US Tax Glossary 2026

Definition: An IRS information return used to report various types of non-employee income paid during the tax year. Common types include 1099-NEC (freelance/contractor income), 1099-K (payment platform receipts), 1099-INT (interest), and 1099-DIV (dividends). Unlike a W-2, no taxes are withheld from 1099 income.

Definition: A 0.9% tax added on top of the standard 2.9% Medicare tax for high earners. It applies to wages, salaries, and self-employment income above $200,000 (single) or $250,000 (married filing jointly). Employers withhold it automatically once wages exceed the threshold, but self-employed individuals must account for it in their estimated taxes.

Definition: Your total gross income minus specific 'above-the-line' deductions allowed by the IRS. AGI is calculated before the standard or itemized deduction is applied and is the critical number that determines eligibility for dozens of tax credits and deductions. It appears at the bottom of page 1 of Form 1040.

Definition: The average rate at which your total income is taxed, calculated as total federal income tax paid divided by total taxable income. Unlike the marginal rate (which applies only to the last dollar earned), the effective rate reflects what you actually pay on average across all income.

Definition: The federal law that mandates Social Security and Medicare payroll taxes. For employees, FICA = 6.2% Social Security + 1.45% Medicare = 7.65% total, matched by the employer. Self-employed individuals pay both halves (15.3%) as Self-Employment Tax. FICA funds the Social Security and Medicare trust funds.

Definition: A tax classification that determines your standard deduction amount, tax bracket thresholds, and eligibility for certain credits and deductions. The five filing statuses are: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse.

Definition: The total of all income you received during the tax year before any deductions or taxes are applied. It includes wages, salaries, tips, business income, interest, dividends, rental income, alimony received, and most other forms of compensation. Gross income is the starting point for calculating AGI.

Definition: The tax rate applied to the last dollar of income you earn — the rate for your highest income bracket. The US uses a progressive system with seven brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%). Only income within each bracket is taxed at that bracket's rate; income below the bracket threshold is taxed at lower rates.

Definition: A 2.9% payroll tax (split 1.45% employee / 1.45% employer) that funds the Medicare Hospital Insurance program. Unlike Social Security tax, Medicare tax has no wage base cap — it applies to all earned income. An additional 0.9% applies to high earners above the threshold ($200K single / $250K joint).

Definition: The IRS system requiring taxpayers to pay taxes throughout the year as income is earned rather than in a lump sum at filing. For employees, this happens through employer withholding. For self-employed workers and those with investment income, this requires making quarterly estimated tax payments — in April, June, September, and January.

Definition: Money received from renting out real estate or other property, which is generally taxable and reported on Schedule E of Form 1040. Rental income can be offset by deductible rental expenses including mortgage interest, property taxes, depreciation, insurance, maintenance, and property management fees.

Definition: The percentage of net self-employment income on which self-employment tax is calculated. The IRS applies a 7.65% reduction (equivalent to the employer's FICA share) before applying the 15.3% SE tax rate. So: SE tax = Net profit × 92.35% × 15.3%. This mirrors the employee's position where the employer's share isn't counted as employee income.

Definition: The 15.3% tax self-employed individuals pay to fund Social Security (12.4%) and Medicare (2.9%). It is the equivalent of FICA taxes but paid entirely by the individual since there is no employer to pay the matching portion. Calculated on Schedule SE and attached to Form 1040. Half of SE tax is deductible as an above-the-line deduction.

Definition: A 12.4% payroll tax (6.2% employee / 6.2% employer) that funds the Social Security Old-Age, Survivors, and Disability Insurance programs. Unlike Medicare tax, Social Security tax has an annual wage base cap ($176,100 in 2025). Income above the cap is not subject to Social Security tax.

Definition: Income ranges within the progressive federal tax system, each taxed at a specific rate. For 2025 (single filers): 10% ($0–$11,600), 12% ($11,601–$47,150), 22% ($47,151–$100,525), 24% ($100,526–$191,950), 32% ($191,951–$243,725), 35% ($243,726–$609,350), 37% (above $609,350). Brackets are adjusted annually for inflation.

Definition: The portion of your income that is actually subject to federal income tax after all deductions are applied. Calculated as: Gross Income − Above-the-Line Deductions (AGI) − Standard or Itemized Deduction − QBI Deduction (if applicable). This is the final number that determines how much federal income tax you owe.

Definition: The annual wage and tax statement employers are required to send to each employee and the IRS by January 31. It shows total wages paid and all federal, state, and local taxes withheld during the year. Box 1 shows federal taxable wages; Boxes 3 and 5 show Social Security and Medicare wages (which differ because pre-tax 401(k) contributions reduce Box 1 but not Boxes 3/5).

Definition: The IRS form employees complete when starting a new job or when their tax situation changes, used by employers to determine how much federal income tax to withhold from each paycheck. The 2020 redesign eliminated withholding allowances in favor of a more direct approach based on income, deductions, and multiple jobs.

Definition: The maximum amount of annual wages subject to Social Security tax. For 2025, the Social Security wage base is $176,100. Wages above this cap are not taxed for Social Security (6.2%), though all wages remain subject to Medicare tax (1.45%). The wage base is adjusted annually for wage inflation.

Definition: The amount of federal, state, and local income tax that an employer deducts from each employee's paycheck and remits directly to the government on the employee's behalf. Withholding is based on the employee's W-4 form, pay frequency, and applicable tax tables. Overwithholding results in a refund; underwithholding results in a balance due.

Definition: Deductions subtracted from gross income to calculate AGI before the standard or itemized deduction is applied. They are called 'above-the-line' because on Form 1040, AGI appears as a line on the form and these deductions come before it. Key examples include IRA contributions, student loan interest, self-employed health insurance, half of SE tax, and educator expenses.

Definition: A below-the-line itemized deduction for qualifying cash or property donations made to IRS-approved tax-exempt organizations (501(c)(3)). Cash donations are generally deductible up to 60% of AGI; appreciated property donations up to 30% of AGI. Donations must be substantiated with receipts for any amount, and a written acknowledgment is required for donations of $250 or more.

Definition: Specific allowable expenses that taxpayers may deduct individually on Schedule A of Form 1040 instead of taking the standard deduction. Major categories include state and local taxes (SALT, capped at $10,000), mortgage interest, charitable contributions, and qualifying medical expenses above 7.5% of AGI. You choose whichever is larger: itemized or standard.

Definition: An itemized deduction for qualifying out-of-pocket medical and dental expenses that exceed 7.5% of your AGI. Only the amount above the 7.5% floor is deductible. Qualifying expenses include health insurance premiums paid out of pocket, prescription drugs, dental work, vision care, and certain long-term care costs. Insurance reimbursements reduce the deductible amount.

Definition: A deduction for business, medical, moving, or charitable use of a personal vehicle, calculated using the IRS standard mileage rate instead of tracking actual expenses. For 2026, the business rate is 72.5 cents per mile. For 2025, it is 70 cents per mile. Taxpayers can alternatively deduct actual vehicle expenses (gas, insurance, depreciation), but not both methods.

Definition: An itemized deduction for interest paid on a qualified home loan (mortgage) used to buy, build, or substantially improve a principal residence or one additional home. For loans originated after December 15, 2017, the deduction is limited to interest on the first $750,000 of mortgage debt. For older loans, the cap is $1 million.

Definition: The method for determining the exact amount of mortgage interest deductible in a given tax year. Mortgage statements (Form 1098) report the total interest paid during the year directly. For partial-year loans, only the interest attributable to the months the loan was held is deductible. Points paid to obtain a mortgage may be deductible in the year paid (purchase) or amortized (refinance).

Definition: A below-the-line deduction allowing eligible self-employed individuals and owners of pass-through businesses (sole proprietorships, S corps, partnerships, LLCs) to deduct up to 20% of their qualified business income. Income limits apply: single filers with taxable income above $191,950 and joint filers above $383,900 face additional restrictions.

Definition: An itemized deduction for state and local taxes paid, including state income or sales taxes and local property taxes. Since the Tax Cuts and Jobs Act of 2017 (TCJA), the SALT deduction has been capped at $10,000 per return ($5,000 if married filing separately), regardless of actual taxes paid. The cap is scheduled to sunset after 2025 unless extended by Congress.

Definition: A fixed dollar amount set by the IRS that taxpayers may subtract from their AGI without needing to itemize individual deductions. For 2025: $15,000 (single/married filing separately), $30,000 (married filing jointly), $22,500 (head of household). For 2026: $15,750/$31,500/$23,625 respectively. Additional amounts are available for taxpayers who are blind or over age 65.

Definition: The refundable portion of the Child Tax Credit for taxpayers who qualify for the CTC but owe less in tax than the credit amount. Up to $1,700 per qualifying child (2025) can be refunded even if no tax is owed. Calculated on Schedule 8812. The ACTC phases in at 15% of earned income above $2,500.

Definition: A partially refundable education tax credit worth up to $2,500 per eligible student for the first four years of higher education. Covers 100% of the first $2,000 in qualifying education expenses and 25% of the next $2,000. 40% of the credit (up to $1,000) is refundable. Phase-out begins at $80,000 AGI (single) / $160,000 (joint).

Definition: A non-refundable (with a refundable portion via ACTC) tax credit of up to $2,000 per qualifying child under age 17. The credit reduces tax liability dollar-for-dollar. It phases out at $200,000 AGI (single) / $400,000 (married filing jointly) at $50 per $1,000 of income above the threshold.

Definition: For tax year 2025, the Child Tax Credit remains at $2,000 per qualifying child under 17, with up to $1,700 refundable as the Additional Child Tax Credit. The TCJA provisions maintaining this $2,000 amount are scheduled to expire after 2025, potentially reverting to $1,000 per child — Congress must act to extend the current credit level.

Definition: A refundable tax credit for low-to-moderate income workers and families, designed to incentivize and reward work. The credit amount depends on earned income, filing status, and number of qualifying children. For 2025, the maximum credit ranges from $649 (no children) to $7,830 (three or more children). Income limits apply — the credit phases out at higher incomes.

Definition: IRS tax credits that reduce the cost of higher education by reducing federal tax liability. Two main credits exist: the American Opportunity Tax Credit (AOTC, up to $2,500 for the first 4 years, 40% refundable) and the Lifetime Learning Credit (LLC, up to $2,000 per return, non-refundable). Only one credit can be claimed per student per year.

Definition: A refundable federal tax credit specifically for workers with earned income (wages, salaries, or self-employment income) below certain thresholds. Investment income must be $11,600 or less (2025) to qualify. The credit is 'refundable,' meaning if the EITC exceeds tax owed, the excess is paid as a tax refund. Eligibility is determined by income, filing status, and number of qualifying children.

Definition: A non-refundable education credit worth 20% of the first $10,000 in qualifying tuition and related expenses per tax return (not per student), for a maximum of $2,000 per return. Unlike the AOTC, the LLC is not limited to the first four years of education and applies to graduate courses, professional degrees, and courses taken to improve job skills. Phase-out: $80,000–$90,000 AGI (single) / $160,000–$180,000 (joint).

Definition: An employer-sponsored tax-advantaged retirement savings plan that allows employees to contribute pre-tax dollars (traditional 401(k)) or after-tax dollars (Roth 401(k)) from their paycheck. For 2025, the employee contribution limit is $23,500. Employer matching contributions are common. Traditional contributions reduce taxable income now; Roth contributions grow tax-free.

Definition: Additional retirement account contributions allowed for taxpayers age 50 and older, above the standard annual contribution limits. For 2025: 401(k) catch-up is $7,500 (total limit: $31,000); IRA catch-up is $1,000 (total limit: $8,000). A new provision under SECURE 2.0 allows a higher catch-up of $11,250 for 401(k) participants ages 60–63.

Definition: The contribution an employer makes to an employee's 401(k) or similar retirement plan, typically expressed as a percentage of the employee's own contribution up to a limit of their salary. A common structure is '100% match up to 3% of salary' or '50% match up to 6% of salary.' Employer matches vest over time according to a vesting schedule.

Definition: An employer-sponsored benefit account allowing employees to set aside pre-tax dollars for qualifying medical expenses (Healthcare FSA) or dependent care (Dependent Care FSA). Healthcare FSA limit for 2025: $3,300. Dependent Care FSA limit: $5,000. Healthcare FSAs typically have a 'use-it-or-lose-it' rule with an optional $660 carryover or 2.5-month grace period.

Definition: A tax-advantaged savings account for individuals enrolled in a High-Deductible Health Plan (HDHP). HSAs have a triple tax benefit: contributions are pre-tax (or above-the-line deductible), growth is tax-free, and qualified medical expense withdrawals are tax-free. For 2025, limits are $4,300 (individual) / $8,550 (family). Unused funds roll over indefinitely — there is no 'use-it-or-lose-it.'

Definition: The minimum amount the IRS requires holders of traditional IRAs and employer retirement accounts to withdraw each year starting at age 73 (under SECURE 2.0). The annual RMD is calculated by dividing the account balance on December 31 of the prior year by the IRS life expectancy factor from IRS Publication 590-B. Roth IRAs are not subject to RMDs during the owner's lifetime.

Definition: The alternative RMD calculation approach using the Joint Life and Last Survivor Table (Table II in IRS Pub. 590-B), applicable when the sole beneficiary of the IRA is a spouse who is more than 10 years younger than the account owner. This table uses a higher divisor, resulting in a smaller RMD, stretching distributions over a longer period.

Definition: A retirement savings account funded with after-tax dollars, where qualified withdrawals in retirement are completely tax-free, including earnings. Annual contribution limits are the same as Traditional IRA ($7,000 in 2025; $8,000 age 50+), but income limits apply. Phase-out begins at $150,000 AGI (single) / $236,000 (joint) in 2025. No RMDs are required during the owner's lifetime.

Definition: A retirement savings account that may offer a pre-tax (deductible) contribution, with taxes deferred until withdrawal. The deductibility depends on whether you have access to a workplace retirement plan and your income. For 2025, contribution limits are $7,000 ($8,000 age 50+). Withdrawals in retirement are taxed as ordinary income. RMDs begin at age 73.

Definition: The process by which an employee earns ownership rights to employer-contributed funds (such as 401(k) employer match, stock grants, or pension benefits) over time. Immediate vesting means the employee owns employer contributions instantly. Cliff vesting provides full ownership after a set period (e.g., 3 years). Graded vesting provides increasing ownership over multiple years.

Definition: Profit earned from selling a capital asset (stock, bond, real estate, mutual fund) for more than its purchase price (cost basis). Capital gains are classified as short-term (held 1 year or less, taxed as ordinary income) or long-term (held more than 1 year, taxed at preferential 0%, 15%, or 20% rates). Capital losses can offset capital gains.

Definition: The original value used to determine capital gain or loss when a capital asset is sold. For purchased securities, cost basis is typically the purchase price plus commissions and fees. For inherited assets, the basis is typically the fair market value at the date of death (stepped-up basis). For gifted assets, the basis generally carries over from the donor.

Definition: Gains from the sale of a capital asset held for more than one year. Long-term capital gains are taxed at preferential rates: 0% (income up to ~$47,000 single / ~$94,000 joint in 2025), 15% (up to ~$519,000 single / ~$583,000 joint), and 20% above those thresholds. These rates are significantly lower than ordinary income tax rates.

Definition: A 3.8% surtax on net investment income for high-income taxpayers. Applies to the lesser of: net investment income (interest, dividends, capital gains, rental income, royalties) OR the amount by which MAGI exceeds $200,000 (single) / $250,000 (married filing jointly). Reported on Form 8960.

Definition: For self-employed individuals, net investment income generally does NOT include active trade or business income — only passive investment income is included. However, if a self-employed person also has passive rental income, dividend income, or capital gains, those amounts may be subject to the 3.8% NIIT in addition to self-employment tax on earned income.

Definition: Dividends paid by corporations or mutual funds that do not qualify for the lower qualified dividend tax rates. Ordinary dividends are taxed as ordinary income at your regular marginal tax rate. They include dividends from money market funds, short-term capital gain distributions from mutual funds, and dividends from certain foreign corporations.

Definition: Losses from passive activities (businesses or rental properties in which the taxpayer does not materially participate). Passive losses can only offset passive income — they cannot offset wages, business income, or portfolio income. Unused passive losses 'suspend' and carry forward to future years or can be deducted fully when the passive activity is disposed of.

Definition: Dividends that meet IRS requirements to be taxed at the preferential long-term capital gains rates (0%, 15%, or 20%) rather than ordinary income rates. To qualify, dividends must be paid by a US corporation or qualifying foreign corporation, and the investor must have held the stock for more than 60 days during the 121-day period surrounding the ex-dividend date.

Definition: Gains from the sale of a capital asset held for one year or less. Short-term capital gains are taxed as ordinary income at the same rates as wages and salaries (10%–37%). Unlike long-term capital gains, there is no preferential lower rate for short-term gains.

Definition: An IRS rule that disallows a tax loss deduction on the sale of a security if the same or a 'substantially identical' security is purchased within 30 days before or after the sale. The disallowed loss is not permanently lost — it is added to the cost basis of the replacement security, deferring the loss until the replacement is sold.

Definition: An accelerated depreciation method that allows businesses to immediately deduct a large percentage of the cost of qualifying business assets in the year they are placed in service, rather than depreciating them over their useful life. Under the Tax Cuts and Jobs Act, 100% bonus depreciation was available 2018–2022. Starting 2023, the rate phases down: 80% (2023), 60% (2024), 40% (2025), 20% (2026), then 0% in 2027 unless extended.

Definition: Ordinary and necessary costs of operating a trade or business, deductible on Schedule C for sole proprietors and single-member LLCs. 'Ordinary' means common and accepted in the industry; 'necessary' means helpful and appropriate (not necessarily required). Common examples: office supplies, software, professional fees, advertising, business meals (50%), utilities, and vehicle expenses.

Definition: The process of deducting the cost of a tangible business asset over its useful life rather than all at once. The IRS specifies depreciation periods for different asset categories (e.g., 5 years for computers/vehicles, 27.5 years for residential rental property, 39 years for commercial real estate). The two main methods are MACRS (most common) and straight-line.

Definition: A deduction for the portion of a home used regularly and exclusively for business. Available to self-employed workers (Schedule C) but NOT employees who work from home. Two methods: Simplified (multiply square footage of dedicated space by $5, up to $1,500 max) or Regular (actual expenses including rent/mortgage interest, utilities, insurance, depreciation, allocated by business-use percentage).

Definition: The standard depreciation system required for most business property placed in service after 1986 in the US. MACRS assigns property to specific classes (3, 5, 7, 10, 15, 20, 27.5, 39 years) and applies declining balance or straight-line methods with half-year or mid-quarter conventions. Most business equipment uses the 7-year class with 200% declining balance.

Definition: Advance tax payments made four times per year by self-employed individuals, freelancers, investors, and others who do not have taxes withheld from their income. Required when expected tax liability exceeds $1,000 for the year. Due dates: April 15, June 17, September 15, January 15 of the following year. Calculated using Form 1040-ES.

Definition: IRS rules that protect taxpayers from underpayment penalties if they meet certain minimum payment thresholds. For estimated taxes: pay 100% of the prior year's tax liability (110% if prior year AGI exceeded $150,000), or pay 90% of the current year's actual tax liability. Meeting either test qualifies for safe harbor protection regardless of the final balance due.

Definition: The IRS tax form used by sole proprietors and single-member LLCs to report business income and expenses. Net profit from Schedule C flows to Form 1040 as self-employment income and is subject to both income tax and self-employment tax. Schedule C covers gross income, cost of goods sold (if applicable), and all business expense deductions.

Definition: An IRS provision allowing businesses to immediately deduct (expense) the full cost of qualifying business assets rather than depreciating them over time. For 2025, the Section 179 limit is $1,160,000, with a phase-out beginning at $2,890,000 in total property placed in service. Cannot create or increase a business loss — limited to net business income.

Definition: The simplest business structure where one person owns and operates an unincorporated business. For tax purposes, business income and expenses are reported on Schedule C of the owner's personal Form 1040. Sole proprietors pay self-employment tax on net profit and have personal liability for business debts. No separate business tax return is required.

Definition: A parallel tax system designed to ensure that high-income taxpayers pay a minimum amount of tax regardless of deductions or credits. Taxpayers must calculate tax under both the regular system and AMT, paying whichever is higher. AMT exemptions ($88,100 single / $137,000 joint in 2025) phase out at higher incomes. AMT disallows many regular deductions including SALT.

Definition: A tax return filed to correct errors or omissions on a previously filed federal tax return. Filed using Form 1040-X. Can be filed to claim additional refunds or to report additional income/tax owed. Generally must be filed within 3 years of the original due date (or 2 years from when tax was paid, whichever is later). Cannot be e-filed in most cases — must be mailed.

Definition: The amount any individual can give to any other person in a calendar year without filing a gift tax return or using any of their lifetime gift/estate tax exemption. For 2025, the annual exclusion is $19,000 per recipient. A married couple can 'gift split' and together give $38,000 per recipient per year with no gift tax reporting required.

Definition: An IRS review of a taxpayer's tax return and financial records to verify accuracy. Types include: correspondence audit (IRS mails questions, most common), office audit (taxpayer visits an IRS office), and field audit (IRS visits taxpayer's home/business, most intensive). Audit risk increases with high-income, large deductions, missing income, Schedule C losses, and home office claims.

Definition: A federal tax on the transfer of a deceased person's taxable estate before assets are distributed to heirs. For 2025, the federal estate tax exemption is $13.99 million per individual ($27.98 million per married couple with portability). Estates below the exemption owe no federal estate tax. Above the exemption, rates range from 18% to 40%. The TCJA exemption is scheduled to sunset to approximately $7 million in 2026 unless extended.

Definition: A 6-month extension of time to file your federal tax return, obtained by submitting Form 4868 by the original due date (April 15). The extension moves the filing deadline to October 15. Important: an extension to file is NOT an extension to pay — any taxes owed are still due by April 15, and interest and penalties accrue on unpaid amounts.

Definition: An accounting period of exactly 12 consecutive months that does not have to begin on January 1. Most individuals use the calendar year (January 1–December 31) as their tax year. Corporations and some businesses may choose a fiscal year end (e.g., September 30 or June 30). Businesses using a fiscal year file their tax return by the 15th day of the 4th month after their fiscal year ends.

Definition: A federal tax on transfers of money or property from one person to another where the recipient pays less than full value. Gifts above the annual exclusion ($19,000 per recipient in 2025) require filing Form 709. However, gift tax is generally not owed until cumulative taxable gifts exceed the lifetime exemption ($13.99 million in 2025). The lifetime exemption is shared between gift and estate tax.

Definition: The federal agency within the US Department of the Treasury responsible for administering and enforcing the Internal Revenue Code. The IRS processes approximately 150 million individual tax returns annually, issues refunds, conducts audits, and collects taxes. The IRS also issues guidance (Revenue Rulings, Notices, and Regulations) interpreting tax law.

Definition: Federal and state income tax on lottery and gambling winnings. All gambling winnings are taxable income reported on Schedule 1. Lottery winnings above $5,000 trigger mandatory 24% federal withholding. Large jackpots may push total income into the 37% bracket. Gambling losses can offset gambling winnings if you itemize, but losses cannot create a net deduction.

Definition: Additional charges imposed by the IRS for failure to comply with tax filing or payment requirements. Major penalties include: failure-to-file (5% of unpaid tax per month, max 25%), failure-to-pay (0.5% of unpaid tax per month, max 25%), underpayment of estimated tax, and accuracy-related penalties (20% of underpayment for negligence or substantial understatement of tax).

Definition: The total amount of tax legally owed to the government for a given tax year, before accounting for withholding or estimated tax payments already made. Tax liability is distinct from tax owed — you may have a $12,000 tax liability but owe only $500 more because $11,500 was already withheld from paychecks throughout the year.

Definition: The return of excess taxes paid throughout the year (via withholding or estimated payments) when those payments exceeded the actual tax liability. A refund is not a gift from the government — it is the taxpayer's own money returned. The average federal refund in 2025 was approximately $3,100. Refunds earn no interest unless the IRS is significantly late in processing.

Definition: The official form (typically Form 1040 for individuals) used to report income, deductions, credits, and tax payments to the IRS each year. The tax return calculates total tax liability for the year and reconciles it against payments already made, resulting in either a refund (overpaid) or a balance due (underpaid). Federal individual returns are due April 15.

Definition: The 12-month period covered by a tax return. For most US individuals, the tax year is the calendar year: January 1–December 31. Tax year 2025 income is reported on the return due April 15, 2026. Some businesses use a fiscal year as their tax year, which must be consistently maintained from year to year.

Definition: The federal tax credit that offsets gift and estate taxes, effectively creating the combined gift/estate tax lifetime exemption. For 2025, the unified credit translates to a $13.99 million exemption per individual. Taxable gifts during life reduce the credit available at death. The credit is 'unified' because it applies to both gift tax (Form 709) and estate tax (Form 706).

Definition: The percentage of a property's full market value used to determine its assessed value for property tax purposes. Many jurisdictions do not tax property at full market value — they apply an assessment ratio (e.g., 80%) to create a lower assessed value, then apply the tax rate to that assessed value. Assessment ratios vary widely by state and property type.

Definition: A tax system in which all taxpayers pay the same percentage rate regardless of income. At the federal level, the US uses a progressive system. However, some states use flat income taxes. Examples include Pennsylvania (3.07%), Illinois (4.95%), and Colorado (4.4%). Flat tax proponents argue it is simpler and more equitable; critics argue it is regressive relative to income.

Definition: A property tax reduction available to homeowners who use the property as their primary residence. Homestead exemptions reduce the assessed value of the home for property tax purposes by a fixed dollar amount or percentage. Amounts vary significantly by state: Florida offers up to $50,000; Texas up to $100,000 (with additional exemptions). Most states require annual or one-time application.

Definition: A tax system in which the tax rate increases as the taxable amount increases. Higher income is taxed at higher marginal rates, and lower income is taxed at lower rates. The US federal income tax is progressive with 7 brackets (10%–37%). Most US states with income taxes also use a progressive structure.

Definition: An annual ad valorem tax levied by local governments (counties, cities, school districts) on real estate and, in some jurisdictions, personal property. Calculated as: Assessed Value × Tax Rate (mill rate). Property taxes are the primary funding source for local public schools in most US states. They are deductible as part of the SALT deduction (capped at $10,000 combined) if you itemize.

Definition: An agreement between two or more states allowing residents who work in another state to pay income tax only to their home state, rather than paying tax in both the state where they work and the state where they live. Reciprocity simplifies tax filing for commuters. As of 2025, approximately 30 states participate in reciprocity agreements with neighboring states.

Definition: A state and local consumption tax imposed on retail sales of tangible personal property and, in many states, certain services. The seller collects sales tax from the buyer at the point of sale and remits it to the government. Rates vary by state (0%–10.25% state; combined state+local rates up to 13%+). Five states have no state sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon.

Definition: The $10,000 limit on the federal itemized deduction for state and local taxes (SALT), enacted under the Tax Cuts and Jobs Act of 2017. The cap applies to the combined total of state income or sales taxes and local property taxes. The $10,000 cap is not adjusted for inflation and is the same for single filers and married couples (making it a 'marriage penalty' for high-tax state couples).

Definition: Income tax levied by individual state governments on residents' income, in addition to federal income tax. State income tax systems vary widely: 9 states have no income tax (FL, TX, WA, NV, WY, AK, SD, TN, NH on wages); some use flat rates; others use progressive brackets. State income taxes are reported on separate state returns filed in addition to the federal Form 1040.