US Tax Glossary 2026

The Sequence: From Paycheck to Tax Bill

Understanding what is taxed requires understanding the sequence the IRS uses to calculate your bill. Every number builds on the previous one.

**Gross Income**: Everything you receive that the tax code does not explicitly exclude. Wages, tips, self-employment income, rental income, capital gains, interest, dividends, alimony (pre-2019 agreements), gambling winnings, barter income, and most other economic benefits. Does NOT include: gifts received, inheritances, most life insurance proceeds, workers' compensation, certain employer benefits, and a growing list of OBBBA-created exclusions (tips, overtime — see those entries).

**Adjusted Gross Income (AGI)**: Gross income minus above-the-line deductions. This is the number on Line 11 of Form 1040. AGI is the most consequential single number on your return — it determines your eligibility for dozens of credits, the phase-out of deductions, and whether you qualify for Roth IRA contributions, the Premium Tax Credit, the child tax credit, deductible IRA contributions, the SALT deduction (now capped), and much more.

**Above-the-Line Deductions**: Deductions you subtract FROM gross income to arrive at AGI. They appear on Schedule 1, Part II. The major ones: student loan interest ($2,500 cap), educator expenses ($300 cap), HSA contributions, self-employed health insurance premiums, self-employed retirement plan contributions (SEP-IRA, SIMPLE, solo 401k), alimony paid under pre-2019 agreements, and the self-employment tax deduction (half of SE tax). These are the most valuable type of deduction because they reduce AGI, which in turn widens eligibility for other benefits.

**Standard Deduction vs. Itemised Deductions**: After calculating AGI, you subtract either the standard deduction (a fixed amount based on filing status and age) or your itemised deductions (Schedule A) — whichever is larger. The 2026 standard deductions: $15,750 (single), $23,850 (married filing jointly), $11,925 (married filing separately), $22,500 (head of household). Itemised deductions include: state and local taxes (SALT, capped at $40,000 under OBBBA), mortgage interest, charitable contributions, casualty losses (federal disaster areas only), and certain unreimbursed employee expenses. OBBBA 2025 also added a senior bonus deduction for taxpayers 65+: an additional $4,000 above-the-line deduction for qualifying seniors.

**Taxable Income**: AGI minus the standard or itemised deduction (and the QBI deduction if applicable). This is the number your marginal tax rate is applied to.

**Marginal vs. Effective Tax Rate**: The marginal rate is the rate on the LAST dollar of taxable income — what people mean when they say 'I am in the 22% bracket.' Your effective rate is total tax divided by total income — it is always lower than your marginal rate because the lower brackets apply to all income up to those thresholds. A taxpayer in the 22% bracket does NOT pay 22% on all income — only on the income within the 22% bracket range.

**Tax Liability vs. Tax Owed**: Tax liability is calculated from the brackets. Tax owed (or refunded) is tax liability minus credits and withholding. Credits come off the calculated tax; deductions come off taxable income.

The sequence: gross income → AGI (after above-the-line deductions) → taxable income (after standard/itemised deduction) → tax from brackets → minus credits = tax owed. (IRC Section 61 (gross income); IRC Section 62 (AGI definition and above-the-line deductions); IRC Section 63 (taxable income); IRC Section 1 (tax rate tables))

AGI vs. MAGI: Why There Are Two Different Versions

Modified Adjusted Gross Income (MAGI) is not a single number — it is a family of recalculations. Congress created different MAGI formulas for different purposes by adding back specific deductions that were subtracted to arrive at AGI. The idea is to create a more comprehensive income measure for specific tests.

MAGI FORMULAS BY USE:

**Roth IRA contribution eligibility**: AGI + student loan interest deduction + tuition and fees deduction + IRA deduction + foreign earned income exclusion + employer adoption assistance exclusion. In 2026, Roth IRA phase-out begins at $150,000 (single) / $236,000 (MFJ). If your MAGI exceeds these limits, your direct Roth IRA contribution is reduced or eliminated — but backdoor Roth contributions have no MAGI limit.

**Traditional IRA deductibility**: If covered by a workplace retirement plan, deductibility phases out starting at $79,000 (single) / $126,000 (MFJ) in 2026. MAGI is AGI recalculated without the IRA deduction itself (to avoid circularity).

**ACA Premium Tax Credit**: MAGI for ACA purposes includes foreign earned income exclusions and Social Security benefits. The credit phases out between 100% and 400% of the federal poverty level.

**Child Tax Credit phase-out**: Uses a simpler MAGI (AGI + foreign earned income/housing exclusion) with phase-out beginning at $200,000 (single) / $400,000 (MFJ) in 2026. The $500 per qualifying child phase-out applies above these thresholds.

**Net Investment Income Tax (3.8% NIIT)**: Applied on the lesser of net investment income or the amount by which MAGI exceeds $200,000 (single) / $250,000 (MFJ). MAGI here includes any net investment income that may have been excluded.

Practical implication: when you hear 'reduce your MAGI,' the advice is to make above-the-line contributions (pre-tax 401k, HSA, SEP-IRA) that reduce AGI — since MAGI is derived from AGI, reducing AGI almost always reduces MAGI for the relevant test.

MAGI is AGI recalculated by adding back specific deductions — different formulas apply for Roth IRA eligibility, IRA deductibility, ACA credits, child tax credit, and the 3.8% net investment income tax. (IRC Section 408A(c)(3) (Roth MAGI); IRC Section 219(g) (IRA deduction MAGI); IRC Section 36B(d)(2) (ACA MAGI); IRC Section 1411 (NIIT); IRC Section 24(b) (child tax credit MAGI))

Tax Credits vs. Tax Deductions: The Dollar-for-Dollar Difference

Deductions and credits both reduce your tax bill, but through different mechanisms and with very different real-money values.

**A deduction reduces taxable income**. A $1,000 deduction saves you $1,000 times your marginal tax rate. At 22%, a $1,000 deduction saves $220. At 37%, it saves $370. The higher your tax bracket, the more valuable a deduction is.

**A credit reduces your tax liability directly**. A $1,000 credit saves you $1,000 regardless of your tax bracket. A $1,000 refundable credit is worth $1,000 to a 10% bracket taxpayer and also $1,000 to a 37% bracket taxpayer.

**Refundable vs. Non-Refundable Credits**: - Non-refundable: can only reduce your tax liability to zero. If the credit exceeds your tax bill, you lose the excess. Examples: the Child and Dependent Care Credit (non-refundable portion), the Retirement Savings Contributions Credit (Saver's Credit), the foreign tax credit. - Refundable: can reduce your tax liability below zero, resulting in a refund even if you owe no tax. Examples: the Earned Income Tax Credit (EITC), the Additional Child Tax Credit (ACTC), the Premium Tax Credit. - Partially refundable: some credits have both a non-refundable portion (that can only reduce tax to zero) and a refundable portion (that continues as a refund). The Child Tax Credit is structured this way: up to $2,000 per child in 2026, with the refundable ACTC portion capped at 15% of earned income above $2,500, up to $1,700 per child.

**Phase-out mechanics**: Most credits phase out based on AGI or MAGI. The phase-out structure varies: some reduce the credit proportionally across an income range; others apply a hard cliff (the credit disappears entirely above a threshold); others require a complex formula. The EITC has the most complex phase-out: it increases with income up to an earned income peak, plateaus, then decreases until fully eliminated.

A credit is worth its face value regardless of your tax bracket. A deduction is worth (deduction amount × marginal rate). Refundable credits can generate refunds even with zero tax liability. (IRC Section 31 et seq. (credits generally); IRC Section 24 (Child Tax Credit); IRC Section 32 (EITC); IRC Section 21 (Child/Dependent Care Credit))

Capital Gains: Short-Term vs. Long-Term and the NIIT

Capital gains are profits from selling capital assets (stocks, bonds, real estate, collectibles, cryptocurrency). The tax rate depends on how long you held the asset.

**Short-term capital gains**: Held 1 year or less. Taxed as ordinary income — same tax brackets as wages. At 37% marginal rate, short-term gains are taxed at 37%.

**Long-term capital gains**: Held more than 1 year. Taxed at preferential rates: 0%, 15%, or 20% depending on taxable income. - 0% rate: taxable income up to $47,025 (single) / $94,050 (MFJ) in 2026 - 15% rate: taxable income up to $518,900 (single) / $583,750 (MFJ) in 2026 - 20% rate: taxable income above those thresholds

**Net Investment Income Tax (NIIT)**: An additional 3.8% tax on investment income (interest, dividends, capital gains, rental income, passive income) when MAGI exceeds $200,000 (single) / $250,000 (MFJ). This means high-income taxpayers can pay up to 23.8% on long-term capital gains (20% + 3.8%).

**Qualified Dividends**: Dividends that meet specific holding and source requirements are taxed at the same preferential rates as long-term capital gains (0%, 15%, 20%). Ordinary dividends are taxed as ordinary income. The distinction appears in Box 1b of Form 1099-DIV.

**Collectibles and Section 1202**: Collectibles (art, antiques, coins, wine, jewelry) have a special maximum 28% long-term capital gain rate. Section 1202 QSBS (qualified small business stock) gains are excluded from income up to 100% if all five qualification tests are met (see QSBS guide).

**Wash sale rule**: If you sell a security at a loss and buy the same or substantially identical security within 30 days before or after the sale, the loss is disallowed. The disallowed loss adjusts the basis of the repurchased security. Cryptocurrency is currently NOT subject to wash sale rules (no specific statute has extended them to crypto as of 2026).

Long-term capital gains are taxed at 0%, 15%, or 20% based on income. Short-term gains are ordinary income. High earners pay an additional 3.8% NIIT on investment income above the MAGI threshold. (IRC Section 1(h) (preferential capital gains rates); IRC Section 1411 (NIIT); IRC Section 1(h)(11) (qualified dividends); IRC Section 1091 (wash sale); IRC Section 1202 (QSBS exclusion))

Filing Status: The Second-Biggest Variable After Income

Filing status determines your standard deduction amount, tax bracket thresholds, and eligibility for numerous credits. Most people qualify for only one status, but understanding all five prevents costly errors.

**Single**: Unmarried, divorced, or legally separated as of December 31 of the tax year. Standard deduction $15,750 (2026).

**Married Filing Jointly (MFJ)**: Both spouses report combined income on one return. Generally the lowest tax rate because brackets are roughly doubled compared to single. Standard deduction $23,850 (2026). Required for EITC if married.

**Married Filing Separately (MFS)**: Each spouse files a separate return reporting only their own income. Almost always produces a higher combined tax bill than MFJ — most credits (EITC, most education credits) are disallowed, the standard deduction is $11,925 (half MFJ), and many phase-out thresholds are compressed. Primarily used when one spouse has significant medical deductions (lower AGI = lower 7.5% floor), potential tax liability issues, or student loan income-driven repayment calculations.

**Head of Household (HOH)**: Unmarried (or considered unmarried) with a qualifying child or dependent who lived with you for more than half the year and for whom you paid more than half the household costs. Standard deduction $22,500 (2026). Wider tax brackets than single. Frequently missed by single parents who do not realise they qualify.

**Qualifying Surviving Spouse (QSS)**: Available for two years after the year of a spouse's death if you have a dependent child. Uses MFJ standard deduction and brackets. After the two-year QSS period, the taxpayer generally drops to HOH if a qualifying child remains in the household.

**Married vs. Unmarried for federal purposes**: For federal taxes, marriage is determined by state law as of December 31. Common-law marriages recognised by the state are treated as married for federal tax purposes. Same-sex marriages are fully recognised.

Filing status is determined on December 31. Head of Household provides significantly better rates than Single for unmarried parents. Married Filing Separately almost always results in higher combined tax. (IRC Section 1 (rate tables by filing status); IRC Section 2 (surviving spouse/head of household definitions); IRC Section 7703 (determination of marital status))

Self-Employment Tax, QBI, and the SE Deduction

Three interconnected provisions apply specifically to self-employed people and pass-through business owners.

**Self-Employment (SE) Tax**: Self-employed individuals pay both the employer and employee halves of Social Security and Medicare taxes — a combined 15.3% rate on net self-employment earnings up to the Social Security wage base ($176,100 in 2026), then 2.9% above that (Medicare only), plus 0.9% Additional Medicare Tax on SE income over $200,000 (single) / $250,000 (MFJ). SE tax is calculated on Schedule SE.

**SE Tax Deduction**: You can deduct half of your SE tax (the employer-equivalent portion) as an above-the-line deduction. This deduction appears on Schedule 1, Line 15, and reduces AGI. On $100,000 of net SE income, the SE tax is approximately $14,129 — and you deduct $7,065 from your AGI. This is an automatic deduction that does not require itemizing.

**Qualified Business Income (QBI) Deduction — Section 199A**: Pass-through business owners (sole proprietors, S-Corps, partnerships, LLCs taxed as pass-throughs) can deduct up to 20% of their 'qualified business income' from taxable income. This is a BELOW-the-line deduction (reduces taxable income, not AGI). The mechanics: - At lower income levels: 20% of QBI with no wage limitation - At higher income levels: the deduction is limited to the greater of 50% of W-2 wages OR 25% of W-2 wages plus 2.5% of qualified property basis - Phase-out range (2026): $197,300-$247,300 (single) / $394,600-$494,600 (MFJ) - Specified Service Trades or Businesses (SSTBs) — law, accounting, consulting, performing arts, financial services, athletics — phase out completely above the upper threshold

The interplay: SE tax deduction reduces AGI → lower AGI means higher QBI deduction eligibility. Both deductions compound in your favour. On $100,000 net self-employment income, you pay SE tax (~$14,129), deduct half ($7,065) from AGI, leaving $92,935. On that, QBI is approximately $92,935 × 20% = $18,587 additional deduction from taxable income.

Self-employed people pay 15.3% SE tax but deduct half above-the-line. Section 199A QBI deduction allows up to 20% of pass-through business income to be deducted from taxable income, with phase-outs above $197k/$394k and SSTB restrictions. (IRC Section 1401 (SE tax); IRC Section 164(f) (SE tax deduction); IRC Section 199A (QBI deduction); Reg. 1.199A (QBI rules))