Essential Tax Terms
Explained for Individuals
Freelancers & Small Businesses
Understanding tax terminology can make a big difference when preparing your tax return. Many taxpayers hear words like deductions, credits, adjusted gross income, or capital gains without fully understanding what they mean.
The KargIQ Tax Glossary was created to simplify complex tax language into clear, easy-to-understand definitions. Whether you are filing your taxes for the first time, running a small business, or managing multiple income sources, this resource will help you understand the most common tax terms used in the United States tax system.
Our goal is to empower taxpayers with knowledge so they can make better financial decisions and avoid costly mistakes.
This glossary covers terminology frequently used by the IRS, tax professionals, accountants, and financial advisors.
A
Adjusted Gross Income (AGI)
Adjusted Gross Income is your total income after certain allowable adjustments have been subtracted. These adjustments may include student loan interest, educator expenses, and retirement contributions.
AGI is important because many tax credits and deductions are based on this number.
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax is a secondary tax calculation designed to ensure that individuals with higher incomes still pay a minimum level of tax. Certain deductions and credits may not apply under AMT rules.
Taxpayers must calculate their taxes under both the regular tax system and the AMT system and pay whichever amount is higher.
Amended Tax Return
An amended tax return is a correction submitted after a tax return has already been filed. Taxpayers may file an amended return if they discover errors, missing income, incorrect deductions, or additional documents.
In most cases, amendments are submitted using IRS Form 1040-X.
B
Business Expenses
Business expenses are ordinary and necessary costs incurred while operating a business. These expenses can typically be deducted from business income to reduce taxable profits.
Examples include:
Office supplies
Business travel
Advertising costs
Software subscriptions
Professional services
Self-employed individuals usually report these expenses on Schedule C.
Basis
Basis refers to the original value of an asset for tax purposes. It is generally the purchase price plus certain costs such as fees or improvements.
Basis is used to determine the taxable gain or loss when an asset is sold.
C
Capital Gains
A capital gain occurs when an asset is sold for more than its purchase price. Assets can include stocks, real estate, cryptocurrency, or investment property.
Capital gains are categorized into two types:
Short-Term Capital Gains
Assets held for one year or less before being sold.
Long-Term Capital Gains
Assets held for more than one year, usually taxed at lower rates.
Child Tax Credit
The Child Tax Credit is a tax benefit designed to help families with qualifying children. Eligible taxpayers may receive a credit that reduces the amount of tax owed.
Some portions of this credit may also be refundable depending on income level.
Credit
A tax credit directly reduces the amount of tax owed. Unlike deductions, credits provide a dollar-for-dollar reduction of tax liability.
Examples include:
Earned Income Tax Credit
Child Tax Credit
American Opportunity Credit
Energy Efficiency Credits
D
Deduction
A deduction reduces the amount of income that is subject to tax. The lower your taxable income, the less tax you may owe.
Taxpayers may choose between:
Standard Deduction
Itemized Deductions
Dependent
A dependent is a qualifying child or qualifying relative that a taxpayer financially supports. Claiming a dependent may make the taxpayer eligible for additional credits and tax benefits.
E
Earned Income
Earned income refers to money received from working. This includes wages, salaries, tips, commissions, and self-employment income.
Earned income is important because many tax credits require a minimum amount of earned income to qualify.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is a refundable tax credit designed to help lower-income working individuals and families.
Eligibility depends on income, filing status, and the number of qualifying children.
F
Filing Status
Your filing status determines the tax rates and standard deduction available to you. The IRS recognizes several filing statuses:
Single
Married Filing Jointly
Married Filing Separately
Head of Household
Qualifying Surviving Spouse
Form 1099
Form 1099 is used to report income received outside of traditional employment. Common examples include freelance work, contract income, interest income, and investment income.
Individuals who receive 1099 income are often responsible for paying self-employment taxes.
G & I
Gross Income
Gross income includes all income received before deductions or adjustments are applied. This may include wages, investment income, rental income, and business earnings.
Itemized Deductions
Itemized deductions allow taxpayers to deduct specific expenses instead of taking the standard deduction.
Common itemized deductions include:
Mortgage interest
State and local taxes
Charitable donations
Medical expenses exceeding certain limits
R & S
Refund
A tax refund occurs when the total tax payments made during the year exceed the taxpayer’s final tax liability.
Refunds may result from:
Employer tax withholding
Estimated tax payments
Refundable tax credits
Standard Deduction
The standard deduction is a fixed amount that taxpayers can subtract from their income instead of itemizing deductions.
The amount changes periodically based on IRS adjustments and filing status.
Self-Employment Tax
Self-employment tax covers Social Security and Medicare contributions for individuals who work for themselves.
Freelancers, contractors, and small business owners generally pay self-employment tax using Schedule SE.
T
Tax Credit vs Tax Deduction
While both reduce tax liability, they work differently.
Tax Deduction
Reduces taxable income.
Tax Credit
Directly reduces the tax owed.
Tax credits usually provide a larger benefit.
Tax Resources From KargIQ
The KargIQ Tax Glossary is part of our commitment to helping individuals and businesses understand their financial responsibilities.
You may also find these helpful resources on our website:
Tax Filing Checklist
IRS Forms Library
Tax Rate Tables
Important IRS Deadlines
Small Business Tax Guides
If you have questions about your tax situation, the KargIQ tax team is here to help.