32 (annual inflation adjustments).

Income & Filing

Adjusted Gross Income (AGI): Your total income minus specific adjustments (above-the-line deductions like student loan interest, HSA contributions, traditional IRA contributions, self-employment tax). AGI determines eligibility for many other tax benefits and is the starting point for federal taxable income.
Modified Adjusted Gross Income (MAGI): AGI with certain items added back (foreign earned income exclusion, student loan interest deduction, IRA contribution deduction, etc.). MAGI is used to determine eligibility for Roth IRA contributions, IRA deductions, ACA premium credits, and Net Investment Income Tax.
Taxable Income: AGI minus the standard or itemized deduction (and the qualified business income deduction if applicable). This is the income amount to which the federal tax brackets are applied.
Standard Deduction: A fixed dollar amount that reduces taxable income for filers who do not itemize. For 2026: $15,000 single, $30,000 married filing jointly, $22,500 head of household. Adjusted annually for inflation per IRS Rev. Proc. 2025-32.
Itemized Deductions: Specific deductible expenses (mortgage interest, state and local taxes, charitable contributions, medical expenses over 7.5% AGI) reported on Schedule A in lieu of the standard deduction. Choose whichever gives you a higher total.
Filing Status: Categorization of taxpayer for tax purposes: Single, Married Filing Jointly, Married Filing Separately, Head of Household, Qualifying Surviving Spouse. Determines bracket thresholds, standard deduction, and credit eligibility.
Head of Household (HoH): Filing status for unmarried individuals who pay more than half the cost of keeping up a home for a qualifying person (usually a child or dependent relative). HoH gets larger standard deduction ($22,500 for 2026) and lower brackets than Single.

Capital Gains

Capital Gain: Profit from selling a capital asset (stock, bond, real estate) at a price higher than its cost basis. Taxed at preferential rates if held more than one year (long-term) or ordinary income rates if held one year or less (short-term).
Long-Term Capital Gain: Gain from an asset held more than one year. Taxed at preferential federal rates: 0% (income up to $48,350 single / $96,700 MFJ), 15% middle, or 20% (income over $533,400 single / $600,050 MFJ) for tax year 2026.
Short-Term Capital Gain: Gain from an asset held one year or less. Taxed at the ordinary income rate (10%-37% federal for 2026), same as wages.
Cost Basis: Original purchase price of an asset, plus commissions, fees, and reinvested dividends. Used to calculate capital gain or loss on sale. Inherited assets get a stepped-up basis to fair market value at date of death.
Wash-Sale Rule: IRS rule disallowing capital loss deduction if you buy the same or substantially identical security within 30 days before or after the loss sale. The disallowed loss is added to the new position's cost basis. Applies across taxable + IRA accounts.
Tax-Loss Harvesting: Strategy of selling losing investments to realize capital losses, which offset capital gains and up to $3,000/year of ordinary income ($1,500 MFS). Excess losses carry forward indefinitely. Must avoid wash-sale rule.
Net Investment Income Tax (NIIT): Additional 3.8% federal tax on investment income (capital gains, dividends, interest, rental) for taxpayers with MAGI over $200,000 single / $250,000 MFJ. Thresholds are NOT inflation-adjusted, so more taxpayers fall into NIIT each year.

Retirement

Traditional IRA: Tax-advantaged retirement account where contributions may be tax-deductible (subject to income limits if covered by workplace plan). Withdrawals in retirement are taxed as ordinary income. Required Minimum Distributions begin at age 73.
Roth IRA: Retirement account funded with post-tax dollars. Qualified withdrawals (after age 59½ + 5-year rule) are completely tax-free. Income limits for direct contributions: $165,000 single / $246,000 MFJ phase-out for 2026. Backdoor conversion bypasses limits.
Backdoor Roth IRA: Strategy where high-income earners contribute to a non-deductible Traditional IRA, then convert to Roth IRA — bypassing direct Roth contribution income limits. Watch out for the pro-rata rule if you have other pre-tax IRA balances.
Mega Backdoor Roth: Strategy using after-tax 401(k) contributions (above the $23,500 elective deferral limit, up to total $70,000 limit for 2026) converted in-plan to Roth 401(k). Available only if your employer plan permits both after-tax contributions and in-service Roth conversions.
Required Minimum Distribution (RMD): Annual minimum withdrawal required from Traditional IRAs and most workplace retirement plans starting at age 73 (raised from 72 by SECURE 2.0 in 2023). Calculated using IRS life expectancy tables. Penalty: 25% excise tax on shortfall (reduced from 50% by SECURE 2.0).
401(k) Contribution Limit: Maximum employee elective deferral to 401(k) plans for 2026: $23,500. Catch-up contribution age 50+: additional $7,500. Catch-up age 60-63 (SECURE 2.0): additional $11,250. Total annual addition limit (employee + employer): $70,000 for 2026.

Deductions & Credits

SALT Deduction Cap: TCJA-imposed $10,000 cap ($5,000 MFS) on the federal itemized deduction for state and local taxes (income + property + sales tax). Set to expire after Tax Year 2025 unless Congress extends it.
Qualified Business Income Deduction (QBI): 20% deduction for qualified business income from pass-through entities (sole proprietorships, partnerships, S-corps, LLCs). Subject to income thresholds and SSTB limitations. Created by TCJA 2017 — currently set to expire after 2025.
Mortgage Interest Deduction: Itemized deduction for interest paid on mortgages up to $750,000 of acquisition debt ($1M for loans before Dec 15, 2017). Available on Schedule A; eliminated by TCJA for new home equity loans not used for home improvement.
Child Tax Credit (CTC): Tax credit of up to $2,000 per qualifying child under 17 for 2026. Refundable up to $1,700. Phase-out begins at $200,000 single / $400,000 MFJ. Supplemented by the Credit for Other Dependents ($500 max).
Earned Income Tax Credit (EITC): Refundable tax credit for low-to-moderate income workers. 2026 maximum: $7,830 (3+ qualifying children), $649 (no children). Income limits range from $19,104 (no kids, single) to $66,819 (3+ kids, MFJ).
Alternative Minimum Tax (AMT): Parallel federal tax system designed to ensure high-income earners pay a minimum amount. Recalculates income with fewer deductions then applies 26% (up to $232,600) or 28% rate. Most filers no longer affected after TCJA raised exemption to $88,100 single / $137,000 MFJ for 2026.

Self-Employment

Self-Employment Tax (SE Tax): 15.3% federal tax (12.4% Social Security up to $176,100 wage base 2026 + 2.9% Medicare with no wage cap) on self-employment net earnings. Half is deductible above-the-line. Reported on Schedule SE.
1099-NEC Form: IRS form used to report nonemployee compensation of $600+ paid to independent contractors during the tax year. Replaced the 1099-MISC for nonemployee comp starting 2020.
1099-K Threshold: 2026 reporting threshold for third-party payment platforms (Venmo, PayPal, Etsy, eBay): $2,500 (down from previous $20,000/200 transactions). Lowering to $600 in 2027 unless changed by Congress.
Quarterly Estimated Taxes: Federal income tax payments due quarterly by self-employed individuals and others without sufficient withholding. 2026 due dates: April 15, June 16, September 15, January 15 (2027). Underpayment penalty if total falls short of safe harbor (90% current year or 100-110% prior year).
SEP IRA: Simplified Employee Pension IRA — retirement plan for self-employed individuals and small businesses. Contribution limit 2026: lesser of 25% of net self-employment earnings or $70,000.
Solo 401(k): Retirement plan for self-employed individuals with no employees (other than spouse). 2026 contributions: up to $23,500 employee deferral + 25% employer profit-sharing, total $70,000 max ($77,500 with age 50+ catch-up).

Real Estate

Depreciation Recapture: Tax on the portion of real estate sale gain attributable to claimed depreciation. Taxed at maximum 25% (Section 1250 property). Reduces incentive of accelerated depreciation when selling.
1031 Exchange (Like-Kind Exchange): Tax-deferred exchange of investment real estate for similar property. Defers capital gains tax indefinitely if rules are followed (45-day identification, 180-day completion, qualified intermediary). Limited to real estate after TCJA 2017.
Step-Up in Basis: When inherited property's cost basis is reset to the fair market value on the date of death of the original owner. Eliminates capital gains tax on appreciation during the deceased's lifetime. Critical estate planning concept.
Property Tax: Local tax on real estate, calculated as a percentage of assessed value. National average effective rate ~1.1% in 2026. Ranges from 0.31% (Hawaii) to 2.23% (New Jersey). Usually paid annually or via mortgage escrow.

State & Local

State Income Tax: Tax levied by states on residents' income. Nine states have NO state income tax (AK, FL, NV, NH, SD, TN, TX, WA, WY). 12 states use flat rates. 30 states + DC use progressive brackets ranging from 1.4% (HI low) to 13.3% (CA top).
Reciprocity Agreement: Agreement between two states allowing residents of one state to work in another and pay state income tax only in their home state. Major pairs: PA-NJ, IL-IA, IL-WI, MI-OH, IN-KY, MD-DC, VA-WV.
Convenience of Employer Rule: NY, PA-Philadelphia, OH-Cincinnati and others tax non-resident remote workers if their employer is located there — even when the worker physically lives elsewhere. Can override reciprocity.
Local Income Tax: City- or county-level income tax in addition to state. Major examples: NYC 3.876%, Yonkers 1.61%, Philadelphia 3.75%, Cleveland 2.5%, Detroit 2.4%. Pennsylvania has 2,500+ municipal local income taxes.

Payroll

FICA (Federal Insurance Contributions Act): Combined Social Security (6.2%) and Medicare (1.45%) payroll taxes withheld from W-2 wages. Total 7.65% from employee + 7.65% matching from employer = 15.3% total. Self-employed pay both halves via SE tax.
Social Security Wage Base: Maximum annual wages subject to Social Security tax (6.2%). 2026: $176,100 (up from $168,600 in 2025). No cap on Medicare 1.45%; +0.9% Additional Medicare Tax on wages over $200K single / $250K MFJ.
W-2 Form: IRS form employers use to report wages, tips, and other compensation paid to employees plus federal/state income tax + FICA withheld. Must be issued by January 31 each year.
W-4 Form: Form completed by employees to inform employer how much federal income tax to withhold from each paycheck. Updated 2020 to remove personal allowances; uses dependents and other adjustments instead.
Withholding: Income tax employer deducts from each paycheck and sends to the IRS on the employee's behalf. Calibrated using W-4 inputs. Adjusting withholding mid-year (via new W-4) prevents over- or under-paying tax.

Tax Planning

Effective Tax Rate: Total federal income tax paid divided by total taxable income. Differs from marginal rate (rate on the next dollar of income) — usually significantly lower because lower brackets apply to portions of income.
Marginal Tax Rate: The federal tax bracket rate that applies to your next dollar of income. 2026 brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%. Most taxpayers operate in 12-24% range due to bracket structure.
Tax Bracket: Range of taxable income subject to a specific federal tax rate. The US uses progressive (marginal) brackets — only the income within a bracket is taxed at that rate, NOT all your income.
Tax Liability: Total amount of tax owed for the year before considering withholding or estimated payments. Calculated by applying brackets to taxable income, then subtracting non-refundable credits.
Tax Refund: Money returned to taxpayers when their total payments (withholding + estimated tax + credits) exceed their tax liability. NOT free money — it's your overpayment being returned. Adjust W-4 to reduce excessive withholding.

Crypto

Form 1099-DA: NEW for 2026 — IRS form for brokers and crypto exchanges to report digital asset sales and exchanges. Replaces voluntary self-reporting. Required by IRS final regulations (August 2024).
Cryptocurrency Tax Treatment: Crypto is taxed as property by the IRS (since 2014 Notice 2014-21). Buying with crypto = sale = taxable event. Mining/staking rewards = ordinary income at receipt. Holding 1 year+ = long-term capital gains rates.
NFT Tax Treatment: Most NFTs taxed as collectibles at maximum 28% long-term capital gains rate (vs 20% for stocks). Some NFTs may be taxed as regular property at 0/15/20%. IRS Notice 2023-27 clarifies.

HSA / FSA

Health Savings Account (HSA): Triple-tax-advantaged account: deductible contributions, tax-free growth, tax-free withdrawals for qualified medical expenses. Requires HDHP coverage. 2026 contribution limit: $4,400 self / $8,750 family + $1,000 catch-up age 55+.
Flexible Spending Account (FSA): Pre-tax employer benefit account for medical expenses (Healthcare FSA) or childcare (Dependent Care FSA). 2026 Healthcare FSA limit: $3,300. Use-it-or-lose-it (with $660 carryover for some plans).
High-Deductible Health Plan (HDHP): Health insurance plan with minimum deductible $1,650 self / $3,300 family for 2026. Required for HSA eligibility. Lower premiums but higher out-of-pocket maximum ($8,300 self / $16,600 family).

Calculate using these terms

→ Federal Income Tax Calculator — applies marginal tax brackets to your AGI
→ Capital Gains Tax Calculator — short-term vs long-term + NIIT 3.8%
→ 1099 Tax Calculator — self-employment tax + QBI 20% deduction
→ Marriage Tax Calculator — single vs MFJ filing status
→ All 22 Calculators

Definitions are educational and not tax advice. For specific tax planning, consult a CPA or enrolled agent. Inflation-adjusted figures (brackets, contribution limits, deductions) are per IRS Rev. Proc. 2025-32 and verified against each cited form/publication. Last reviewed April 27, 2026.

Jump to category