Tax terms, in plain English.

Adjusted Gross Income (AGI)

Your total income for the year, minus a specific list of adjustments the tax code allows — things like deductible retirement contributions, student loan interest, or half of your self-employment tax.

AGI matters more than most people realise, because it's the number that decides whether you qualify for a long list of credits and deductions. Two people earning the same salary can have very different AGIs, and the one with the lower AGI often pays less.

Marginal rate vs. effective rate

Your marginal rate is the rate applied to your next dollar of income — your tax bracket. Your effective rate is the tax you actually pay divided by your total income.

The effective rate is always the lower of the two, because the US uses graduated brackets: only the income above each threshold is taxed at the higher rate. This is the single most common misunderstanding we encounter. Moving into a higher bracket does not mean all of your income is suddenly taxed at that rate, and a raise never leaves you with less money.

Deduction vs. credit

A deduction reduces the income you're taxed on. A credit reduces the tax itself, dollar for dollar.

That makes credits substantially more valuable. A $1,000 deduction saves you your marginal rate on $1,000 — perhaps $220. A $1,000 credit saves you $1,000. Some credits are refundable, meaning they can pay out beyond what you owe; most are not.

Standard vs. itemized deduction

Every filer gets a choice: take the flat standard deduction, or add up their actual deductible expenses and itemize instead. You take whichever is larger — never both.

Itemizing is worth doing when mortgage interest, state and local taxes, charitable giving, and large medical expenses together exceed the standard amount. Since the standard deduction rose sharply in 2018, the large majority of filers no longer itemize. We check both ways regardless.

W-2 vs. 1099

A W-2 reports wages from an employer who has already withheld income tax, Social Security, and Medicare on your behalf. A 1099 reports income paid to you with nothing withheld at all.

The practical difference is who carries the tax burden during the year. 1099 income generally makes you self-employed in the eyes of the IRS, which means you owe self-employment tax on top of income tax — and you're expected to pay it in quarterly instalments rather than at the end. This surprises a lot of people in their first year of contracting.

Schedule C

The form where a sole proprietor or single-member LLC reports business income and expenses. It attaches to your personal 1040 rather than being a separate return.

Schedule C is where legitimate business expenses reduce your taxable income — vehicle use, home office, supplies, professional fees, and so on. It's also the schedule that most rewards decent bookkeeping, because every deduction on it needs to be substantiated if anyone ever asks.

Schedule E

Where rental property income and expenses are reported, along with income passed through from partnerships and S-corporations.

If you own a rental, this is your schedule. It's also where depreciation on the property gets claimed — which is frequently the difference between a rental that looks profitable on paper and one that doesn't.

Schedule K-1

The statement a partnership, S-corporation, estate, or trust issues to each owner or beneficiary, reporting their share of the entity's income, deductions, and credits.

A K-1 is why business returns are due before personal ones: the numbers on it flow onto your 1040, so your personal return can't be finished until the entity's return is. If you're waiting on a K-1, you're waiting on someone else's filing.

Estimated tax payments (“quarterlies”)

Tax paid in instalments across the year by people whose income isn't subject to withholding — the self-employed, landlords, retirees, and anyone with significant investment income.

The US tax system is pay-as-you-earn. If you don't have an employer withholding for you, the obligation to pay throughout the year doesn't go away; it just becomes yours to manage. Underpaying can trigger a penalty even if you pay the full balance in April.

Safe harbor

A rule that protects you from an underpayment penalty as long as you've paid in at least a specified amount during the year — generally measured against either your current-year tax or your prior-year tax.

This is genuinely useful when your income is uneven or hard to forecast. Paying to the safe harbor means you can owe a substantial balance in April and still face no penalty for it. It's one of the more common things we set up for self-employed clients.

Depreciation

Deducting the cost of a long-lived business asset gradually over its useful life, instead of all at once in the year you bought it.

Buildings, vehicles, equipment, and machinery are all depreciated. Certain provisions let you accelerate some or all of that deduction into year one, which can be a powerful planning tool — and occasionally a trap, since a deduction taken early isn't available later. When you eventually sell, some depreciation may be “recaptured” and taxed. This is a conversation worth having before the purchase, not after.

Form 8879

The authorization you sign to let your preparer electronically file your return. Nothing is transmitted to the IRS until it's signed.

If you sign it in person at our office, that's all there is to it. If you're signing remotely, the IRS requires an identity-verification step first — a federal rule for electronic signatures, intended to stop someone else filing a return in your name.

This glossary is general educational information, not tax advice, and it deliberately leaves out edge cases. Definitions describe how these terms generally work; the specific thresholds, rates, and limits attached to them change from year to year. For how any of this applies to your own situation, talk to us.