Tax terminology: your ultimate tax jargon buster 

401(k)

A 401(k) is a tax-advantaged defined contributions plan which could be offered to you by your current or former employer.

You, and often your employer, can make pre-tax contributions to a savings plan that helps you save money towards your future.

Or with a Roth 401(k), you can pay your contributions after tax, meaning that when you come to draw on your funds, you won’t need to pay any additional taxes.

Adjusted gross income

You can work out your adjusted gross income by subtracting eligible deductions, such as standard or itemized deductions or student loan interest from your existing gross income.

Your gross income is the sum of all your income, profits, rents and other earnings before you include deductions.  

Adoption tax credit

This tax credit effectively refunds a part of the cost you may need to pay to adopt a child and is paid directly by the Federal Government.  

Alternative Minimum Tax (AMT)

Designed to prevent wealthy people from using too many legal tax breaks to reduce their eligible tax, the AMT overrules certain existing deductions and applies special tax rates of 26 and 28 per cent to a larger share of people’s incomes.  

Blindness deductions

For people who qualify as legally blind, a larger than usual deduction from your taxes can be claimed. 

Capital Gains Tax (CGT)

CGT is a tax on the profits made by an asset once it has been sold on. For instance, if you bought a house for $200,000 and then sold it for $500,000, you would be taxed CGT on the $300,000 profits made.  

Capital Loss

Capital losses are losses made on an asset once it has been sold. Some of these losses can qualify for a tax deduction.

Child tax credit

Child tax credits are paid to families with eligible children as a means of supporting families on low incomes.

In 2021, child tax credits were expanded, meaning for each child under six, families now receive $3,600. For children between six and 17, families now receive $3,000. 

Citizenship-based taxation

The US tax system taxes by citizenship, rather than residence. So, whether you live in the US or not, you will be taxed at standard rates on your global income.

In countries where the US doesn’t have a double tax treaty, American citizens can be double taxed by both the American and local systems.

Deductions

Deductions are a legal way for you to reduce the amount of tax you pay.

You can take a standard deduction, which removes a certain portion of your eligible tax depending on your filing status but can only be used once. Or you can take itemized deductions, which are lists and records of each individual deduction that you could qualify for.

A long list of itemized deductions can take away more of your tax than the standard deduction, but also requires a lot more planning and effort.  

Education interest deduction

You could get an education interest deduction on the interest that you have paid off on your student loans.  

Estate tax

Estate taxes are levied on properties that are handed down to your relatives when you die. The maximum rate is 40 per cent once the value of your estate has exceeded $11.7 million. 

Federal income tax

A progressive tax on income, meaning that the more you earn, the more tax you become eligible for.  

Filing status

The amount of tax you need to pay will vary depending on your filing status.

You’ll pay different levels of tax based on whether you’re filing your taxes as an individual, as a couple filing separately, a couple filing jointly, or as a head of household.  

Gift tax

Gift taxes prevent people from giving excessive amounts of their property away. In 2021, people could give up to $15,000 each year, before becoming eligible for gift tax.  

Individual Retirement Account (IRA)

An IRA is a tax-advantaged savings account, similar to a 401(k). With an IRA, you’re in control of how much you contribute to your account and what the funds are invested into.  

Lifetime learning credit

You can get a lifetime learning tax credit to help you pay for qualified tuition and educational programs. 

Marginal tax rate

The marginal tax rate is the amount of tax that you pay on your next dollar.

The more money you earn, the higher your top tax rate is going to be, so your marginal tax rate is the highest tax threshold at which you’ll pay tax. 

Medicare tax

The Medicare tax is the proportion of the combined Social Security and Medicare tax that goes towards funding Medicare. 

Tax free income

Lots of your sources of income can be considered tax free. This can include anything from auto rebates, childcare payments, disability payments and Social Security payments.  

Tax rebate

If you’ve paid too much tax, you could be eligible for a rebate, which will see some of the tax you paid returned to you.  

Tuition deductions

You can get a tuition deduction if your adjusted gross income falls below certain levels. This deduction will allow you to deduction a portion of your college expenses.  

Withholding

Your employer will automatically withhold the amount of federal income tax you’re due to pay from your monthly paycheck. This means your federal income tax is deducted from your paycheck automatically.