Financial & Tax Glossary

Plain-English definitions of 30+ key tax, paycheck, retirement, mortgage, and investment terms. Updated for 2026 with current dollar amounts.

102 terms across 7 categories.

💰 Tax

Adjusted Gross Income (AGI)

Adjusted Gross Income (AGI) is your total gross income minus specific "above-the-line" deductions like contributions to a traditional IRA, student loan interest, and HSA contributions. It appears on Form 1040, line 11.

Modified Adjusted Gross Income (MAGI)

Modified Adjusted Gross Income (MAGI) is your AGI plus certain deductions added back, used to determine eligibility for specific tax benefits. The exact MAGI formula varies by program (Roth IRA, ACA premium tax credit, Medicare IRMAA, etc.).

Standard Deduction

The standard deduction is a fixed dollar amount that reduces your taxable income. For 2026, it's $16,100 single, $32,200 MFJ, $24,150 HoH (per IRS Rev Proc 2025-32). Most taxpayers take the standard deduction because it exceeds their itemized deductions.

Marginal Tax Rate

Your marginal tax rate is the rate applied to your last dollar of taxable income — the bracket your highest-earning dollar falls into. In 2026, federal marginal rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Effective Tax Rate

Your effective tax rate is your total tax liability divided by your total income — the blended average across all tax brackets you fall into. It's always lower than your marginal rate.

Capital Gains

Capital gains are profits from selling investments held more than a moment. Long-term gains (held >1 year) get preferential federal rates (0%, 15%, or 20% depending on income). Short-term gains are taxed as ordinary income.

SALT Cap (State and Local Tax Deduction)

The SALT cap limits the amount of state and local taxes (income, property, sales) you can deduct on federal Schedule A. For 2026, the cap is $40,000 (raised from $10,000 by the One Big Beautiful Bill Act of 2025).

Alternative Minimum Tax (AMT)

AMT is a parallel federal income tax system designed to ensure high-income taxpayers pay a minimum level of tax. After 2017 reforms and the 2025 OBBBA, AMT affects very few middle-income taxpayers — primarily those with very high incentive-stock-option (ISO) exercises.

Tax Bracket

A tax bracket is a range of income taxed at a specific rate. The U.S. uses progressive federal brackets (10%, 12%, 22%, 24%, 32%, 35%, 37% in 2026). Only income WITHIN each bracket is taxed at that rate.

Depreciation

Depreciation is the tax-deductible decline in value of business assets (equipment, vehicles, buildings) over their useful life. The IRS provides several methods: MACRS (most common), Section 179 expensing, and bonus depreciation.

Cost Basis

Basis is your investment in property for tax purposes — typically the original purchase price plus improvements, minus depreciation. When you sell, gain (or loss) = sale price − basis.

Qualified Retirement Plan

A qualified retirement plan is an employer-sponsored plan that meets IRS requirements (under IRC §401(a)) for favorable tax treatment. Includes 401(k), 403(b), 457(b), pension plans, and profit-sharing plans.

AMT Credit

The AMT credit (technically Minimum Tax Credit, MTC) lets you recover AMT paid in prior years against your regular tax liability in years when regular tax exceeds AMT. Reported on Form 8801.

Net Operating Loss (NOL) Carryforward

A Net Operating Loss (NOL) occurs when business deductions exceed business income. Post-2017 reform NOLs carry FORWARD indefinitely (no carryback) and can offset up to 80% of future taxable income.

Schedule K-1

Schedule K-1 is the IRS form that pass-through entities (partnerships, S-corps, LLCs taxed as either, trusts) issue to each owner annually. It reports each owner's share of income, deductions, credits, and other tax items.

Quarterly Estimated Tax

Quarterly estimated tax payments are required when you have income not subject to withholding (self-employment, investments, K-1, rental). Due April 15, June 15, September 15, January 15 (of following year). Penalty applies for underpayment.

Form 1099-K

Form 1099-K reports payment card and third-party network transactions to the IRS. 2026 threshold (after multiple delays): payment processors must issue 1099-K when total transactions exceed $5,000 (down from $20,000+200 transactions previously, and headed to $600 future).

Step-Up in Basis

When inherited assets pass to heirs, their cost basis is reset ("stepped up") to fair market value on the date of the original owner's death — eliminating capital-gains liability on appreciation that occurred during the owner's lifetime.

Depreciation Recapture

When you sell a depreciable asset (rental property, business equipment), the IRS "recaptures" the depreciation deductions you claimed by taxing that portion of the gain at a special rate — up to 25% for real estate, ordinary income for personal property.

QBI Deduction (Section 199A)

The Qualified Business Income deduction lets pass-through business owners (sole props, LLCs, S-corp owners, partners) deduct up to 20% of qualified business income from federal taxable income. Made permanent under OBBBA (2025).

AMT Triggers (Common)

Common items that push taxpayers into AMT: ISO exercise without sale, large state-and-local-tax deductions (now SALT-capped at $40K), private-activity bond interest, certain depreciation methods, and high long-term capital gains in conjunction with high ordinary income.

🧾 Paycheck

FICA (Federal Insurance Contributions Act)

FICA is the federal payroll tax funding Social Security and Medicare. Employees pay 6.2% Social Security on wages up to $184,500 (2026) plus 1.45% Medicare on all wages, totaling 7.65%. Employers match this for a combined 15.3% on each worker.

Gross Pay

Gross pay is your total wages before any deductions — taxes, retirement contributions, health insurance premiums, etc. Annual salary divided by pay periods, or hourly wage × hours worked.

Net Pay

Net pay (take-home pay) is what arrives in your bank account after all paycheck deductions. For most W-2 workers, net pay is 65%-80% of gross depending on tax bracket, state, and pre-tax contributions.

Pre-Tax Deduction

A pre-tax deduction reduces your taxable income before federal income tax (and often FICA) is calculated. Common examples: traditional 401(k), HSA, health insurance premiums under Section 125 plans, transit benefits.

Overtime Pay

Overtime pay is 1.5× regular wage for non-exempt employees who work over 40 hours per week (federal FLSA). Some states (CA, AK, NV, CO) require daily overtime over 8 hours/day.

Form W-4

Form W-4 (Employee's Withholding Certificate) tells your employer how much federal income tax to withhold from each paycheck. Redesigned in 2020 — no longer uses "allowances." Adjusts withholding based on filing status, multiple jobs, dependents, and other adjustments.

Shift Differential

Shift differential is extra pay (typically 5-15% of base) for working non-standard hours: nights, weekends, holidays. Not federally required (FLSA does not mandate it) — driven by union contracts, employer policy, or industry custom.

Severance Pay

Severance pay is compensation given to terminated employees beyond their final paycheck and accrued PTO. Not federally required by FLSA — driven by employer policy, employment contract, or WARN Act notice requirements.

Wage Garnishment

Wage garnishment is a court-ordered or statutory deduction from your paycheck to satisfy a debt — child support, taxes, student loans, or court-ordered judgments. Federal CCPA caps total garnishment at 25% of disposable earnings (50-65% for child support).

🏦 Retirement

401(k)

A 401(k) is an employer-sponsored retirement savings plan with substantial tax benefits. 2026 contribution limit is $24,500 ($32,500 with age-50+ catch-up; $35,750 with new SECURE 2.0 ages 60-63 catch-up).

Roth IRA

A Roth IRA is an individual retirement account funded with after-tax dollars; qualified withdrawals are 100% tax-free. 2026 contribution limit is $7,500 ($8,500 with age-50+ catch-up). Income phase-out begins at $146K single / $230K MFJ.

Required Minimum Distribution (RMD)

RMDs are mandatory annual withdrawals from traditional IRA, 401(k), and similar pre-tax retirement accounts starting at age 73 (rising to 75 in 2033 under SECURE 2.0). Failure to take an RMD triggers a 25% penalty on the missed amount.

Social Security

Social Security is the U.S. federal retirement insurance program, funded by FICA payroll taxes. Workers earn benefits over 35 years of work; full retirement age is 67 for most workers. 2026 max benefit at FRA is $4,018/month.

Full Retirement Age (FRA)

Full Retirement Age (FRA) is the age at which you receive 100% of your Social Security benefit. For workers born 1960 or later, FRA is 67. Born 1955-1959: 66 + 2-10 months. Born 1937-1954: 65-66.

SEP-IRA

A SEP-IRA (Simplified Employee Pension) is a retirement account for self-employed individuals and small businesses. 2026 contribution limit: 25% of net self-employment income, up to $73,000 — among the highest annual contribution limits in the U.S. tax code.

SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan for small businesses (≤100 employees). 2026 employee contribution limit: $17,500 ($21,000 with age-50+ catch-up). Employer must match 3% of comp or 2% non-elective.

Solo 401(k)

A Solo 401(k) is a 401(k) plan for self-employed individuals with no employees (or only their spouse). 2026 contribution limit: $73,000 ($81,000 with age-50+ catch-up; $84,250 with SECURE 2.0 60-63 catch-up) — combining employee + employer contributions.

Backdoor Roth IRA

The backdoor Roth IRA is a strategy for high-income earners (above the Roth IRA income limits) to fund a Roth IRA. Step 1: contribute to a non-deductible traditional IRA. Step 2: convert to Roth IRA (no income limits on conversions).

Mega Backdoor Roth

The mega backdoor Roth is a strategy that uses your 401(k) plan's after-tax contribution feature + in-plan Roth conversion to add up to $46,500 in additional Roth retirement savings beyond the standard $24,500 employee 401(k) limit.

Rule 72(t) — SEPP

Rule 72(t) (technically Substantially Equal Periodic Payments, SEPP) lets you withdraw from a traditional IRA before age 59½ without the 10% early-withdrawal penalty, by taking equal annual payments based on a defined formula for at least 5 years or until age 59½ (whichever is longer).

Roth Conversion Ladder

A Roth conversion ladder is a multi-year strategy converting traditional IRA funds to Roth in chunks, then waiting 5 years before withdrawing each conversion penalty-free. Used by FIRE adopters to access pre-tax retirement money before age 59½.

Saver's Credit (Retirement Savings Contributions Credit)

The Saver's Credit is a non-refundable federal tax credit of 10%, 20%, or 50% of the first $2,000 ($4,000 MFJ) contributed to retirement accounts — for low-to-moderate income taxpayers. Maximum credit: $1,000 single / $2,000 MFJ.

Qualified Charitable Distribution (QCD)

A QCD lets IRA owners age 70½+ donate up to $108,000 directly from their IRA to a qualifying charity in 2026, satisfying RMDs while excluding the donation from taxable income — better than itemizing for most retirees.

Catch-Up Contribution

Catch-up contributions let workers age 50+ contribute extra to retirement accounts above the standard limit. 2026 401(k) catch-up: $7,500 (ages 50-59 and 64+) or $11,250 (ages 60-63 — SECURE 2.0 enhanced catch-up).

Rule of 55

The Rule of 55 lets workers who leave their employer in or after the year they turn 55 withdraw from THAT employer's 401(k) or 403(b) without the 10% early-withdrawal penalty — applies even if they take a new job elsewhere.

Vesting

Vesting determines when employer contributions to your 401(k) or RSU/option grants legally become yours. Cliff vesting: 0% until cliff date, then 100%. Graded vesting: gradual ownership (e.g. 20%/year over 5 years).

Target-Date Fund (TDF)

A Target-Date Fund automatically rebalances its stock/bond mix to grow more conservative as the target retirement year approaches. The default investment in most 401(k) plans under the Pension Protection Act of 2006 QDIA rules.

Roth 5-Year Rule(s)

Two separate Roth 5-year rules: (1) earnings withdrawals are tax-free only after 5 years from your FIRST Roth contribution AND age 59½; (2) each Roth conversion has its own 5-year clock for penalty-free principal withdrawal before 59½.

Net Unrealized Appreciation (NUA)

NUA is a tax strategy for distributing employer stock from a 401(k): you pay ordinary income tax only on the original cost basis, while appreciation is taxed at lower long-term capital-gains rates when you sell — instead of all-ordinary if you rolled to an IRA.

Annuity

An annuity is an insurance contract that converts a lump-sum payment into guaranteed periodic income — for life or a fixed term. Types: fixed (set rate), variable (market-linked), indexed (capped market participation), immediate (SPIA — payments start now).

Employer 401(k) Match

An employer 401(k) match is the portion your employer contributes to your 401(k) based on your own contributions. Most common formula: 100% match on the first 3% of pay + 50% match on the next 2% (4% total = "Safe Harbor").

🏠 Mortgage

PITI (Principal, Interest, Taxes, Insurance)

PITI is the four components of a typical monthly mortgage payment: Principal (loan paydown), Interest (lender fee), Taxes (property tax), and Insurance (homeowners insurance). Lenders use PITI to calculate debt-to-income ratios.

Private Mortgage Insurance (PMI)

PMI is insurance protecting the lender if you default on a conventional mortgage with less than 20% down. PMI premiums add 0.5%-1% of the loan amount annually to your monthly payment, removable once you reach 20% equity.

Debt-to-Income Ratio (DTI)

DTI is the percentage of your monthly gross income that goes to debt payments. Lenders use front-end DTI (housing only ≤28%) and back-end DTI (housing + all other debts ≤36-43%) to qualify mortgages.

Amortization

Amortization is the gradual paying down of loan principal over time through scheduled monthly payments. Each payment includes both interest (more in early years) and principal (more in later years). A standard 30-year mortgage is "fully amortizing".

Home Equity Line of Credit (HELOC)

A HELOC is a revolving credit line secured by your home equity. Like a credit card, you borrow against an approved limit, repay, and re-borrow. Interest rates are variable (Prime + margin) and only the drawn balance accrues interest.

Conforming Loan

A conforming loan meets Fannie Mae / Freddie Mac maximum loan limits and underwriting standards, making it eligible for purchase by these government-sponsored entities. 2026 single-family conforming limit: $832,750 baseline / up to $1,249,125 high-cost areas.

Jumbo Loan

A jumbo loan exceeds the Fannie/Freddie conforming limit ($832,750 baseline / $1,249,125 high-cost in 2026). Jumbo loans typically have stricter qualifying standards and slightly higher interest rates.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a larger loan, with the difference paid to you in cash at closing. Useful for accessing home equity at typically lower rates than HELOC or personal loans.

Adjustable-Rate Mortgage (ARM)

An ARM is a mortgage with an interest rate that adjusts periodically based on a market index (typically SOFR). Common types: 5/1, 7/1, 10/1 — first number = years of fixed rate; second = years between adjustments after that.

FHA Mortgage Insurance Premium (MIP)

MIP is FHA's required mortgage insurance: an upfront 1.75% premium financed into the loan + annual 0.55-0.85% premium added to monthly payments. Unlike conventional PMI, MIP cannot be removed by reaching 20% equity — only by refinancing to a conventional loan.

Mortgage Escrow

A mortgage escrow account is a lender-held savings account where 1/12 of your annual property tax + homeowner's insurance is collected each month with your mortgage payment. The lender pays the bills when due.

Loan-to-Value Ratio (LTV)

LTV is the ratio of mortgage debt to property value, expressed as a percentage. Example: $400K loan on $500K home = 80% LTV. Lower LTV = lower lender risk = better terms.

Closing Costs

Closing costs are fees due at mortgage settlement, typically 2–5% of the loan amount. Includes lender origination, appraisal, title insurance, recording fees, prepaid escrow, and per-state transfer/mortgage taxes.

Discount Points (Mortgage Buy-Down)

1 discount point = 1% of the loan amount, paid upfront at closing to reduce the interest rate by ~0.25% (varies by lender and rate environment). Typical break-even: 5-7 years of holding the loan.

Mortgage Recast

A mortgage recast (re-amortization) lowers your monthly payment by re-calculating it based on a new lower principal after a lump-sum prepayment — without refinancing. Keeps your original rate and term, but reduces the payment.

Mortgage Forbearance

Mortgage forbearance is a temporary pause or reduction of mortgage payments granted by the lender due to verified financial hardship (job loss, medical, disaster). Missed payments are not forgiven — they must be repaid via lump sum, repayment plan, modification, or deferral.

USDA Rural Development Loan

A USDA loan is a 0%-down government-backed mortgage for low-to-moderate-income buyers in eligible rural and suburban areas. No down payment required. 1% upfront guarantee fee + 0.35% annual fee (replaces PMI).

📈 Investment

529 Plan

A 529 plan is a tax-advantaged investment account for education expenses. Earnings grow federal-tax-free; qualified withdrawals (tuition, room/board, K-12 up to $10K/year) are also tax-free. Most states offer income-tax deductions for contributions.

Compound Interest

Compound interest is interest calculated on the initial principal AND the accumulated interest of previous periods. It produces exponential growth over long periods — Einstein reportedly called it "the most powerful force in the universe".

Dollar-Cost Averaging (DCA)

Dollar-cost averaging (DCA) is investing a fixed dollar amount at regular intervals (e.g., $500/month into an index fund), regardless of market price. Reduces timing risk and emotional decision-making vs. lump-sum investing.

Tax-Loss Harvesting

Tax-loss harvesting is the strategy of selling investments at a loss to offset capital gains (and up to $3,000/year of ordinary income), then immediately buying a similar (but not "substantially identical") investment to maintain market exposure.

Qualified Dividend

Qualified dividends are dividends from US corporations (and qualifying foreign corporations) that meet IRS holding-period requirements. Taxed at preferential long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income rates (up to 37%).

Net Investment Income Tax (NIIT)

NIIT is a 3.8% surtax on net investment income (interest, dividends, capital gains, rental income) for high earners. Applies when MAGI exceeds $200,000 single or $250,000 MFJ. Not indexed for inflation.

Wash-Sale Rule

The wash-sale rule disallows a tax loss when you sell a security at a loss and buy a "substantially identical" security within 30 days before or after the sale. The disallowed loss is added to the basis of the replacement shares.

1031 Like-Kind Exchange

A 1031 exchange lets real-estate investors defer capital-gains tax by reinvesting sale proceeds into a "like-kind" property within strict timelines. Post-2017 TCJA: only real property qualifies (no longer machinery, art, vehicles).

APR vs APY

APR (Annual Percentage Rate) is the simple annual cost or rate before compounding — used for loans and credit cards. APY (Annual Percentage Yield) reflects compounding — used for savings accounts and CDs. APY > APR for the same nominal rate.

Compound Annual Growth Rate (CAGR)

CAGR is the smoothed annual rate at which an investment would have grown if it grew at the same rate every year. Formula: (Ending Value / Beginning Value)^(1/years) − 1.

Expense Ratio

A fund's expense ratio is the annual percentage of assets deducted to cover operating costs (management fee, admin, marketing). Index funds: 0.03–0.20%. Active funds: 0.50–1.50%. Compounds against you over decades.

Dividend Yield

Dividend yield is the annual dividend per share divided by the current share price, expressed as a percentage. S&P 500 historical yield: ~1.5% (2026), down from ~4% historical average due to buyback substitution.

Return on Investment (ROI)

ROI is the gain or loss on an investment as a percentage of cost. Formula: (Final Value − Initial Cost) / Initial Cost. Simple ROI ignores time and intermediate cash flows — use CAGR or IRR for multi-year analysis.

Payback Period

Payback period is the time required for an investment's cumulative cash flow to equal its initial cost. Simple payback ignores the time value of money; discounted payback uses present-value cash flows.

Internal Rate of Return (IRR)

IRR is the discount rate that makes an investment's NPV equal zero — effectively the annualized return accounting for the timing of all cash flows in and out. Higher IRR = better return.

📋 Benefits

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is a refundable federal tax credit for low-to-moderate-income workers. For 2026, max EITC is $8,231 with 3+ qualifying children, $649 with no children. Income limits range $19K-$62K depending on family size.

Child Tax Credit (CTC)

The Child Tax Credit (CTC) is a federal tax credit of $2,000 per qualifying child under age 17 in 2026. Up to $1,700 is refundable as the Additional Child Tax Credit (ACTC). Phase-out begins at $200K AGI single / $400K MFJ.

Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax-advantaged savings account for medical expenses, available to people enrolled in a qualified High Deductible Health Plan (HDHP). 2026 contribution limit: $4,400 self-only / $8,750 family ($1,000 catch-up at 55+).

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is a pre-tax employer-sponsored account for medical or dependent-care expenses. 2026 limits: $3,300 health FSA, $5,000 dependent care FSA. Funds are "use it or lose it" — typically forfeit at year-end with limited carryover.

Federal Poverty Level (FPL)

Federal Poverty Level (FPL) is HHS's annual income threshold defining poverty. 2026 FPL: $15,650 single / $32,150 family of 4. Eligibility for Medicaid, ACA premium tax credits, SNAP, and many other programs is expressed as percentage of FPL.

SNAP (Food Stamps)

SNAP (Supplemental Nutrition Assistance Program) provides monthly grocery benefits via EBT card to low-income households. 2026 max benefit: $292 (1 person) / $975 (4 people). Eligibility: gross income ≤130% FPL + asset test.

Medicaid Spend-Down

Medicaid spend-down (Medically Needy program in some states) lets people with income above the categorical Medicaid limit qualify by "spending down" income on medical expenses until they reach the threshold. Available in ~30 states.

LIHEAP (Energy Assistance)

LIHEAP (Low Income Home Energy Assistance Program) is a federally funded program providing one-time grants to low-income households for heating and cooling bills. 2026 federal funding ~$4.1 billion; max benefit varies by state ($300-$1,500 typical).

IRMAA (Income-Related Monthly Adjustment Amount)

IRMAA is an additional amount Medicare beneficiaries with higher income pay on Medicare Part B and Part D premiums. 2026 IRMAA brackets start at $109,000 single / $218,000 MFJ MAGI (look-back to 2024 income).

Dependent Care FSA (DCFSA)

A Dependent Care FSA lets parents set aside up to $5,000 ($2,500 if MFS) of pre-tax wages annually for qualifying childcare expenses (daycare, after-school programs, summer day camp) for children under 13.

Premium Tax Credit (ACA PTC)

The Premium Tax Credit subsidizes ACA Marketplace health insurance premiums based on household income relative to the federal poverty level. Enhanced subsidies (no income cap, capped at 8.5% of income) extended permanently under OBBBA.

COBRA Health Insurance

COBRA (Consolidated Omnibus Budget Reconciliation Act) lets former employees of companies with 20+ employees continue their employer health insurance for up to 18 months after job loss — but at the FULL premium (employer + employee portion) plus a 2% admin fee.

Social Security Disability Insurance (SSDI)

SSDI provides monthly benefits to disabled workers who paid into Social Security via FICA. Strict definition of disability: cannot perform substantial gainful activity due to a medical condition expected to last 12+ months or result in death.

Supplemental Security Income (SSI)

SSI provides monthly cash benefits to low-income disabled, blind, or 65+ adults — and disabled children. Funded by general tax revenues, NOT FICA. 2026 federal max: $967/month single, $1,450 couple (states may supplement).

Medigap (Medicare Supplement Insurance)

Medigap is private supplemental insurance that covers gaps in Original Medicare (Part A + B) — deductibles, coinsurance, and copays. 10 standardized plan types (A through N). Premium varies by plan, age, location, and rating method.